Sunday, July 28, 2013

What If Trade Volume Is the Bubble?

Here’s two insights from Paul Krugman: 1) interstate trade is declining in the U.S., and 2) international trade may be going the same way.

Think about it. What we’ve done in America is homogenize our regions. With that homogenization comes a reduction in the need for trade. Why ship something when it’s made down the street?

The exception to this is agricultural products.

The exception to this also used to include manufactured products. But note how long the specialization in manufacturing has been in decline: it peaked 90 years ago.

Now think about the world. Do you think a chart like this for the whole world would show a big pink hilltop like this one? My guess is that for the world we are just approaching the peak.

This means the story of the next 100 years is going to be declining international trade in manufacturing. The reason is that there won’t be much point in getting something shipped from China when their wages are high enough to make that more costly.

And the growth of international trade in manufactured goods needs, perhaps, to be seen as something more special and less generic than often imagined. It’s not that there’s some inexorable force leading to stuff rattling around the globe; it’s that the combination of containerization and trade liberalization has made it possible to break up the value chain to take advantage of international wage differences.

What will a future of less trade look like?

Don’t Believe Chinese Economic Data

You knew that, right?

No one is claiming that China isn’t growing, or that it isn’t big and getting bigger.

But, having said that, the data by which we measure that isn’t any better than propaganda.

Here’s my prediction for my students’ adult lives: the big threat to America is not being overtaken by China, instead it is how the world deals with another very large economy doing what Japan has been doing the last 25 years … basically, not much at all.

The “Final” Cypriot Haircut

What started out as a proposal for a 10% haircut on all accounts back in March, has now been set officially as a 47.5% haircut on all accounts over 100K Euros.

This is a little better than the worst-case scenario.

Sunday, July 7, 2013

How the “I” in the PIIGS Is Getting By

Italy is doing it the old-fashioned (private business) way: not paying their bills on time.

The government’s refusal to pay its suppliers violates EU rules. But the EU has soft-pedaled the issue, for two very big reasons: payment of arrears would force Italy to sell a truckload of bonds when there might not be any demand; and it would push the deficit way beyond the 3% line in the sand. Thanks to cash accounting, only actual disbursements make it into the deficit figure. Italy has achieved its “austerity” goals by not paying its suppliers.

Italy owes private firms about €120B, while its GDP is about €1,200B. If America owed the same proportion it would be about $1,500B. Yes, that is the size of the U.S. deficit, but (that’s just a coincidence and) there’s a huge difference. America has actually sold the bonds to fill that hole, while Italy can’t sell that many bonds (and remain good with the EU) so instead they’re simply not paying the bills on time.

The EU is also trying the sort of accounting gimmicks that got WorldCom into trouble:

Hence, a eurocratic deus ex machina: Jos̩ Manuel Barroso, president of the European Commission, told the European Parliament on Wednesday that the budget rules would be reinterpreted for 2014 so that some public spending on infrastructure projects could be excluded from the deficit figures Рsomething Italy has long pushed for in its valiant efforts to keep its deficit under 3%. If all else fails, monkey with the rules.

Read the whole thing.

Via Tyler Cowen, who points out that if you’re a Keynesian (as most Europeans are) then the centrist government of Italy is choosing a contractionary fiscal policy that harms its own country … just to stay cool with the EU. This during Italy’s longest recession in 70 years, all while the right-wing party that wants the payments made now to help the economy.

BTW: You should look up and learn “deus ex machina”. It’s a fairly common phrase that a college student should know.

Saturday, July 6, 2013

New World Record

It’s constantly in the news: some feature of widgets hit a new record today.

Vacuous former communications majors love this sort of headline for stock markets and government debt.

Here’s what you need to think about:

New World Record


Just about any series that is trending upwards will set new records … constantly.

This includes, but is not limited to: GDP, GNP, income, personal income, disposable income, the number of unemployed and employed, the deficits, the debt, military spending, social spending, disability payments and recipients, nominal prices and price indices, and all stock market indices.

You need to put on your foil hat and recognize this for what it is: emotional button-pushing intended to get you to think less.