By Rok Spruk, on October 7th, 2009
Robert Barro and Charles Redlick wrote an op-ed in WSJ (link) on their original paper (link) where they discuss the macroeconomic effects of fiscal stimulus and construct long-term time-series on U.S macroeconomic data to examine whether real GDP increases follows the spending multipliers and whether reductions in marginal tax rates, rather than spending increases, tend to exert a stronger effect on GDP growth.
“Our research also shows that greater weakness in the economy raises the estimated multiplier: It increases by around 0.1 for each two percentage points by which the unemployment rate exceeds its long-run median of 5.6%. Thus the estimated multiplier reaches 1.0 when the unemployment rate gets to about 12% … For data that start in 1950, we estimate that a one-percentage-point cut in the average marginal tax rate raises the following year’s GDP growth rate by around 0.6% per year. However, this effect is harder to pin down over longer periods that include the world wars and the Great Depression.”
Rok Spruk is a supply-side economist and a libertarian.
He (currently) lives in Slovenia where he studies economics
and business. His fields of research are economic growth,
macroeconomics, international economy, global competitiveness,
and tax reforms. His views, observations and ideas are posted
on his blog. 
By Claus Vistesen, on October 7th, 2009
I am not an ardent watcher of the Australian economy so I shall leave it neatly to the side of whether this was expected or, Bloomberg so famously puts it, unexpected.
Australia’s central bank unexpectedly raised its benchmark interest rate from a 49-year low and signaled further increases in coming months amid signs the economy is strengthening. Reserve Bank Governor Glenn Stevens increased the overnight cash rate target to 3.25 percent from 3 percent in Sydney today. Only one of 20 economists surveyed by Bloomberg News forecast today’s move. The rest predicted no change.
The local currency jumped as Australia became the first Group of 20 nation to raise borrowing costs since the start of the global financial crisis more than a year ago. Rising job vacancies, retail sales and house prices, plus surging business and consumer confidence support Stevens’ view that the “basis for such a low interest rate setting has now passed.”
Carry traders will of course feel that warm fuzzy feeling in the stomach by now with the prospect of Australia (and perhaps New Zealand or others) raising rates while the Fed continues to supply the system with free liquidity. The only question is of course whether risk is really on here or whether we are about to get hit by another anvil exactly brought about by a retrenchment of stimulus. I don’t know, but this is also beyond the point here. The only question which needs to be answered at this point in time is, how high will it go?
To parity and beyond? (graph courtesey of Reuters, click for better viewing)
By Trace Mayer, on October 7th, 2009
The world economy is incredibly intertwined. For example, a butterfly flapped its wings in the Amazon resulting in typhoon after typhoon hitting the Philippines. This has interrupted the work flow for RunToGold because one of my wonderful assistants located there has had his village decimated, been flooded out of his house and therefore been unable to complete several projects. As a result, thousands of people are not able to consume information that may affect the decisions they make. Often when we are in the moment we do not fully comprehend the gravity of the situation until it is fully upon us.
CHAOS THEORY
Chaos theory is a branch of mathematics which studies the behavior of certain dynamical systems that may be highly sensitive to initial conditions. This sensitivity is popularly referred to as the butterfly effect. As a result of this sensitivity, which manifests itself as an exponential growth of error, the behavior of chaotic systems appears to be random. That is, tiny differences in the starting state of the system can lead to enormous differences in the final state of the system even over fairly small timescales. This gives the impression that the system is behaving randomly. This happens even though these systems are deterministic, meaning that their future dynamics are fully determined by their initial conditions with no random elements involved. This behavior is known as deterministic chaos, or simply chaos.
Chaotic behavior is also observed in natural systems, such as weather with typhoons pummeling the Phillipines. This may be explained by analysis of a chaotic mathematical model which represents such a system. Quantum chaos investigates the relationship between chaos and quantum mechanics.
HUMAN ACTION
While we like to think that human action is largely individual and unique, and it is, the branch of statistics allows us to make incredibly accurate predictions regarding populations. In economics this is perhaps the chief competing premise between the Austrian school of economics and others: starting with the individual and deriving the macro or vice versa.
The problem with starting somewhere besides the individual is that there is always a previous history to that choice; every individual has their own story. To discount the individual is to discount their humanity; their ability to choose. And it is that humanity which will often lead to choices which do not always conform with game theory or ‘rational behavior’.
That is not to say an individual cannot build mighty towers with and through other people. The issue is whether he will view them as bricks or stones (Genesis 11:3). The problem with individuals as bricks, or in other words human livestock, is that it is immoral and the immoral policy will always fail. While the behavior of the chaotic system may appear random it is deterministic. Mankind will be what he was born to be: free and independent.
FINGERS OF INSTABILITY
John Mauldin wrote a great piece Another Finger Of Instability:
Imagine, Buchanan says, dropping one grain of sand after another onto a table. A pile soon develops. Eventually, just one grain starts an avalanche. Most of the time it is a small one, but sometimes it builds on itself and it seems like one whole side of the pile slides down to the bottom.
Well, in 1987 three physicists, named Per Bak, Chao Tang, and Kurt Weisenfeld, began to play the sandpile game in their lab at Brookhaven National Laboratory in New York. Now, actually piling up one grain of sand at a time is a slow process, so they wrote a computer program to do it. Not as much fun, but a whole lot faster. Not that they really cared about sandpiles. They were more interested in what are called nonequilibrium systems.
They learned some interesting things. What is the typical size of an avalanche? After a huge number of tests with millions of grains of sand, they found that there is no typical number. “Some involved a single grain; others, ten, a hundred or a thousand. Still others were pile-wide cataclysms involving millions that brought nearly the whole mountain down. At any time, literally anything, it seemed, might be just about to occur.”
The piles were indeed completely chaotic in their unpredictability. Now, let’s read this next paragraph from Buchanan slowly. It is important, as it creates a mental image that helps me understand the organization of the financial markets and the world economy.
“To find out why [such unpredictability] should show up in their sandpile game, Bak and colleagues next played a trick with their computer. Imagine peering down on the pile from above, and coloring it in according to its steepness. Where it is relatively flat and stable, color it green; where steep and, in avalanche terms, ‘ready to go,’ color it red. What do you see? They found that at the outset the pile looked mostly green, but that, as the pile grew, the green became infiltrated with ever more red. With more grains, the scattering of red danger spots grew until a dense skeleton of instability ran through the pile. Here then was a clue to its peculiar behavior: a grain falling on a red spot can, by domino-like action, cause sliding at other nearby red spots. If the red network was sparse, and all trouble spots were well isolated one from the other, then a single grain could have only limited repercussions. But when the red spots come to riddle the pile, the consequences of the next grain become fiendishly unpredictable. It might trigger only a few tumblings, or it might instead set off a cataclysmic chain reaction involving millions. The sandpile seemed to have configured itself into a hypersensitive and peculiarly unstable condition in which the next falling grain could trigger a response of any size whatsoever.”
AVALANCHE
Often I get questions such as when is the dollar is going to collapse, when is the DOW going to crash, etc. Now I like to profit from trading just as much as the next guy and have made a few recommendations that have made tidy returns for diligent readers. But I try to look at all possible events, assess the probability of an outcome occurring and then acting in accordance with that assessment.
Is it possible that a CIA employee will be charged or indited for detainee abuse charges before December 31, 2010? Yes. Is it probable? Well, Intrade puts the probability at 25%. I think it is even lower; criminal gangs costumed in government regalia do not like to prosecute those in their fraternal brotherhood.
Many people seem to think that the evaporation of the world’s reserve currency is something that can be played for profit. When we are in the moment and bursting with confidence of greenshoots we seem to ignore out better judgment and ski down the slope. But to the 3rd party observer it looks all too predictable and probable. This likely will not be a period of history easily played for profit; at least not for those lacking a costume or cohorts with one.
I recommend being more concerned with principles of provident living and prepare for survivalism in the suburbs. Will they be necessary? We hope not but The Black Swan now the norm it is wise to be prepared.
THE SAFEST HAVEN OF GOLD
While the world is in commotion the bull market for gold is in forward motion like never before. The 24 day moving average is above $1,000 per ounce with the 50 day moving average above $970.
The Gold Wars have been waged for centuries. The latest incarnation is the US government and central banks engaging in a gold price suppression scheme. The US government has gone ‘all in‘ and they are losing. And that is primarily driving the demand for the ancient metal of kings. But this is deterministic of the chaotic system’s future dynamics. Empires rise; empires fall and always for economic reasons.
Sure, many think that gold has effectively been demonetized. But Information Age technologies like GoldMoney allow for gold, silver and platinum to easily circulate as currency in ordinary daily transactions. The King is dead! The King is dead! Long live the King! Gold has only begun to stir from its long slumber. The prime form of money’s price will only continue to rise as its value does from increased daily use among individuals as currency.
CONCLUSION
When you own an unencumbered ounce of gold your wealth is sovereign. Hoard it. Whether buried under an avalanche or on the bottom of the ocean in one of the most corrosive environments on earth; gold will have value one, ten or hundreds of years later. Every empire that has fought gold has lost. Those who own the bullion are riding in the helicopter safely away from the ruinous effects of the Kondratieff Winter’s avalanche.
Humanity’s gold lust has been dormant for nearly a century and when it awakens it will be extremely vehement and go viral. Those who own gold know of what I speak. The yellow metal seems to call out to the inner conscience and resonate with our DNA. And that is perhaps the most bullish aspect of this bull market. Gold has been the only safe haven and how much of the general public has actually touched a gold coin let alone owns one? The result will be that the pitiful garrets of the central banks will be overrun as The Great Credit Contraction continues. These chaotic fingers of instability will shake these giant welfare states until they implode.
Disclosures: Long physical gold, silver and platinum with no positions in the problematic GLD or SLV ETFs, S&P 500 or DOW.
By Bron Suchecki, on October 6th, 2009
On Sep 17 Jeff Nielson posted an article on SLV. I took issue with his belief that ETFs’ management fees were unrealistically cheap and thus another indicator they were a scam. Below is the exchange between Jeff and I on the matter.
Bron: You say “custodians of the vast majority of all the world’s bullion-ETFs – a service which they are providing free of charge” but SLV has an expense ratio of 0.50%, some of which if I remember the prospectus correctly, is paid to the custodian. If SLV holders pay 0.50% how can it be considered “free”. By what do you mean free?
Jeff: Hi Bron. Just look at all that is SUPPOSEDLY covered by this 1/2% fee:
1) Transaction costs. Purchases must be made CONSTANTLY, all day long – in order to buy the actual silver for unit-holders at the same price they bought their units at. Given the huge volatility with silver, it’s not even feasible to restrict buying to once a day – since silver has had MANY daily moves of 5% or more.
2) Insurance/delivery costs
3) Storage/security costs.
Obviously BILLIONS of dollars of silver require significant security to guard such a hoard. The U.S. government has an entire military battalion guarding Fort Knox – so no one can find out how much gold is NOT there.If you think these costs are minimal, then answer this question: why do the small number of companies who hold their own bullion need to charge MANY times that premium for their own security/storage costs?
Bron: Before I comment, just want to state upfront that I work for the Perth Mint, but I am speaking here in a personal capacity. While I’m speaking personally, obviously the ETFs are competitors to my employer’s business, both in respect of physical coins and bars as well as our own storage facility, so I’m not any apologist for the ETFs. Taking each of your points in turn.
1) Transaction costs. I note that SLV’s average Bid Ask Ratio is 0.08%. This is very tight but is not necessarily unprofitable for a market maker. You are right that the market maker must be purchasing (or selling) gold constantly as it sells (or buys) SLV shares. My experience with the Perth Mint’s ASX listed product (code: ZAUWBA) is that the market maker will simply set their stock exchange price for an ETF higher than their cost on the wholesale over-the-counter market and adjust this constantly during the trading day. This way they always make a profit on transactions, it is not a cost to them. If individuals bid prices under this than the market maker misses out on a trade. It is only where there are excessive buyers or sellers that the market maker’s prices will get hit.
2) Insurance/delivery costs. Delivery costs are effectively zero, as the metal is most likely already in the vaults as sellers of physical need to bring their metal to London to trade it. Insurance is a real cost, but are easily covered by 0.50%. Important to note that the metal is not fully insured, just the first couple of billion (I don’t think the prospectus says anything about the first loss limit of the insurance). Once you get to a certain size therefore, the insurance cost is a fixed cost, not variable.
3) Storage/security costs. These are fixed costs, once you have a vault and have secured it, every additional ounce does not result in any change in costs. Once you get to the point that you have covered these fixed costs, every ounce above that is pure profit and this is where custodianship can be highly profitable. At 280 million ounces, SLV is definitely there in my opinion. Storage business is a classic case of economies of scale, which is why smaller companies have to have higher storage charges (eg Perth Mint allocated silver is 2.5% pa).
I have been a bit brief on explaining the above, but my view is that they are making money with a 0.5% expense ratio. That is why I think the “free of charge” line of attack is not supported and you are better off focusing on your other criticisms.
Jeff: Bron, at the time that SLV was created, there was only 200 million oz’s of silver in GLOBAL inventories. Now SLV and others hold close to 450 million oz’s. Obviously there MUST be both delivery AND insurance charges for AT LEAST 250 million oz’s of silver – which could NOT have “already been in vaults”.
As for security/storage costs, I’ll happily concede (for purposes of argument) that no new storage space was created. This brings me back to my point about the ludicrous idea of a BANKER (holding a massive short position) SUBSIDIZING “longs” by providing free storage/security.
Even if you subscribe to that ludicrous fantasy, there is still the issue of the “opportunity cost” to banks. Precious metals are not the ONLY items in the world for which there is a demand for high-security storage. Will ANYONE suggest that banks will provide a FREE service for precious metals longs – rather than charge someone a fee for storing other valuable assets? Try asking JP Morgan to store YOUR OWN precious metals for free – and listen to how hard they laugh at you.
Bron: “Obviously there MUST be both delivery AND insurance charges for AT LEAST 250 million oz’s of silver – which could NOT have already been in vaults”
You’ve missed my point. Lets assume the additional 250moz is real and was bought by bullion banks to back SLV & others. In that case, the bullion banks would incur no delivery charges as the seller delivers metal to London at their cost to be able to sell it on the spot market in London. Secondly, the additional 250moz has no insurance charges – as I said, they only insure the first $1b of holdings, not the entire holdings.
“the ludicrous idea of a BANKER (holding a massive short position) SUBSIDIZING longs by providing free storage/security” & “Will ANYONE suggest that banks will provide a FREE service for precious metals longs – rather than charge someone a fee for storing other valuable assets?”
Jeff, you keep on saying they are doing it for free when SLV charges 0.5%. Some of that 0.5% goes to the custodian, they are being paid. That is not “for free” – I don’t understand why you keep on saying they are providing free storage.
The question is whether the 0.5% charge is realistic, profitable assuming the volumes of metal SLV and others hold is physical. As explained in my previous reply it is. Saying this does not mean that they have physical, but nor does it mean they do not.
Jeff: Bron, your assumptions about delivery cost are only valid if you’re implying that silver (and gold) goes straight from refineries into bankster vaults – rather than having to be PURCHASED by the banksters (first) on the open market, and then transferred to their vaults.
When you mention the 0.5% fee charged by SLV, my understanding is that this also (supposedly) covers their OWN administrative costs AS WELL AS all the shipping costs, transaction costs, insurance costs, and storage/security costs.
You would be hard-pressed to find any ONE bankster service (in ANY of their business activities) which they are willing to provide for a 0.5% fee. Suggesting that they are willing to REDUCE their fees (to close to ZERO) to SUBSIDIZE the entry of longs into the market is simply nonsense.
Bron: “your assumptions about delivery cost are only valid if you’re implying that silver (and gold) goes straight from refineries into bankster vaults – rather than having to be PURCHASED by the banksters (first) on the open market, and then transferred to their vaults.”
No it doesn’t. There is no difference between purchasing from refineries or on the open market – refineries are all in different countries just like existing stocks. If market makers cannot acquire metal from investors or sellers already holding it in London, they will actually be able to acquire it at a discount to London spot (which is the usual state of the market), the discount equalling the shipment cost into London. Even if they have to pay a premium (or pay shipment costs into London), then they just factor this into their bid and ask prices quoted for SLV. This is why delivery is not a cost that comes out of the 0.5% fee.
“When you mention the 0.5% fee charged by SLV, my understanding is that this also (supposedly) covers their OWN administrative costs AS WELL AS all the shipping costs, transaction costs, insurance costs, and storage/security costs.”
The 0.5% does cover their administrative and compliance costs, but as I have discussed above and in my previous replies, any shipping and transaction costs are recovered via market making activities, so these do not come out of the 0.5%. As I have also replied, insurance and storage/security are FIXED costs, not variable, whereas the revenue of 0.5% is variable. This means that once you cover you fixed costs, the 0.5% on any additional metal is pure profit.
“You would be hard-pressed to find any ONE bankster service (in ANY of their business activities) which they are willing to provide for a 0.5% fee. Suggesting that they are willing to REDUCE their fees (to close to ZERO) to SUBSIDIZE the entry of longs into the market is simply nonsense.”
0.5% is not “close to zero”. On 280moz, 0.5% = $24 million, that is not anywhere near zero. The fact is that in the wholesale market storage is offered for much less than 0.5%. Do you remember David Einhorn’s Greenlight Capital exiting his GLD in favor of physical bullion? He did this because it was CHEAPER, in other words he could get storage for less than GLD’s 0.4%. In fact, quoting http://www.hardassetsinvestor/:
“By contrast, a $400 million player in the bullion market has substantial room to negotiate. You can be sure his [Einhorn] bullion holdings are being custodied for less than 12 basis points.”
If you believe that 0.5% is an unrealistic fee, a subsidised fee and therefore proof that SLV is a scam, then logically you must also believe that Bullion Vault, with a 0.12% storage fee, is also a scam. This puts you in a bit of a spot, because Bullion Vault is one of the most transparent operations in the market, and favoured by many goldbugs and commentators. Your stepping out on a limb here.
The post above was on Sep 21, Jeff replied to another post on Sep 22 but ignored mine. I posted the comment below on Sep 27. No response by Jeff as at Oct 4.
Bron: You have replied to someone else’s comment which appear after mine, but ignored mine. Does this mean you conceed on the issue of the reasonableness of the storage fee? 
By Claus Vistesen, on October 6th, 2009
I am a sucker for a good argument presented with the correct dose of eloquence and cold facts, and John Hempton’s latest tour of the balance sheet of the Spanish bank BBVA is just that. Essentially, John sets out to address the question of whether Spanish banks are hiding their losses or, as John ultimately goes on to argue, frontloading their eventual losses by extending credit to bad debtors in stead of writing down on the balance sheet.
Of course, this is not only a question of the practices of BBVA and whether you buy John’s extrapolation from the case of BBVA to the case of the entire Spanish banking industry and on to the Spanish economy and the Eurozone itself, I believe the analysis and underlying points deserve a closer look. Personally, I do think that this is one of the most important questions we face in the context of the ongoing financial crisis, namely the extent to which the periphery of the Eurozone (and in particular Spain) harbour the ingredients to pull the whole edifice down or very close to the brink as a result of an unravelling which lies ahead in the beginning of 2010 as government and monetary stimulus begins to wane and/or the pressure from deleveraging and internal devaluation becomes too much.
Readers with a good memory or just a specific interest in this topic will remember the debate that arose in the context of the report by Variant Conception that essentially attempted to call the emperor, in the form of the Spanish banking industry, with not clothes. The VP report stirred up quite a flurry with for example an Iberian Equity piece that specifically targeted the arguments of Variant Perception. I have a good overview of the initial skirmish here if you want to read up on the background on this (although John draws up the playing field very nicely in his piece). As you will see, I am with the bears here, but I do think that we need to settle this with facts and good reason and to this end I would rate John’s piece very highly, even if it also tends to conform with my world view.
Now, the basic point made by Hempton is, as far as I can see, the following;
There is a time honoured way of hiding losses in banking – a method that Variant Perception suggests is being done on a breathtaking scale in Spain. The method is rather than call a bad loan bad – to just extend it a bit more credit. If the borrower can’t pay the interest give them a bigger loan or line of credit. They will use the loan to become current. The slogan is that a “rolling loan gathers no loss”. Even the most diabolical subprime mortgage book in the US showed only small losses until the market stopped rolling the loans.
Together with this qualifying comment at the end;
All these problems of the same type that Variant Perception alleges in Spain – but none are of the scale Variant Perception alleges in Spain. In other words I can unequivocally support the notion that the Spanish banks are hiding their losses – but support for the notion that these losses are so large that France and Germany will be left “holding the bag” is not to be found in the US data.
What the Spanish bankers have been telling us about their credit is – at least on the American data – easily shown to be lies. We just don’t know whether they are big lies.
For the sake of Europe I hope they are not.
This last point is naturally important and somehow goes to the heart of the problem at hand here. Are we dealing with one, or a few, rotten apples or is the whole plantation sour? At this point, we can only speculate on the basis of the facts that are on the table. For me personally, it is thoroughly outside my realm of analytical ability to say whether this is a widespread practice among Spanish banks although the extent to which it is, we should be very worried with respect to the Spanish macroeconomy which is alread, as Edward noted recently, in an exceptionally dire state.
But more importantly, the arrows of causation may run in both directions here. Specifically, (and I may be reading too much into Hempton’s analysis here but still), one important underlying current seems to be that with the absolute horrific situation in which the Spanish economy finds itself we should be seeing a lot more pain in the banking sector in the form of loan writedowns or simply deleveraging. And of course, the extent to which we aren’t suggests that Spanish banks are trying to frontload their inevitable losses and the further this goes on the more grim it will be when the penny drops. This, I should add, has been my colleague’s Edward Hugh’s point (and to some extent my own too) right back from the summer of 2007 when it became clear that the subprime crisis was not merely a US undertaking. Basically, better rattle the closet well and good in the beginning and face all the skeletons than have a bunch of them come knocking you out later on, when you have grown, potentially, complacent.
To finish off with my own, albeit modest, contribution to the discussion it is worthwhile taking a look at the chart I have prepared from ECB data on the aggregate balance sheets of monetary financial institutions in France and Spain, where the former is naturally present as a benchmark case.
Essentially the graph plots of a moving average of a weighted value [1] of loans to housholds, loans to non-financial corporations and loans for household purchases in France and Spain (stock value, end of period). The change is month on month and then smoothed with a 6 month moving average. On the basis of the my remarks above the hypothesis to test here would be the extent to which Spain has clearly had a larger boom and subsequent bust than France, the degree and pace of deleveraging should also be comparatively larger and faster in Spain. Clearly, and even though the process of deleveraging in Spain is moving faster than in France, it does not correspond to the macroeconomic differences between the two economies. Could then be evidence of a macroeconomic pendant to practices shown by Hempton to prevail at BBVA? This is to say, is the apparent lack of fastpaced deleveraging in Spain evidence by contraposition to the argument Hempton implies in his analysis?
This is difficult to say and clearly this is no smoking gun since we cannot see beyond, well, what we cannot see and thus Spain may just be about to hit sh’t in the second half of 2009. Also, a larger sample size would aid the hypothesis significnatly, but it does at least makes me think that there may be more to this than meets the eye.
—
[1] I constructed this myself and it is NOT complicated. Mail me if you really want to know what I did.
By Richard Daughty, on October 6th, 2009
One of the most interesting news items I’ve found was on the cover of The Financial Times, where I learned that a guy named Lahde “made tens of millions of dollars from betting against the financial and property sectors during [the] past two years”, and he now wanted to thank “the low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA” who made it all possible for him to find enough suckers.
He noted that “These people who were often truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the aristocracy,” he says, “only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.”
This goes along with an article in the St. Petersburg Times about Tom James, chairman and chief executive of Raymond, James Financial, who had “some tough words for the wizards of Washington, DC who oversaw the $700-billion bailout package”.
He reports, “The Brave And Wonderful Mogambo (BAWM) was right all along! Those government weenies are the biggest freaking morons you ever saw, and we as a country should be ashamed of ourselves for having elected such corrupt, half-witted, utter failures and congenital idiots!”
As you have probably guessed by now, he did not say those exact words, but he implied every syllable when he said, “Legislators were almost embarrassingly ignorant of how the financial system works”, which I figure explains how they don’t understand the linkage between their own Bad, Bad Performance (BBP) as legislators and the subsequent Bad, Bad Performance (BBP) of the economy, and he says that only 3 of 16 legislators that he talked to actually understood what was going on in the “credit crisis.” Less than 20%! Hahaha! We’re doomed!
Well, maybe these Congressional losers will understand the unfolding economic slowdown, as evidenced by the Baltic Dry Index, which is an index of the cost to transport stuff by cargo ship, and which has fallen precipitously, which seems very important to me, and to Junior Mogambo Ranger (JMR) Riccardo, too, who is also alarmed by this like – as I previously said – me.
It’s actually beyond scary, in a terrifying kind of “ain’t nobody buying nothing in a consumer economy” kind of way, which means that without the consumer buying stuff as his or her contribution to the famous statistic of “the consumer is 70% of the economy”, we are, in case you ain’t heard, freaking doomed!
Well, maybe not all buying is drying up, as silver market analyst, Ted Butler, reports that in the last 10 months, “some 150 million ounces of silver can easily be documented to have been bought by investors. Undocumented purchases would add tens of millions more ounces.”
In fact, when you add it all up, “Investment demand for silver this year is running at a full 25% of world mine production and over 20% of total production (including recycling). This is a remarkable historical turnabout.”
Thus, it is easy to see why Mr. Butler is “bullish beyond belief for silver”, since this kind of demand means that “In silver, the documented 150 million ounces bought in the first ten months of this year is equal to 15% of all the silver bullion equivalent thought to exist!” Wow!
More than one-seventh of all the silver bullion “thought to exist” in the whole world was suddenly bought up in less than a year, and yet the price of silver has been pounded down to less than 10 bucks an ounce? No wonder I am so bullish on silver!
He also notes that the gold/silver ratio is at more than 80, which is “one of the biggest differences in history.”
And not only that, but since there are 4 to 5 billion ounces of gold in the world versus only 1 billion ounces of silver, that means that “the total dollar value of all the gold in the world is worth 300 to 400 times more than all the silver in the world (80 times 4 or 5)”.
Talk about undervalued! Hey! This investing stuff is easy! Whee!
By Ajay Shah, on October 6th, 2009
We’ll soon get the announcement. Here are a few possibilities, computed by Thomson/Reuters, using citation analysis.
If I had to vote, it would be a Taylor/Woodford prize. For a sense of this work, see: link, link. While inflation targeting was invented in New Zealand based on the intuition of cleanliness in public administration, Taylor and Woodford had a lot to do with being able to think straight about it.
It’s interesting to wonder how publicly visible citation data can be used to predict the Nobel prize outcome. One would want some kind of model which consumes citation data and comes up with an estimate of the Pr(Nobel prize). E.g. if one strong idea suffices (example: James Heckman) then it suggests certain people who will get through (example: Paul Romer). If they want you to build a broad literature (example: Robert Lucas) then that yields a different profile of those who will get through. Hmm, I can’t come up with an example of another Robert Lucas. Such a modelling effort will yield insights on the usefulness of summary statistics of citation data such as the h-index and the g-index. As an example, it’s easy to test which of the h index or the g index have superior predictive power in a model of predicting the Nobel prize.
Most people in India think of Raghuram Rajan as being the first Indian-born economist who became the chief economist of the IMF. What is not widely appreciated is that in the class of economists of Indian origin who are younger than Amartya Sen, Raghu is the best set of papers, as measured by citations.
By Rok Spruk, on October 5th, 2009
Gary Becker (link) and Richard Posner (link) opened a discussion on how unions influence policymaking decision. Recently, president Obama imposed punitive 35 percent tariff rate on imported Chinese tire (link) risking the coming trade war. Indeed, China may file a case against the U.S at the WTO, and the WTO may rule against the U.S for imposing illegal and discriminatory trade practices.
Many believe that president Obama enforced trade protection to win the support of the unions in health care reform. In fact, the bailout of GM and Chrysler was one of the major efforts to help unions, particularly the United Auto Workers, in paying the health-care and pension benefits that GM and Chrysler couldn’t actually afford to pay.
Recently, the Congress has been split up on Employee Free Choice Act which suggests giving mandate to unions representing employee in arbitrating union-management contracts. I believe the Congresional Budget Office will yield a meaningful research on the economic effects of the act.
The empirical evidence on union activity is, in fact, quite clear. In OECD comparison panel (link), there is a strong, negative and significant relationship between the density of union membership and labor market rigidity. Sweden, for example, hasn’t enforced a general level of minimum wages. Yet in 2007, over 7o percent of the working population was unionized. High union density further contributed to inflexible labor market structure which led to low employment growth, low productivity growth and exerted a strong upward pressure on real labor cost.
Yet, there is a distinctive character of trade unions within Europe. Traditionally, unions in Europe possessed a stronger influence on political decision in areas such as taxation, income redistribution and government size. However, there are significant disparities in union activity throughout Europe. In 1990s, Denmark enforced a series of reforms that deregulated labor market structure towards greater flexibility. Today, Denmark’s labor market is cited as the most competitive in the world (link). From 1990 to 2007, union density decreased from 75.3 percent to 69.1 percent. On the other side, labor market structures in Continental and Mediterranean Europe are known for inflexible features, regulation and rigidity. Meanwhile, Anglo-Saxon countries, Britain and Ireland, are known for flexible labor markets and few barriers impeding labor market performance. Dismissing and employee costs 10 weekly salaries in Ireland compared to 56 weekly salaries in Spain.
Although variation in trade union density over time explains a relatively large part of variation in productivity, union activity and influence in political decision-making could be the decisive factor in explaining cross-country variation in labor market outcome. That would requiring the design of principal indicator that could measure union influence on the quantitive basis. The influence of trade unions has, in my opinion, a strong common connection to cultural patterns and informal institutions.
For instance, countries with weak rule of law, persistent corruption, high tax burden and barriers to trade and investment, tend to have larger underground economies. Empirical estimates on the size of underground economies suggest that, in Europe (link), Mediterranean countries (Italy, Spain, Greece, Portugal) have the largest share of shadow economies. There is a significant cross-country variation. The estimates of shadow economies for 28 transition countries is 40.1 percent and 16.3 percent for the OECD. So, could union activity affect the size of shadow economies
If unions, as an interest group, exert a strong influence in politics, their political philosophy will probably lean left. Thus, if unions influence decisions on taxation issues, welfare benefits, pension schemes and government size, the outcome will probably induce more complexity, more regulation and more barriers to trade, entrepreneurship and investment. The combination of those factors can strongly influence labor and business incentives and, hence, also determine and productivity growth.
By Claus Vistesen, on October 5th, 2009
The analysis that follows accompanies Manuel’s political overview, over at GEM, of the recent events in Germany as well as Edward’s economic survey of the current state of play in the German economy. Essentially we are going to have a look at, arguably, one of the more salient features of the German economy in the recent period, namely that of her dependence on exports to grow. What we are going to ask here is then furthermore whether this presence of export dependency is related to the fact that Germany is one of the oldest economies in the world measured on median age (currently running at approximately 44 years)[1]. This is a bold claim and if it is unlikely that we will be able to provide decisive evidence for our claims that Germany; 1) is dependent on exports to grow and 2) that this can be traced back the economy’s ageing population, we hope that at least we will provide some perspective. As an editorial note, the arguments presented follows closely Vistesen (2010) which is essentially a working paper under preparation at this point in time.
In the first instance, it is worthwhile to point out that while export dependency in the form it will be presented here enjoys very little, if any, backing in the academic literature it remains one of the more popular ways to narrate the German situation in the context of its recent economic performance, not least in a financial crisis context (see e.g. Martin Wolf Martin Wolf (2008) – Global Imbalances Threatens the Survival of Free Trade). The main question which arises is thus how the global economy will, or indeed can, emerge in a situation where hitherto external deficit nations (the US, Spain, etc) now have to live less off of foreign borrowing while those surplus nations supporting these deficits cannot arrive at stimulating domestic demand. This question which ties together a lot of the contemporary discourses on the global economy is important to keep in my as we move along into a more static world of academic theory.
What is Export Dependency?
We define export dependency as a high and increasing connection between the variation of total output and the variation of the external balance, the latter which will be proxied by the trade surplus in the analysis that follows. Consider consequently the following very simple empirical relationship for an open economy;
Where Y(t) is national income modeled as a simple function of its components; consumption expenditures, government spending, investments, and the current account. All partial derivatives are naturally positive and if we focus strictly on the partial derivative for national income with respect to the current account, we get;
In this simple framework, export dependency may arise as function of the increasing importance of this derivative in explaining the variation of total output which simply means that the extent to which we observe the trade surplus as an increasingly strong driver of economic growth we are moving closer to a state of de-facto export dependency.
Now, this still does not answer the question of exactly what export dependency is the present context since while it is certainly one thing to be export oriented or perhaps even export reliant, the term dependency implies a much strong and potentially malignant situation as it translates into a situation where domestic economic activity becomes overtly reliant on matters elsewhere and external to the economy.
In this sense, export dependency arises in the distinction between an economy where external demand may simply be an extra boost to growth beyond a vibrant domestic economy and an economy where domestic activity is not sufficiently able to spur growth to an acceptable degree and where the positive contribution from extra demand become a prerequisite to maintain growth. It is exactly in this context that the demographic perspective becomes interesting since one obvious and intuitive consequence of the prolonged process of ageing as a result of lingering below replacement fertility as seen in Germany is that domestic demand proxied by consumption and investment demand will decline to reflect the decline in the labor force relative to the total population. This would then be a natural consequence of a standard life cycle analysis set in a closed economy where savings have to equal investment in every period.
Of course, the rub which arises as a result of this quite natural and logical process is that the need to keep and maintain economic growth does not dissipate with ageing. If anything, in a society such as the German this need will remain, or even increase, as an ever growing headache in the context of how to maintain (or viably reform) key institutional structures such as pension and health care systems whose continuing existence, whether one likes this or not, is contingent on headline economic growth. In this sense, the open economy opens up a window of opportunity to fight this situation and essentially to make up for an increasingly lackluster domestic economic environment by exporting excess capital and capital goods abroad to earn a return either in the form interest income of a pure addition to growth in the form export revenues.
Demographics and Open Economy Macroeconomics
If the introductory section above should convince you what export dependency is and why it may be related to ageing the fundamental question here is whether and how demographics may ultimately act as a driver of open economy macroeconomics and international capital flows. The empirical and theoretical contributions here are extensive, so we won’t deal with them in detail but merely point out that the idea that demographics may affect capital flows is not an original postulate and has been investigated in seminal contributions such as Summers et al. (1990), Higgins (1998), Feroli (2003), Bryant (2006), Supan et al. (2007) and Ferrero (2007) to mention just a few.
Despite considerable uncertainty surrounding the exact effects, these studies jointly find that demographics indeed do form strong drivers of open economy dynamics and that, by a applying a standard life cycle framework, come reasonably close at providing some interesting results even if for example the hypothesis of rapid dissaving is still highly contested. But what is a standard life cycle framework then in the context of the effect of demographics on the current account? Well, life cycle theory as postulated by Franco Modigliani and Richard Brumberg (see Deaton (2005)) simply states that a consumer’s saving pattern will be hump-shaped to reflect the fact that she will need to spend her working years saving for retirement where she, by definition, will not be receiving labor income. This also indicates that the current account should follow a similar pattern if modeled entirely as a function of the age structure of society
This figure is essentially drawn free hand on the basis of the empirical estimations of Higgins (1998) and comes with an important interpretation. According to Higgins (1998), and in a general life cycle perspective, we need to distinguish between two centers of gravity as economy moves through the demographic transition: One is when the demand for investment is largest as a function of age and thus when, one could argue, the capacity to absorb external investment is largest (e.g. the demographic dividend). Such periods are traditionally thought to be associated with a current account deficit since whereas investment demand may be large, domestic savings are not likely to be adequate to cover this thus implying a current account deficit to the extent that foreign savings stand ready and able to move. The second period occurs later as the total labour force begins to decline relative to the total population. This has the effect of depressing investment demand, but since this is also the period in which savings are maximized (really not counterintuitive when you think about it), it should, all things equal, be associated with a current account surplus.
The green line is a pure hypothecial construct and has no empirical counterpart (yet). It essentially represents a constraint in the form of the economy’s need to rely on external demand to provide economic growth. In this sense, the constraint is non-binding up until the economy moves into old age (say a median age of >42 years) after which the expected result from ageing based on the life cycle theory stands in stark contrast with the fundamentals of an ageing economy where external demand becomes one of the only real sources of continuous growth in headline GDP. Remember here, as a rather important point aside, that economies such as Germany need this growth if they want to maintain the continuity of their welfare societies.
Within the typology of Malmberg, Germany would clearly be in the ageing phase, but since the threshold here is very unclear as a general rule, we could say that it is placed somewhere in the maturity phase inching over to the ageing phase and thus the period in which we should hypothetically observe dissaving as the savings supply will decline faster than investment demand. The first thing to observe here is then that the fact that Germany is running a surplus is not surprising given this model framework since, but the crucial and all encompassing question becomes whether this becomes a de-facto state of dependency with respect to economic growth since the decline in domestic demand will continue to depress the potential growth rate of the economy. In the jargon of the typology above, thesis of export dependency attacks the assumption of dissaving and postulates instead that keeping domestic savings above domestic investment demand and thus running an external surplus is one of the only ways in which an economy such as Germany may hope to achieve the desired growth rates as she, inevitably, moves into the unknown with an increasingly skewed old age structure.
An Empirical Perspective
In order to get a hold of the argument in the specific context of Germany it is worthwhile to start out with the following charts which depicts the ratio of consumption to GDP, the ratio of the trade surplus to GDP, the ratio of government spending to GDP as well as the ratio of total savings (including the trade surplus) to GDP. The data is taken from OECD in current prices (seasonally adjusted) and covers the period Q1-1960 to Q3-2008. All manipulations are based on own calculations.
 
The first thing to notice is that up until the very end of the 1990s the trade surplus did not represent a substantial part of total income in Germany. If we take the large perspective we can say that up until the latter part of the 1980s Germany was running consistent trade deficit, a deficit which narrowed substantially throughout the 1990s and moved into a substantial surplus at the entry to the 21st century. Moving on to consumption it is possible to observe a slight negative trend in the share of consumption to GDP and especially in recent 10 years, the negative trend has been strong and thus we could say that decline in consumption has been substituted for an increase in the trade surplus, at least; it would appear so from just eyeballing the graph. It is also interesting to observe that the point in time where consumption to GDP peaked from somewhere around 1975 to 1985 coincides quite nicely with the peak of the trade deficit in a historical context.
Moving on to the share of government spending to GDP the trend is, contrary to the corresponding figure for consumption and investment, is upwards. However, there is a certain sense of optical deceit here since if you disregard the sharp increase in government spending as a share of GDP from the 1960 to the middle of 1970s, the trend has been very much like the one for consumption with the interesting detail that the share of government spending to GDP has not declined to the same extent as consumption.
If we finally look at the graph which plots the share of investment of GDP in combination with the trade surplus to GDP, it is obvious that while domestic investment has steadily declined as a share of GDP total savings have been more stable thanks to the addition from the trade surplus. In fact, we look at the total savings to GDP in 2008 it resides at the same level seen in 1970. What is crucial here of course is the composition of this saving base in the sense that the external surplus takes up a substantial part (around a quarter).
This last point is interesting with respect to the framework above since while the life cycle framework would definitely predict that Germany would be running a current surplus at the given juncture, it also predicts that, at some point, domestic savings will decline so as to make the external balance a negative contribution to output in GDP. The question we must ask ourselves is whether this is an optimal response to the increase in ageing since this process is also driven by a secular decline in the ability of consumption and domestic investment (not to mention government spending) to spur economic growth.
Specifically, it would be interesting here to check whether Germany may have reached a point in terms of its age structure (proxied by median age) where the contribution from external demand to output growth has been important. To that end, let us have a look at the following graph;
Notwithstanding the fact that this graph can hardly be seen as decisive evidence either way, it is worthwhile just observing the trend of the two series. The first thing we should note is that throughout the median age bracket 33-38 years the external balance has been deficit with a moderate trend towards balance as we move closer to a median age of 38 years. This is an interesting observation in so far as goes the life cycle framework sketched above where we can say that all things equal, this period was when Germany was moving towards its maturity phase in which it now finds itself slowly but surely moving into the horizon where we may only speculate to effects of further ageing. If we relax the typology a bit we can add that if a given economy may have a propensity to run a surplus as a function of its age structure it may only grow to be dependent on the continuing accumulation of this surplus as it enters a later stage of the age transition and it is this point that we are interested in here. Looking at the graph, we can superficially infer that the trade surplus to GDP increased sharply from the point where Germany moved above and beyond a median age of 39 (roughly the beginning of the 2000s).
This point in time is interesting since the sharp increase in the trade surplus’ share of GDP has occurred at the same time as a sharp decline in investment and consumption and thus a substitution in growth derived from internal domestic demand and towards one derived from external demand. The key to which this signifies export dependency is the extent to which this substitution in some sense is involuntary in the sense that it is a natural and necessary (and optimal?) way to compensate for the fact that the ability of domestic demand to generate growth declines as an economy enters the latter part of the age transition.
One issues which is worth stressing here towards the end is that the prediction of an entry into some form or the other of rapid dissaving as a function of age seems very difficult to reconcile with the economic realities of an ageing society such as Germany’s. This is not to say that it won’t ultimately occur, but it is important to emphasize that the extent to which we will see this, it is going to be a very serious issue for the structure of the Germany economy since one would assume that with an external deficit at the same time as an inability to create domestic growth as well as a potentially very large public debt overhang the German economy and indeed society will be in a very difficult position. It then seems a more likely outcome that Germany (and other ageing economies) will fight this and one of the only ways to do this (besides reversing the underlying demographics trends) will be through keeping domestic investment accumulation persistently above the domestic economy’s ability to absorb this and thus rely on the ability to offload this excess investment off to foreign takers.
List of References
Cutler, David M., James M. Poterba, Louise M. Sheiner and Lawrence H. Summers (1990) – An Aging Society: Opportunity or Challenge? Brookings Papers on Economic Activity, Vol. 1990, No. 1: 1-56
Deaton, Angus (2005) – Franco Modigliani and the Life Cycle Theory of Consumption, Research Program in development studies and Center for Health and Wellbeing, Princeton University; the paper was presented ad the Convego Internazionale Franco Modigliani Feb. 17th-18th March 2005
Ferrero, Andrea (2007) – The Long Run Determinants of the US External Imbalance, FRB of New York Staff Report No. 295
Borsch-Supan, Axel H; Alexander, Ludwig; and Krüger Dirk (2007) – Demographic Change, Relative Factor Prices, International Capital Flows and their Differential Effects on the Welfare of Generations, NBER Working Paper No W13185
Bryant, Ralph C (2006) – Asymmetric Demography and Macroeconomic Interactions Across National Borders, Brookings Institute, the paper was presented at a conference hosted by the Reserve Bank of Australia in 2006
Higgins, Matthew (1998) – Demography, National Savings, and International Capital Flows, International Economic Review, Volume 39 (1998) Issue (Month): 2 (May) pp 343-69
Vistesen, Claus (2010) – Ageing and Export Dependency, Working Paper 2009 (forthcoming)
[1] Japan would be another obvious candidate here and essentially Japan and Germany are very similar on this account.
By Thomas Knapp, on October 5th, 2009
Hat tip — Eric Dondero.
Here’s the text of a note from Tom Barthold, chief of staff to the Joint Committee on Taxation, to US Senator John Ensign (R-NV) [Click here for PDF]:
Dear Senator Ensign,
Sec 7203 of the Code provides that if there is a willful failure to file, pay. maintain appropriate records and the like that the taxpayer may be charged with a misdemeanor with a penalty of up to $25,000 and not more than one year in jail.
Sincerely,
Thomas A. Barthold
The “Code” in question is the Internal Revenue Code, and Barthold’s note was a followup to Ensign’s public interrogation of him on the issue of whether or not the IRS would be responsible for enforcing the “individual mandate” in President Barack Obama’s health care “reform” plan. Apparently the answer is “yes.”
If the IRS enforces the thing, and if failure to comply is prosecuted under the tax code, it gets pretty hard for Obama to argue with a straight face — as he did last Sunday to George Stephanopoulos — that the mandate isn’t a tax.
Last year, some companies were “too big to fail.” This year, apparently, some companies are “big enough to get Washington to sic the IRS and the cops on people who don’t want to buy their stuff.”
How big does a company have to be to get that kind of sweetheart deal? Will the store ads that arrive in the mail each week eventually come with red letter warnings that a warrant may be issued for your arrest should you fail to take advantage of Wal-Mart’s low low prices every day, or to transfer your medical prescriptions to Walgreens? Will we be assessed fines (with jail time for not paying) if we choose to nurse a few more miles out of our clunkers, or ride bikes, instead of ponying up for something new from Detroit every five years?
A liquidator with friends in DC could really clean up on this kind of thing — buy a warehouse full of Slim Whitman albums, say, then get a two-years-in-stir penalty passed for willful non-possession of “Indian Love Call.” It’s a matter of personal responsibility! We must each carry our fair share of the yodeling fandom burden!
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