The Skeptical Optimist

Inflation Watch, Apr 2007

I’ll start posting this chart monthly, as soon as the Dallas Fed publishes its “trimmed mean” inflation statistic, calculated from Personal Consumption Expenditures.  That measure (the red line) is an indicator of consumer price inflation based on the Commerce Department’s data.  The TIPS spread (blue line) is, in effect, the bond market’s collective opinion of expected inflation. 

Click to enlarge:

Both measures are still saying the same thing: Inflation is still hovering around the 2.5% level.  Doomsday, if it’s out there somewhere in the future, is still eluding the radar.  [I think it's an apparition, but I'll keep watching for signs of it.]  So far, the Fed is successfully threading the needle (not too loose, not too tight). 

Just to take in one other perspective, I bought a book titled The Death of Inflation, by Roger Bootle.  Although I’m not sure high inflation has been rendered unlikely or impossible just yet, it’s next on my reading list anyway.

Profit: Our “thank-you” to effective businesses

A few months ago I suffered my worst computer crash ever [something must have fried the motherboard]; the 3-year-old box was beyond hope.  The only way for me to recover was to purchase a new box at Best Buy on a Sunday evening, then return home to install applications and retrieve data from the backups I’d made.   

FQ.07.17: Favorite Quote for This Week

Central planning is always fairer, at least when the planners remember not to look after themselves first, a detail they sometimes overlook. 
—Peter Huber

GDP, First Quarter 2007

The housing market slowdown took a full percentage point off the first quarter growth rate of real GDP.  Here’s the usual chart:

On the bright side, just about all other indicators are booming, including the growth in exports as the world economy grows.  This indicator should get a lot better as 2007 unfolds.

Divergence
The Monthly Treasury Statement is due out in two weeks; if it confirms that tax receipts (corporate and individual income) are still growing at double-digit rates, that means we are in a period when the growing debt-to-GDP ratio is sending out a much different signal than the “interest as a percent of tax receipts” indicator, which is low and steady, as shown below.  Although real GDP growth is key, it's best for analyzing the past; for watching the debt load however, I like "net interest % tax receipts" better than debt-to-GDP whenever they diverge, because it’s more timely and more to the point. 

Click to enlarge: 

Five things China can do with their US dollars

China has had a big trade surplus with the USA for years.  Although that doesn’t scare me nearly as much as it apparently scares some of our politicians, I thought it would be worthwhile to list all the possible things China could do with their dollars, and what our reaction should be to each one.  [I was asked to lift this from the comments, so here goes…]

The five things China could do with the dollars they accumulate from the USA:

1. Buy stuff from us.
Our proper reaction: "Thanks for creating US jobs."

2. Invest in dollar-denominated real assets.
Our proper reaction: "Thanks for helping us grow, and for increasing our tax base. We look forward to the extra growth, and the extra tax dollars we'll collect from you."

3. Invest in dollar-denominated financial assets such as Treasury securities.
Our proper reaction: "Thanks for trusting us to invest your money in our own growth and security; we’ll use a portion of the extra growth to pay you the 4.5% interest we promised.  Feel free to continue buying T-bonds and notes with your dollars; that's money we would otherwise have to tax away from our own people, and it also helps hold down the interest rate we'll have to pay you."

4. Hoard the dollars.
Our proper reaction: "Thanks for trusting in our currency more than yours, thereby making future inflation of our currency even less of a worry than it is now.  In essence, this means the goods you sold us turned out to be absolutely free.  Thank you very, very much."

5. Dump the dollars for another currency.
Our proper reaction: "Your masochism is puzzling.  Nonetheless, thanks for the goods you sold us before you caused the value of the dollar to drop a smidgen, inexplicably making it more difficult for us to continue buying goods from you."

Those are the only five I could think of, but feel free to suggest extras you think I overlooked.

The joy of trade deficits

Yesterday I heard Pat Buchanan on CNBC lamenting our large trade deficit with Communist China.  I got a few good chuckles listening to him.  He’s been making a lot of political hay for many years with his pseudo-economic rant, and today I wasn’t surprised that he reminded us it was not just China, but “Communist” China he was talking about.  (Lou Dobbs does the same thing; they both like to imply that it’s bad enough for us to have a trade deficit with regular people, but it’s doubly disgusting when we have one with foreign people who are not only scary Chinese, but also “communists,” for heaven’s sake.  Sheesh, how low can we sink—corrupting communists by offering them capitalistic opportunities?) 

If you think anything like I do, you’ll really enjoy the potent antidote I found to the vitriolic drivel of the Pat Buchanan and Lou Dobbs types: Russ Roberts’ interview of Don Boudreaux, chairman of the economics department at George Mason University.  The interview is titled “Boudreaux on the Economics of ‘Buy Local’” and you can either download it or listen to it at this page.  Invest 55 minutes in this, because it’s well worth it.

One of Boudreaux’s supreme pet peeves is hearing someone complain about a bilateral trade deficit—i.e., a trade deficit with one specific country—and he expertly rips that argument to shreds.  (Example: If Pat Buchanan is upset by his country’s trade deficit with China, he must be really disgusted with his own personal trade deficit with his favorite grocery store—unless, of course, he hasn’t really thought through the economics of trade deficits very well.  I strongly suspect the latter, by the way, because Buchanan is a politician, not an economist.) 

Enjoy the Roberts/Boudreaux interview.  They explain why trade deficits are nothing to fear, as long as the sellers remain confident in the stability of the currency they accept in exchange for the goods they are selling us—and that’s the situation we have today.

-------------------------
End note:
Russ Roberts is responsible for a cornucopia of educational interviews at EconTalk.  Also, Roberts and Boudreaux are co-writers of the Café Hayek blog. 

Destroying jobs, and creating them

“Creative destruction” is the term Joseph Schumpeter coined to describe in a nutshell how the economy grows.   But the second word is the one that seems to get most of the attention from our mainstream media, for some reason.  (I touched on this subject qualitatively a few months ago, and decided to give it some perspective with this post.) 

Lou Dobbs gives us a good example of a focus on the second word only; he’s selling a book (Exporting America) about how our corporations are destroying jobs—by “exporting” them to foreign countries, of all places!  [I have no use for single-entry accounting, so I’m not providing a link to his book.]

Anyway, Dobbs is correct: jobs are being destroyed (they are represented by the red bars in the chart below; data source: Bureau of Labor Statistics).  By the way, not all of the destroyed jobs were “exported”; many just disappeared.  Click to enlarge:

But the chart also gives us the good news, an added perspective the single-entry accountants don’t talk much about: the job creation process, the result of which is represented by the blue bars.  Who’s creating all those new jobs?  Could it be corporations?  Of course it could.  [I started one recently, and I'm only one among thousands.] 

Also notice the net effect of the creative destruction process (green bars): net gains since mid 2003.  Our economy has been a net creator of jobs most of the time.  (But we sure wouldn’t know it from those who keep complaining that we’re “exporting jobs,” would we?)  The creative destruction process replaces not just obsolete jobs with new, better ones, but also replaces deadwood companies with new, innovative, better-managed ones.

One last chart, for a little more perspective; click to enlarge:

This chart shows the big picture: how the job churn compares to the total number of jobs in the private sector.  Notice the growth trend in total jobs since 2003.  The “creative destruction” process is working just as Schumpeter described sixty years ago.  Net growth is the result. 

The global warming debate isn’t "settled"

A follow-up on global warming:  As I suspected, in spite of the way some are talking, the debate isn’t quite “settled”—at least for those of us who don’t buy the argument that scientific truths are “settled” by opinion polls, or an appeal to either side’s bandwagon. 

A recap of the two sides of the debate, as I see them:

(1) The globe is warming, and it’s our fault; or,
(2) The globe is warming, and it’s the sun’s fault. 

Why am I interested in the global warming topic?  Because of the impact the globe’s politicians will have on the rate of global wealth creation (i.e., the rate at which the people of the globe escape from poverty), whichever way the science goes.  If it’s our fault, then the proper question is, what should we do, if anything, to mitigate our effect?  If it’s not our fault, then the proper question is, what should we do, if anything, to prepare for the inevitable? 

Getting the science right will help ensure that we don’t waste global resources by solving the wrong problem.  [The worst thing we could possibly do would be to get the science wrong, but to keep that under wraps—because the “solution” money is necessary to fund the politicians advocating the “solution.”  I can’t think of a bigger waste of economic resources, can you?] 

I discovered a forum at BadAstromony.com that looked like a good place for me to start isolating the science from the politics, so I asked my question at the beginning of this thread.   

One of the intriguing responses included this hypothesis and tentative conclusion . . .

Hypothesis:
Global warming is a significant problem and is caused by mostly by CO2 from human activities.

[--Facts and estimates--]

Tentative conclusion:
The only non-debatable issue is that there is some temperature increase due to human CO2 emission. The magnitude of CO2’s historical contribution to temperature is debatable, and the magnitude of future CO2 emissions is a step above guesswork (maybe two steps). Add to that the question of whether warming is bad in the first place (which is probably a function of how much warming we’re talking about, which is guesswork), and the question of what we can do about it anyway (not much without nuclear or draconian measures to change our energy consumption), and I think I can safely say that debate is still called for here.

To see the responser's entire post, including the “facts and estimates,” go to this link.

That’s where my time-constrained research stands.  The scientific debate is still open, and I’ll be keeping an eye on it—because of my interest in economics.   

FQ.07.16: Favorite Quote for This Week

The only profit center of a business is a customer whose check hasn't bounced.
—Peter Drucker

Interest rate inversion continues

It’s time I posted the interest rates chart again.  Short term and long term rates are still inverted. 

Although inversion has historically signaled recession, other indicators are pointing toward sustained growth.  In short, I’m still not in the interest-rate forecasting business.  However, it is good to see the bellwether 10-year T-note holding reasonably steady, below 5%.