Implausible Headline of the Week

‘Nationals Put Sense into VSU.’

posted on 03 August 2005 by skirchner in Economics

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Forbes on Economics Blogs, Mark II

Forbes has updated its story on economics blogs from March 2003 and rather kindly suggests that ‘the depth of Kirchner’s discussions…isn’t matched in many other blogs.’  However, the author of the story concludes that ‘if you don’t know the difference between demand-pull inflation and dividend imputation, this probably isn’t the blog for you.’  One of the main motivations behind this blog has been my disappointment at the dumbing-down of economics and financial market reporting in the mainstream press.  There seems to be a working assumption, even in the ‘quality’ press, that you should avoid challenging your readers.  If this blog were not challenging, then I would be wasting my time writing it and there would be no point in you reading it. 

The Forbes story also suggests that the blog’s ‘worst feature’ is being ‘Aussie-centric.’  The author of the story is perhaps unaware that one of the other eight economics bloggers profiled is a former resident of Australia.  My other objective in writing this blog has in fact been to challenge the parochialism that sometimes afflicts discussion of public policy issues.  An excellent example of this has been the attempt to frame debates about the US and Australian current account deficits and house price inflation in country-specific terms.  Yet clearly there is a much bigger story here involving changes in the saving-investment preferences and financial technology of the Anglo-American economies.  The cross-national perspective offered in this blog is hopefully a useful corrective to the more parochial perspective often found in the mainstream media, which still depends on a predominately local rather than global audience.

posted on 03 August 2005 by skirchner in Economics

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Foreign Official Sector Asset Purchases and Bond Markets

Brad Setser asks ‘Can China add close to $300 b to its reserves a year and have no impact on the bond market?’  I think the answer to this question is yes, although I would agree with him that the small size of the RMB revaluation means that it is not a good test of this proposition one way or the other.  It is generally agreed that central bank intervention in foreign exchange markets is ineffective, because the size of these interventions are trivial in relation to the multi-trillion dollar daily turnover in these markets.  Yes, central banks can peg their exchange rate below its equilibrium level, because there is no theoretical limit on the ability of a central bank to devalue its own currency by issuing more of its own liabilities, but as China has found, the sustainability of such a policy is limited in practice.  Pegging the exchange rate above its equilibrium value is even more problematic because, as many countries have found, foreign exchange reserves can be quickly exhausted in attempts to defend fixed exchange rates against the weight of the market.

I would suggest that the same argument can be made in relation to central bank purchases of debt securities.  It is very difficult to determine total turnover in global bond markets, because of the lack of centralisation in bond trading compared to foreign exchange markets.  However, even the relatively small Australian bond market had an annual turnover of AUD 1 trillion in the mid-1990s.  The totality of East Asian central bank purchases of USD denominated assets would have at best a marginal impact on markets with the depth and liquidity of US Treasuries and the US dollar.

posted on 02 August 2005 by skirchner in Economics

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Contrarian Indicators and the Housing ‘Bubble’

If making the cover of The Economist is not enough to convince that talk of a housing ‘bubble’ is nonsense, how about when the ‘bubble’ starts appearing on T-shirts?

For more evidence that the optimists are now the true contrarians, don’t miss Victor Niederhoffer’s Open Letter to the Doomsdayists:

I confess that I have read all of the books, and listened to all your fears, and find that they do not contain any reason to think that the conditions of our own day are considerably worse than they ever been before – or, if they were, that this would be bearish. When you consider the record of the proponents of these views, who have been proclaiming them since S&P 300 in 1987, all through the regularly occurring implied volatilities of 25 in 1998 and the 30s in 2002, and their hopes and wishes that America will be doomed unless we scale down consumer spending and retaliations against those who would destroy us, increase our funding of the United Nations and support of the Kyoto agreements, I would commit their books to the flames and indeed insist that they return to the monasteries and austere existences and sabbaticals that many of them have threatened to retire to or engage in since the falsity of their views has been manifest—for they want common sense and do not take into account the resilience of the enterprise system nor the many good things that counterbalance all their misinformed emphasis and hopes for the negative.

Nay, the very prevalence of their views, the extent of the belief that comparisons of the present times to the 1920s and 1970s when there were crashes without reference to any other decades might be predictive of anything, is evidence that the prospects for future returns are even greater than they have been during the 20th century when markets throughout the world scored a 1.5 million percent return.

posted on 01 August 2005 by skirchner in Economics

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EMU Meltdown

We previously linked to this HSBC report on the long-term prospects for the euro in extract.  Here is the full text (pdf).

posted on 31 July 2005 by skirchner in Economics

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Consenting Adults versus Irrational Exuberance in Housing

Neil Barsky of Alson Capital Partners rubbishes the notion of a housing ‘bubble’ in the US in terms that will be very familiar to readers of this blog:

bubbles happen when prices become unhinged from intrinsic value. Homes are not stocks; their “intrinsic value” can only be in the eye of the beholder. A house has utility. Rational people might be willing to pay more for a water view, or for living close to work, or for a larger loo. Such voluntary economic decisions are neither irrational nor exuberant.

posted on 28 July 2005 by skirchner in Economics

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Reserve Bank Governance

Former Treasury Secretary Ted Evans will be giving a seminar for ABE on 18 August on the subject of RBA governance, including ‘some suggestions with respect to improving transparency at the Bank.’  This is a little surprising, since as Treasury Secretary and an ex-officio RBA Board member, Evans was rather dismissive of the issue.  Indeed, he once told a gathering of market economists that if ever the minutes of RBA Board meetings were released, we would be very bored with their contents, which doesn’t say much for the Board’s deliberations under its existing governance framework.  It will be interesting to see what Ted has to say on the subject now that he is a private citizen.

posted on 28 July 2005 by skirchner in Economics

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Killing Sesame Street

David Boaz on the Top Ten Reasons to Privatise Public Broadcasting.

posted on 27 July 2005 by skirchner in Economics

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Should the RMB Reval Keep Flordia Mortgage Holders Awake at Night?

There has been much ink spilled on the subject of the RMB revaluation, but few have put it in perspective quite as well as UBS economist Jon Anderson:

the current 2% revaluation (or, for that matter, even a move two or three times larger) is nothing to get excited about. By far the most common question in my inbox over the past three days has been the impact of the yuan adjustment on China’s trade and economic growth. The short answer is: no impact whatsoever. G-3 currencies fluctuate by 2% or more nearly every month without any noticeable influence on their economies, but somehow people who would never dream of asking about the effect of a yen move to 110 from 113 still can’t resist running for the phones when the yuan strengthens by the same amount. UBS hasn’t changed its forecasts for Chinese growth, inflation or employment, and I suspect most other economists haven’t either.

Nor do we foresee any sustained “yuan effect” on other Asian currencies, regional growth, the dollar or global bond markets. Despite the current press speculation, Florida mortgage holders can sleep soundly—at least as far China is concerned.

The notion that a few hundred billion in annual official reserve asset purchases by China could influence markets with the depth and liquidity of the US dollar and Treasuries has always been a stretch, but that has not stopped it from becoming an article of faith among many economists.

posted on 26 July 2005 by skirchner in Economics

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More Monetary Policy Central Planning from the AEI

The AEI is at it again, advocating that the Fed should fine-tune US house prices:

the Fed is raising interest rates, a central-bank policy move that has already quelled a housing boom in the United Kingdom, not to mention Australia and New Zealand. We need a “Goldilocks Tightening” that sets the temperature in the real estate sector just right: not too hot and not too cold.

Unlike many commentators, Makin acknowledges the prevalence of variable rate mortgages in the UK and Australia, but nonetheless argues that ‘the ability of rate increases [of the magnitude of past US tightening cycles] to slow the rate of increase of housing prices is not in question.’  Fine tuning house prices via monetary policy is still a risky proposition, even in Australia, where RBA Governor Macfarlane has argued against it along similar lines to the arguments made by Alan Greenspan.  It is an infinitely more risky proposition in the US, where the relationship between the Fed funds rate and mortgage rates is much looser. 

Makin’s article acknowledges the difficulties of fine-tuning monetary policy.  Indeed, as recently as late last year, Makin was arguing against further Fed tightening on the basis that it would plunge the US into recession in 2005.  The obvious conclusion to draw is that the Fed should not determine monetary policy on the basis of house or other asset prices, but because Makin is one of many analysts who take a ‘bubble’ in house prices as a given, he draws the opposite conclusion.  This is a good illustration of how bubble-talk can lead analysts astray.  Indeed, there is something profoundly absurd about the fact that central bankers like Greenspan and Macfarlane have become the de facto defenders of capitalist acts between consenting adults, while right-wing American think tanks have become advocates of the central planning of asset prices.

posted on 26 July 2005 by skirchner in Economics

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Acronyms You’ve Gotta Love

CKNAWWW (Clueless Know-Nothing Analysts of the World Wide Web).  From the anything but clueless James Hamilton.

posted on 25 July 2005 by skirchner in Economics

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The Future Fund as Revenue Laundering Operation

The government’s Future Fund, a massive proprietary trading operation being established at the expense of taxpayers, is a thinly disguised revenue hoarding scheme on the part of a government that has more money than it knows what to do with.  The Minister for Finance has now all but confirmed that the Future Fund’s earnings will be subject to taxation, siphoning the Fund’s earnings directly into consolidated revenue.  Of course, paying taxes on the Fund’s earnings is no less absurd that than the government using the Fund to purchase its own liabilities in the form of government securities.  It just serves to highlight the fact that the Fund has been explicitly designed to launder the proceeds of privatisation and protect them from being returned to taxpayers.

posted on 21 July 2005 by skirchner in Economics

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Spec Free Property Boom

Here is one property boom that is more or less guaranteed to be leverage and speculation free!

LONDON, July 20 (Reuters) - The rapid growth in investments compliant with Islamic Sharia law is gaining fresh impetus from high oil prices for energy-rich Muslim countries, and a large slab of this capital is going into real estate, researchers say.

The attributes of real estate investment lend themselves to Sharia law which forbids the payment of interest, and speculation in the form of short selling—as practised by hedge funds—or the use of derivatives, Parsa said.

(via Mahalanobis)

posted on 21 July 2005 by skirchner in Economics

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Greenspan as Failed Guru

Peter Hartcher continues the Greenspan bashing.  Implicit in Hartcher’s criticism of Greenspan, and praise of RBA Governor Macfarlane, is the idea that central banks can and should centrally plan asset prices through monetary policy.  Hartcher ignores the inconvenient fact that Governor Macfarlane has consistently argued against the wisdom of targeting asset prices in general, and house prices in particular.  But why let the facts get in the way of a lame story?

Then there is this anecdote:

[Prime Minister] Howard recalls vividly his first encounter with Dr Greenspan more than 20 years ago, when the economist, hearing that Mr Howard was from Australia, remarked: “Ah yes, Australia, the country with the biggest middle class in the world.”

The thought struck Mr Howard forcefully, and much of his political success since derives from his understanding of Australia as an aspirational middle-class society.  For John Howard, Alan Greenspan will always be a guru.

Somehow, I very much doubt John Howard’s famed political instincts owe much to Alan Greenspan.

posted on 20 July 2005 by skirchner in Economics

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Australia’s Bubble that Wasn’t

Australia’s experience with house price inflation is attracting a lot of attention in the US, featuring on the front page of the WSJ, which notes that Australia provides a ready example of a major house price inflation that has ended benignly:

As the U.S. confronts its own housing-price boom, Australia’s experience suggests that the end of a boom needn’t necessarily lead to widespread economic distress. So long as most people decide to hold on to their homes and ride out the storm, the economy can hold up. Australia has yet to experience a trigger, such as widespread job losses or a spread of panic about the real-estate market, that would drive owners to unload their homes en masse and create a crisis.

The above extract implicitly concedes the point that house prices are driven by broader economic conditions, not the other way around.  But the notion that people would ‘unload their homes en masse’ in response to some sort of exogenous shock is nothing short of bizarre.  There are many reasons why house prices might fall, but people abandoning their homes to rent or live in the streets is not one of them.  Most participants in the housing market are buying and holding, not speculating, and choose the most favourable time to rollover their asset.  Falling prices lead to a reduction, not an increase, in market turnover.  Much of the post-boom weakness in Australia has been seen on volumes rather than prices. 

The article also argues:

Mr. Greenspan has said that it’s hard to know when asset bubbles truly exist, raising the odds that a pre-emptive strike will unnecessarily damage an otherwise healthy economy. The other school of thought, exemplified by Australia, holds that it’s wiser to pop likely bubbles before they get out of hand. Even if Mr. Greenspan wanted to follow Australia’s lead, he might find it hard to. The U.S. Fed is already raising interest rates at a steady pace. If it moved any faster in an attempt to pop a bubble, it would risk putting the brakes on U.S. economic growth, with potential global consequences.

The RBA has in fact denied that it is targeting house prices and Governor Macfarlane has argued against the wisdom of doing so.  The article also overlooks the prevalence variable rate mortgages in Australia, which are closely tied to the RBA’s official cash rate.  This gives the RBA much more traction over household disposable income than is available to the Fed.  Targeting house prices with monetary policy is a much riskier proposition in the US than it is in Australia.  Greenspan is right not to follow Australia’s supposed example.

posted on 19 July 2005 by skirchner in Economics

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