Policies apart: how the central banks differ on prices

(Source: 4/7/2010 Financial Time print edition)

[My Thoughts: Keynesian economists believe a priori that capitalism is inherently unstable; therefore, government intervention is absolutely necessary to smooth out the drop in consumption during recessions. They never consider seriously enough that recessions are in fact a result of prior government policies, which in our modern times it emanates from Central Bank controlling the price of money (i.e. the interest rate). Maintaining low interest rates necessarily requires printing money. The excess money floods the economy, which pushes up prices. Slowing down the prining of money or removing it completely from the economy (which in economic speak means tightening monetary policy) eventually leads to a bust. No one, except the "Austrian" economists adhere to this philosophy. I do. This philosophical framework is what allowed me to forsee the previous financial crisis; it is reason that i can confidently determine another crash, in much greater intensity, is on the way. The following missive from the Financial Times gives evidence that the policy of excessive money printing is slowly coming to an end. This is inconsequential because an economic bust will inevitably occur once money printing slow.]

China

The People’s Bank of China is playing a waiting game but with the benchmark one-year deposit rate currently below inflation, a rate rise is likely in the next few months

US

The Federal Reserve said in March rates would remain at ‘exceptionally low’ levels for an ‘extended period’. Market expectations are for rates to stay on hold for six months or more

Eurozone

The European Central Bank sees growth and inflation remaining moderate, which means markets are not pencilling in a rise in the main policy rate until next year

Brazil

The central bank has kept its target overnight rate at 8.75 per cent since July but sent a strong signal last month of an imminent rise. Economists expect the rate to hit 11.25 per cent by 2011

India

The Reserve Bank of India raised interest rates in March for the first time in almost two years in what is expected to be a long tightening cycle as it tries to cool rising prices

Japan

Despite cutting rates to 0.1 per cent, Japan is still mired in deflation, putting pressure on its central bank. Markets judge that rates will remain close to zero for at least a year

UK

The Bank of England voted unanimously in March to hold rates at 0.5 per cent and halt monetary easing, but noted that a close eye needed to be kept on the public’s inflation expectations

Argentina

The central bank is likely to keep monetary policy loose for some time despite the latest official data putting monthly inflation at a nearly four-year high of 1.2 per cent in February

All you need to know about modern economics in less than 10 minutes

Prof. Nassim Taleb explains it. See this video.

Stock Market Value: The Dow-Gold Ratio

In light of the Dow’s extraordinary resurgence over the last 12+ months, where it has risen from about 6,600 to nearly 11,000, it is worth (pun intended) putting that figure into perspective. With that in mind, I present you today’s chart courtesy of http://www.sharelynx.com/chartstemp/DowGoldRatio.php (for a better graphic of the chart click on the link).

Pay attention to the “fiat capital era,” which is the one marked by the creation of the Federal Reserve Board—the U.S. Central Bank. Fiat literally means by decree; in other words, value is not set by the economic law of scarcity but rather by political legislation. A Dow measure of, say 11,000 is insignificant unless it is compared against a standard of value. Gold has historically been such standard.

As you can see from the graph, true stock market bottoms are set when the Dow-Gold ratio is between 1.5 and 3.0. Presently the ratio stands at 9.74, which about 33 points below of the all-time high set in 1999. Two things have caused this shrinkage: the Dow has declined and gold has risen. Based on this measure of value, the stock market is significantly overvalued on a long-term basis. This will be corrected in our generation. What is impossible to predict is exactly when it will occur.

"Knowing the price of everything and the value of nothing"

Robert Eisenbeis, chief monetary economist at Cumberland Advisors Inc., talks with Bloomberg's Betty Liu and Michael Mckee about the Federal Reserve's release of details about securities it acquired to aid the sale of Bear Stearns to JPMorgan Chase & Co., part of the information that Bloomberg News sued the central bank for in 2008.

The Fed, through its New York regional bank, also identified the securities acquired in the 2008 bailout of American International Group. (Source: Bloomberg)

http://www.youtube.com/watch?v=XHqtmT-L338

(Video runs 4 mins 19 secs).

Unemployment Rate for March 2010

The U.S. Bureau of Labor Statistics reported that the March 2010 unemployment rate remained unchanged at 9.7% and that nonfarm payrolls increased 168K. Politicians and court economist lauded this as signs that “the economy appears to be moving towards escape velocity.” Of course, the less salient aspect of the announcement, which renders their views as inappropriate, we left out.

For example, notice the following:

- The number of long-term unemployed (those jobless for 27 weeks and over) in-creased by 414,000 over the month to 6.5 million. In March, 44.1 percent of unemployed persons were jobless for 27 weeks or more.

- The number of persons working part time for economic reasons (sometimes re-ferred to as involuntary part-time workers) increased to 9.1 million in March. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job.

- Employment in federal government was up over the month, reflecting the hiring of 48,000 temporary workers for the decennial census.

The announcement figures are merely statistical noise. The employment situation continues to be dismal.

Nonfarm Jobs: Historical Perspective

[Below is a a Chart of the Day commentary on the March employment numbers. Further below you will read my comments.]


Today, the Labor Department reported that nonfarm payrolls (jobs) increased by 162,000 in March -- the largest increase in three years. Today's chart puts that decline into perspective by comparing job losses following the beginning of the current economic recession (solid red line) to that of the last recession (dashed gold line) and the average recession from 1950-1999 (dashed blue line). As today's chart illustrates, the current job market has suffered losses that are more than triple as much as what occurs at the lows of the average recession/job loss cycle. It is also worth noting that previous job market declines did not tend to end abruptly but rather flattened out before moving back into an expansionary phase. Today's relatively positive jobs report provides an early indication that the current job market is moving from a phase of stabilization to that of expansion [emphasis mine].

********************************************

My Comments:

I highlight the last statement from Chart of the Day’s commentary because it demonstrates the problems of deriving conclusions simply by looking at charts; namely, the concept of spurious correlation. In other words, that a relationship exists between 2 variables may in fact be caused by something else entirely. That is, correlation does not imply causation. This results in the idea that since unemployment has stabilized, growth will return. Furthermore, this conclusion is furthered fortified by the assumption that the past is indicative of the future. All chart lack context, yet they provide a valuable simplification of what is happening. But like all tools, they must be used appropriately.

The only valuable conclusion we can derive by looking at the chart is that the expected expansion most likely will be weaker than the 2001-2006 expansion. Weaker employment means a reduction in the confiscation base (i.e. tax payers). In light of burgeoning fiscal spending, this could translate in a greater deficit than expected.

Let me mention other things that were left out of the commentary above:

- The majority of job losses in the present recession originated in the bloated financial and construction sector. These jobs are not coming back!

- The 2001-2006 average was significantly below the 1950-1999 average.

- The phase of “stabilization to that of expansion” in the 2007-present bucket may mean an upward move that still falls below 0 percent. In plain English, this means nonfarm payrolls move from a phase of really ugly to really bad. This is a very loose sense of expansion.

- Intertemporal comparison is limited because the structure of the economy has changed over the years (e.g. manufacturing employment is not as relevant today vis-à-vis the past). This distorts averages.

- The chart does not mention anything about the long-term unemployed (i.e. those who have been unemployed greater than 27 weeks).

sovereign Debt Explosion

On its April 1st edition, The Financial Times reported the following:

"By the end of this year, OECD sovereign debt will have exploded by nearly 70 per cent from 44 per cent of GDP in 2006 to 71 per cent. According to the Bank of International Settlements, it would take fiscal tightening of 8-10 per cent of GDP in the US, the UK and Japan every year for the next five years to return debt levels to where they were in 2007."

I don't immediately recall any OECD country that has undergone such drastic cuts in public expenditures. We know for a fact that as far as the U.S. goes, government deficit will increase as far as eye can see.