By Eldon Mast, on November 17th, 2010
Manufacturing rose quite handily in October. That is according to the Industrial Production report released on Tuesday.
By major components, manufacturing increased a healthy 0.5 percent, following an upwardly revised 0.1 percent rise in September (previously a 0.2 percent dip). Excluding motor vehicles, manufacturing rose 0.5 percent, following a 0.1 percent increase the month before.
The output of durable goods increased 0.9 percent, with increases in most major categories. The production of nondurable goods moved up 0.2 percent in October after having risen 0.4 percent in September.
It really is the manufacturing component that matters in this report since the utilities component can swing sharply on adverse weather. The manufacturing component is quite healthy and should lead us to discount any weakness in the Empire State report yesterday.
By B.P.T., on November 17th, 2010
The Mortgage Bankers’ Association purchase index was released at 7:00 AM EST, and there was a week to week decrease of 5.0% in the Purchase Index and a week to week decrease of 16.5% in the Refinance Index as interest rates moved up significantly from near record lows.
At 8:30 AM EST, the Consumer Price Index report for October will be released. The consensus is that CPI increased by 0.4% last month, with a 0.1% increase in CPI when food and energy are removed.
Also at 8:30 AM EST, the Housing Starts report for October will be released. The consensus is that construction on 590,000 new homes were started last month, which would be a decrease of 20,000 from September.
At 10:30 AM EST, the weekly Energy Information Administration Petroleum Status Report will be released, giving investors an update on oil inventories in the United States.
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By Winton Bates, on November 16th, 2010
A few months ago a guest blogger on ‘The Baseline Scenario’ blog, StatsGuy, wrote a post entitled ‘Good Government Versus Less Government’. It was described as a ‘must-read’ in a post by Tyler Cowen on ‘Marginal Revolution’ and received a great deal of attention on a range of other blogs including Scott Sumner’s (here).
StatsGuy draws attention to the fact that the size of government component of the Heritage Foundation index of economic freedom is negatively correlated with the other components of this index. He concludes that the Heritage Freedom index is really a composite of measures that get at two different things: good government, and less government. His bottom line:
‘Overall, the Good Government factors tend to dominate, and drive a lot of the correlation with good economic and quality of life outcomes. When one splits out the factors, the case for Less/Weaker Government weakens substantially, and the case for Clean/Non-Corrupt/Efficient government strengthens considerably’.
Some other researchers have similarly objected to the inclusion of size of government in economic freedom indexes. For example, Peter Lindert describes this as ‘guilt by definition’ on the grounds that it tends to make big government and the welfare state look bad merely by describing this national attribute as contributing to lower economic freedom (‘Welfare states, markets and efficiency: the free lunch puzzle continues’, 2007: 6).
At least one contributor to the discussion of StatsGuy’s post made the point that if economic freedom has two different dimensions, a lack of correlation between those dimensions does not necessarily mean that one of them is irrelevant. For example, it is possible for both size of government and quality of government to be important to economic growth.
I recently had an opportunity to test whether this is so in preparing a background paper for the 2025 Taskforce, which was established by the New Zealand government to advise how average incomes in that country could be raised to equate those in Australia by 2025. The analysis provides some support for the view that size of government is an important component of economic freedom indexes.
The analysis uses the Fraser Institute’s index of economic freedom because this provides a consistent measure of institutional quality over a longer time period than the alternatives. The data set relates to ‘advanced economies’ as defined by the IMF – this data set includes high income jurisdictions with small governments, such as Hong Kong and Singapore, as well as OECD countries. The regression, based on panel data, explains average per capita GDP growth in each decade in terms of several variables including two components of economic freedom at the beginning of each decade, the size of government index and ‘other economic freedom’. The relevant regression results are presented in Table A 2.3, p 43 (the right hand column).
The coefficients on both the size of government and ‘other’ economic freedom variables were significantly greater than zero – suggesting that smaller size of government has a positive effect on economic growth. The magnitude of the estimated coefficient on size of government is about half that on ‘other’ economic freedom, but that is about twice as large as I had expected it to be on the basis of the weight of size of government in the economic freedom index (20%).
One fairly obvious question that might be asked is that if size of government is so important, how is it that some countries with big governments, an obvious example is Sweden, have managed to maintain relatively strong economic performance. I have attempted to answer this question in the chart below which compares per capita incomes in Sweden and Australia (Penn World Tables, rgdpch with some extrapolation using IMF growth estimates). The results of the simple analysis presented in the chart suggest that if Sweden had not undertaken substantial economic reforms (including some improvement in the size of government component of economic freedom as well as other components) it would have performed poorly. The chart also suggests that Sweden’s economic growth performance could have been much better if it had a smaller government.
 This analysis doesn’t tell us that every country could become a paradise if only it had a small government, or that countries with big governments are dreadful places to live. It just suggests that big government is not a free lunch. The lack of correlation between the size of government and other aspects of economic freedom is interesting, but it doesn’t mean that size of government doesn’t matter.
By Christopher Briem, on November 16th, 2010
Required reading in itself is Harvard’s Ed Glaeser latest in City Journal: Start-Up City Entrepreneurs are the heroes of New York’s past and the key to its future.
What I caught first was the reference to former Pitt Economist, the late Ben Chinitz, and his thoughts direct from his seminal work. Contrasts in Agglomeration: New York and Pittsburgh, American Economic Review, Papers and Proceedings, Vol. 51, 1961, pp. 279-289. Read Glaeser on the crux of Chinitz’s argument desribing where Pittsburgh was 50 years ago:
Fifty years ago, the economist Benjamin Chinitz used the apparel industry to compare New York City, which then seemed like a model of small-scale entrepreneurship, with Pittsburgh, a city of massive steel companies. “My feeling is that you do not breed as many entrepreneurs per capita in families allied with steel as you do in families allied with apparel,” Chinitz wrote. “The son of a salaried executive is less likely to be sensitive to opportunities wholly unrelated to his father’s field than the son of an independent entrepreneur.” Few economists would use the word “breed” today, but Chinitz’s hypothesis remains legitimate: a vast industry of small-scale entrepreneurs leads to the development of entrepreneurial skills, which are used in other industries and also passed along to children.
Measuring entrepreneurship is one of those nearly mythical metrics we talk about far far more than we can really generate meaningful numbers for. When it comes to Pittsburgh people seem to talk as if the entrepreneurial climate in Pittsburgh has improved in the half century since Chinitz wrote the article referenced above. Yet most measurements of entrepreneurial activity in Pittsburgh have never shown much improvement at any time since when Chinitz wrote. If you accept that observation as a premise it begs a big question? Are our perceptions correct?
By B.P.T., on November 16th, 2010
At 7:45 AM EDT, the weekly ICSC-Goldman Store Sales report will be released, giving an update on the health of the consumer through this analysis of retail sales.
At 8:30 AM EDT, the Producer Price Index for October will be released. The consensus is that the index increased 0.8% over last month, and increased 0.8% when food and energy are excluded.
At 8:55 AM EDT, the weekly Redbook report will be released, giving us more information about consumer spending.
At 9:00 AM EDT, the Treasury International Capital report for September will be released, showing the flow of capital in and out of the United States economy.
At 9:15 AM EDT, the Industrial Production report for October will be released. The consensus is that there will be an increase 0f 0.3% in production and an increase of 0.2% in industrial capacity utilization.
At 10:00 AM EDT, the Housing Market Index for November will be announced. This index is created from a survey of homebuilders, so it shows the confidence that the sector has in the overall economy and their business.
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By Claus Vistesen, on November 15th, 2010
Life can be incredibly cruel sometimes. Only a week after Bernanke gave markets an early Christmas present with another helicopter drop the SP500 is stuttering and it seems, much as many astute observers have argued, that the real effect from QE lies in the announcement itself. Further, and to add insult to injury a recent survey conducted by Bloomberg suggests that the Fed’s reenactment of QE is not particularly popular among investors as they don’t think it will help the economy or the unemployment rate but rather that it is a deliberate policy to drive down the USD.
Ok, this is the trivial point then and I don’t give much for the investors’ opinion here since one presumes these are the same investors that recently scurried around the QE2 announcement as, well, pigs around the trough. The real irony here is that just as Bernanke thinks he can settle down to watch the USD drift down to help exports the crisis in the Eurozone flares up again, pushing a correction in the Euro and a general sentiment towards risk-off which would be positive for the USD. So, if QE does not help the economy or the unemployment rate and can’t even push the USD down and/or secure a decent melt-up in risky assets, what is a poor central banker left to do?
Now, my screen is a sea of red today which may provide the first bid for an answer for that question and the reason is essentially that the great eye of the market has turned from Bernanke’s helicoptor drop to the Eurozone where the problems of course never went away (oh and of course tightening in China). To add further context, provisional GDP estimates suggest that growth has slowed down notably in the Eurozone with especially the peripheral economies such as Spain, Italy, Ireland posting anemic growth rates.
In itself, it is not surprising that the effect from QE2 has gone astray, but the ultimate cynic would no doubt point to the fact that the real catalyst of the resurgence of the market’s focus on problems in the Eurozone coincided pretty well comments from first Angela Merkel and second the French finance minister Lagarde that bondholders should ultimately prepare for taking a loss on peripheral bonds.
Effectively, this seems to have broken Ireland’s back and now it is only a matter of time before Ireland enters into some form of quasi IMF/EU custody and most likely we will see just what kind of beast the stability fund is. Of course, the actual degree to which bondholders are supposed to take part in a restructuring was greatly watered down by comments hitting the wire today that outstanding debt would not be affected.
(quote Bloomberg)
European finance ministers said plans to establish a new crisis resolution mechanism, including the potential for bondholders to be held accountable, will not apply to outstanding debt. “Any new mechanism would only come into effect after mid-2013 with no impact whatsoever on the current arrangements,” the finance ministers of Germany, France, Italy, Spain and the U.K. said in a statement distributed to reporters in Seoul today.
This sounds to me to be the ultimate rubber paragraph and won’t do anything but to kick the proverbial can down the road, but in terms of calming markets in the here and now. Perhaps. On Ireland in general, I have already covered the situation in some detail, but going back to the cynical take on this situation, it seems that Ireland might have been thrown to the wolves exactly in order to bring a little attention back on Europe and thus in an attempt to avoid that the EURUSD moved too much above 1.40. It certainly seem to have worked.
Perhaps this is me being too cynical however and surely the toolbox contains other tools than merely pulling the restructuring and pissing off everyone. One alternative is that the ECB joins the ranks of its QE wielding colleagues in Japan and the US and start buying them bonds, big time and with no reservations and questions asked. Indeed, Bloomberg’s Simon Kennedy and James Hertling said it well when they recently denoted the ECB not only as the buyer of last resort, but of only resort;
(quote Bloomberg)
European Central Bank President Jean-Claude Trichet is the buyer of only resort as the euro area’s bond market melts down (…) ”The ECB’s lack of action is puzzling to say the least and begs the question as to whether it’s fulfilling its financial- stability mandate,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland in London. “The more the ECB waits, the bigger the purchase program will have to be.”
Note in particular monsieur Cailloux’ comments here. Basically, he is saying. What the heck are they waiting for?
A likely question can be directed at the G20 who concluded their meeting this week in Seoul and while I certainly recognise the inherent difficulties in agreeing on difficult issues, it is a bit disappointing still. Macro Man provides a cynical view of the consequences of s strong global consensus of doing nothing. Perhaps, this is part of the effect from markets seemingly being able to eye only one thing at once?
By Emmanuel Tabones, on November 15th, 2010
There is a scene in Book XXI, Chapter IV, of Sir Thomas Mallory’s Le Morte D’Arthur,” which described how King Arthur waged his final battle with Sir Mordred, concluding with the utter destruction of both their armies, and leaving the latter surviving, alone. Meanwhile, the monarch still had two knights left, Sir Lucan and Sir Bedivere, though they were both “sorely wounded.” Sir Lucan pleaded with the king not to continue the conflict any further, reminding him that he had “won the field” that day. But Arthur would have none of that as he was determined to exact final revenge, at whatever cost. Readers all know what happened next because of his fateful decision.
This all came to mind as I read a recent question posted in the Wall Street Journal’s online “Journal Community” section:
Should the U.S. and other countries risk a trade war with China over the valuation of the yuan?
Alas, it is just another way of saying, should the U.S. and like-minded countries risk mutually assured destruction in order to fix what others refer to as a non-existent problem, or at worst, one that is overblown. We could all simply end up like King Arthur.
As economist Walter E. Williams noted in his excellent article entitled, “Our Trade Deficit (May 25, 2005):” “I buy more from my grocer than he buys from me, and I bet it’s the same with you and your grocer. That means we have a trade deficit with our grocers. Does our perpetual grocer trade deficit portend doom?”
Of course not, I say, but as Dr. Williams had observed, this example illustrates that there is more to the issue than those seemingly frightening deficit figures used by certain “pundits and politicians” to scare the general public, and there are a fair number of such fear mongers these days, both from the political right and left, whether we refer to Pat Buchanan, Lou Dobbs, as well as former congressman Richard Gephardt, current U.S. Senator Sherrod Brown (D-Ohio), and a host of others.
However, judging from the lopsided poll results and angry posts in support of trade war, these respondents and other, similarly outraged individuals, have largely ignored the thoughtful and sensible pronouncements of people like Dr. Williams. Yes, these folks have certainly worked themselves up to a similar, “to hell with the consequences” frenzy, and the U.S. Federal Reserve’s new initiative, known as QE2, is largely influenced by these same views. Fortunately, saner heads seem have to have prevailed at the recent G20 summit, with the general consensus rejecting American efforts to pressure China to relax tight controls on its currency. Yet, that hardly resolved any major issues, leaving the prospect of trade war hanging over everyone’s heads like a dreaded “Sword of Damocles.” More importantly, the United States has simply incurred the opposition of trading partners such as Germany (not to mention China) for this seemingly reckless monetary policy aimed at further bringing down the value of the U.S. currency, all in the name of “stimulating the U.S. economy and creating jobs.”
Gee, if only things were that simple and not fraught with risks, such as the likelihood of causing a dramatic rise in inflation, especially in the price of commodities like petroleum products. With the continued deterioration of the U.S. dollar, we may very well see oil prices again rise north of USD $100 per barrel, perhaps as early as 2011. The Obama administration is probably betting that many Americans (especially those who actively participate as voters) are not savvy enough to know the connection, and unfortunately, that may very well be the case. Maybe people will finally figure it out once oil hits USD $200, with inflation raging at 20 percent.
Meanwhile, I doubt President Obama fooled anyone with his insistence that QE2 was “not meant to deliberately weaken the U.S. dollar,” as reported by Ben Feller of AP and others. It also appeared that the Fed was not fully prepared for international reaction, especially with countries getting ready to, or having imposed additional financial regulations meant to blunt the intended effects of QE2. Nowadays, I am increasingly convinced that Bernanke and his people are losing their grip on economic, global reality.
With this unfortunate and largely misleading political perception that America’s high unemployment rate is directly linked to its massive U.S. trade imbalance, and with increasing demands to impose trade barriers, other nations could likely respond in kind, which could bring us to a SH2 (Smoot-Hawley 2) type scenario and an economic nightmare that could reduce global trade dramatically and bring about massive, worldwide unemployment not seen since the Great Depression. As the philosopher George Santayana was quoted as saying, “Those who do not learn from history, are doomed to repeat it.”
By B.P.T., on November 15th, 2010
At 8:30 AM EDT, the Empire State manufacturing index for November will be released. The consensus is that the index value will be 15, which would be an decrease of 0.73 points from October, after an increase of over 11 points last month as economic indicators improve in New York.
Also at 8:30 AM EDT, the Retail Sales report for October will be released. The consensus is that retail sales increased 0.7% from September, after a 0.6% increase last month.
At 10:00 AM EDT, the Business Inventories report for September will be released. The consensus is that inventories increased 0.9% from August.
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By Trace Mayer, on November 12th, 2010
A Merrill Lynch banker has been indicted on charges of helping clients move undeclared money abroad. By using a few simple and free hawala privacy tips he could have drastically strengthened his criminal defense and perhaps even avoid arousing suspicion in the first place.
A bedrock legal principle is that the accused stands innocent until proven guilty.
BLOOMBERG REPORTS
Bloomberg reported:
Just before dawn on a cool June morning, six submachine-gun-wielding federal agents charged into Alexandre Caiado’s Sao Paulo apartment. After arresting him, they hustled Caiado into a pickup truck for a 30-block drive to Merrill Lynch & Co.’s office, where he had been working as a private banker for two years.
As the agents scoured Caiado’s desktop computer, Mary Livingston, a lawyer for Merrill, sat down alone with Caiado. “She gave me very specific instructions,” says Caiado, recalling the scene in 2006. “I wasn’t supposed to say what I really did.”
Prosecutors charged Caiado with arranging illegal fund transfers for Merrill clients — part of what has become a four- year investigation into bankers helping clients secretly move undeclared money abroad to evade Brazilian income taxes. …
“I kept trying to figure out what I did wrong,” says Caiado, in his first interview ever with journalists. “It was Merrill Lynch, one of the most respected places to work on the planet. They were emphatic about the fact that it was OK to transfer money abroad.”
Caiado, who wears jeans and a sports shirt with the sleeves rolled up, says he’s a scapegoat.
An ounce of prevention is worth a pound of cure.
PRIVACY TIPS
In this interview with Bill Rounds of How To Vanish we discuss the Merrill Lynch banker’s case and provide three powerful tips on how to protect your privacy when engaging in legal hawala transactions. Bill has contributed before with Hawala Banking And Currency Controls Part I and Part II. These privacy tips would also be helpful for those who are implementing the strategies found in the Tax Domicile Report.
1. Advantageously use the $10,000 reporting limit. When you cross borders there is often a safe haven of having to declare only amounts of cash or monetary instruments in excess of $10,000 per person per crossing. If you, family and friends travel frequently then availing yourself of this limit can quickly add up to material amounts.
2. Use encryption. Encrypt email. Encrypt files. I find using TrueCrypt and Dropbox to be a potent duo for encrypting and transferring files.
3. Jurisdictional arbitrage. Different jurisdictions have different privacy laws and free speech protections. You can use the differences, multiple jurisdictions and information technology to leverage your defensive position and make it exponentially costly for nefarious individuals to breach your privacy in the first place.
For example, England may throw you in the pokey if you do not disclose an encryption key in contrast to the United States where you often do not have to disclose an encryption key. Iceland recently enacted extremely strong legislation to protect free speech that was almost entirely written by the team at Wikileaks. By encrypting and bouncing data around the globe which resides in the cloud you can make the acquisition of your personal information without your consent extremely costly in terms of time, money and legal process.
The goal is to protect your data and have it reside safely and out of reach in the cloud. If costumed thugs break into your office wielding submachine guns then they will find nothing useful. By using anonymous web surfing techniques such as VPNs or proxy servers you can obfuscate the path to your data.
CONCLUSION
A bedrock legal principle is that the accused stands innocent until proven guilty. While it is possible that Mr. Caiado did engage in illegal conduct we should keep in mind that the case has not been proven beyond a reasonable doubt and therefore Mr. Caiado is presumptively innocent. Additionally, unlike real criminals who lie, steal, murder and intimidate, even costumed ones wielding submachine guns, even if Mr. Caiado engaged in the alleged illegal conduct there is no victim. None of the allegations are for charges of using violence or intimidation against innocent people or their legitimately acquired property.
But as quantitative easing increases, the State becomes hungrier and currency controls are ratcheted up there will be increasingly large amounts of innocent behavior that is criminalized by various costumed criminal gangs to extort holders of capital. But the cost of protection has dramatically fallen and jurisdictions like Iceland and Montenegro are arising and catering to the productive members of society. By starting early and taking proactive steps to engrain these privacy tips into your habitual activities you will be in a better position to avoid arousing suspicion and if in the unfortunate and unlikely event there is a criminal case brought your defense will be that much stronger. An ounce of prevention is worth a pound of cure.
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By B.P.T., on November 12th, 2010
At 9:55 AM EDT, Consumer Sentiment for the first half of November will be announced. The consensus is that the index will be at 69, which would be an improvement of 1.3 points from the unexpectedly low level reported in the second half of last month.
At 4:30 PM EDT, the Federal Reserve will release its Money Supply report, showing the amount of liquidity available in the U.S. economy.
Also at 4:30 PM EDT, the Federal Reserve will release its Balance Sheet report, showing the amount of liquidity the Fed has injected into the economy by adding or removing reserves.
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