Stefan Karlsson

Cows line up to feed at a farm in Danville, Vt. in 2012. Last week, House Republicans passed the farm bill, a measure that provides billions of subsidies to farmers and businesses in rural areas. (Toby Talbot/AP/File)

The farm bill survived. Who supports it?

By Stefan Karlsson, Guest blogger / 07.15.13

Some people find it puzzling that even though farmers are only about 1-2% or so of the population, there is strong political support in both the U.S. and the EU for farm subsidies.

I think there are two reasons. One is that although farmers are few they care deeply about farm subsidies because they gain so much per person which means that they will almost all vote on the basis of that issue. By contrast, the majority of non-farmers lose so little per person that almost no one will vote on that issue, and of course many non-farmer voters don't even know about the issue.

A second reason is that a lot of people feel sympathy for farmers. Food is after all the most important product in the economy since we would all die without it, so many feel that the producers of it should be supported. This of course doesn't follow since while it is of course necessary that food is produced, any potential shortage of farmers due to too low incomes for farmers would be self-corrected on the free market with higher prices. However, that is probably how some people think and some perhaps also have a emotional/sentimental sympathy for farmers.

As a result, far from all non-farmers who care about the farm subsidy issue are opposed to it.

A screen displays the final closing number for the S&P 500 index at the New York Stock Exchange in May 2013. Reports claiming that earnings were 'better than expected' are mostly due to companies revising their official earnings estimates at the last minute, Karlsson argues. (Brendan McDermid/Reuters/File)

Why earnings will be 'better than expected'

By Stefan Karlsson, Guest blogger / 07.10.13

It's the beginning of a quarter, meaning that it is time for earnings reports for the preceding quarter. One thing that we can say for sure is that most reports, at least in the U.S., will be "better than expected". The reason I can say this is not because I'm psychic (I'm not, unfortunately) nor because there is evidence to suggest companies really are doing better than expected, but because the official "earnings estimates" produced by official analysts are always lowered just before the reports so that they will almost always be "better than expected."

The case of Alcoa illustrates this. Until recently, the average official forecast was for quarterly per share earnings of about 20 cents, but the report showed a profit of only 7 cents per share. But since forecasts had been reduced to 6 cents just before the report, the headline still said "better than expected."

Why is this done? Because the companies producing these estimates have an economic interest in making people buy stocks. And by presenting most reports as "better than expected" while producing extremely over optimistic forecasts about the future, they hope to make people wanna buy those stocks, hoping that people won't notice how they almost always quietly lower these forecasts shortly before the reports.

Latvia's Finance Minister Andris Vilks speaks about Latvia adopting the euro at the European Union council building in Brussels, Belgium, on July 9, 2013. Latvia is set to join the Eurozone on January 1, 2014. (Francois Lenoir/Reuters)

Latvia picks up the euro. It won't change much.

By Stefan Karlsson, Guest blogger / 07.09.13

While certain people have predicted the end of the euro ever since the trouble in Greece began in late 2009, these predictions have yet to materialize. Not only hasn't it ended, not a single country has exited, with one country, Estonia, in fact joining in 2011 and with Latvia now set to join as well on January 1 next year.

Estonia's and Latvia's entries have/will strengthen the northern German-led faction in the ECB, as they have demonstrated a commitment to sound public finances even in a crisis, also likely making them supporters of the German sound money policies.

However, apart from the influence Latvia will gain in the ECB governing council, this move won't change anything in terms of exchange rates and monetary policy as Latvia has had during a long time a fixed exchange rate against the euro for its currency.

This also means that as the number of euro area countries increases from 17 to 18 (excluding micro states Andorra, Monaco, San Marino and the Vatican as well as Kosovo and Montenegro which have unilaterally adopted the euro without being formal members) the number of EU countries with a national currency with a fixed exchange rate drops from four to three, with the remaining being Lithuania, Bulgaria and Denmark. Of these remaining three, Lithuania seems eager to follow the path of their fellow Baltics and adopt the euro, while Bulgaria and Denmark are content with the status quo of a national currency pegged to the euro.

Ireland's Prime Minister Enda Kenny, whose country is holding the rotating EU Council presidency, holds a news conference at the end of a European Union summit in Brussels on June 28, 2013. Despite seeing its GDP drop, Ireland is recovering from an economic slump, Karlsson says. (Yves Herman/Reuters)

The Irish economy is not contracting. Here's why.

By Stefan Karlsson, Guest blogger / 06.28.13

"Ireland’s economy lurches back into recession" says the headline in The Irish Times, based on a drop in GDP. The problem is that for Ireland, GDP is misleading.

The reason for that is that because of Ireland's low corporate income tax rate, multinational companies, tend to attribute too much of their profits to Ireland, by having their Irish subsidiaries charge their non-Irish subsidiaries unreasonably high prices when supplying them with goods & services and similarly having their non-Irish subsidiaries charge their Irish subsidiaries unreasonably little. Yet apart from the (at most)12.5% of the profits that is paid in corporate income tax, those profits goes to foreigners, not the Irish. And because those alleged profits only reflect tax avoidance, it gives a misleading picture of how much value is produced there. For this reason, GNP, which subtracts the profits of foreign companies in Ireland, provides a more accurate picture of the Irish economy than GDP.

And  for some unknown reason, foreign companies have sharply reduced the profits they attribute to their Irish subsidiaries during the latest year. As a result, even as real GDP fell by 0.9%  real GNP rose by as much as 6.1%!

That 6.1% number seems implausibly high considering that the unemployment rate has fallen by only 1½ percentage points, something that probably reflects price index problem. Nominal GNP rose by only 4.8% meaning that the real GNP number assumes 1.3% deflation, even as consumer prices rose by about 1%.

Still, while growth was almost certainly lower than 6.1%, it was clearly far above zero, meaning that Ireland has joined the Baltic countries in recovering from the slump.

In a separate report, BTW, Ireland's current account surplus rose to a record €9 billion, or nearly 7% of GNP, in the year to the first quarter.

Federal Reserve Chairman Ben Bernanke speaks during a news conference in Washington earlier this month. Some investors have expressed concern that the Fed will decrease its support of the economy, but Karlsson argues that the Fed is unlikely to do so anytime soon. (Susan Walsh/AP/File)

Fed unlikely to end support

By Stefan Karlsson, Guest blogger / 06.21.13

Both bonds and stocks, not just in the U.S. but interestingly in most other countries as well, have sold off heavily after the Fed expressed optimism about how the U.S. economy would develop, something that was interpreted as a signal that it might reduce its bond purchases.

I however doubt that they will actually do that anytime soon. The U.S. economy is expanding, but very slowly, so slowly that the employment to population ratio was no higher in May 2013 than in May 2012.

And though Bernanke may have hinted that the criteria for drawing down QE is a 7% unemployment rate, the official statement keeps mentioning the 6.5% rate, along with expected inflation of 2.5%

Furthermore, the negative market reaction to the possibility of reduced QE may prove to be a case of "self-preventing prophecy". The large sell-off to the hint of such policy change could deter the Fed from actually going through with it.

Japan's Prime Minister Shinzo Abe speaks at the G8 Summit in Eniskillen, Northern Ireland, on June 17, 2013. Abenomics could very well allow Japan to export deflation, Karlsson argues. (Stefan Rousseau/AP)

Should you cheer on Abenomics?

By Stefan Karlsson, Guest blogger / 06.17.13

The popularity of "Abenomics" among non-Japanese pro-inflationists is puzzling for many reasons. One is, as I've noted before, the fact that Japan with its 4% unemployment rate was already very close to full employment, so even using Keynesian models there is little it can do to boost growth. 

Another fact which should make it less popular is that while it will cause inflation to increase in Japan, it will lower inflation elsewhere.

The reason for that is the key result of it so far has been to dramatically lower the value of the yen, by about 20% against the U.S. dollar and 25% against the euro. Unless reversed, this dramatic exchange rate drop can result in three different outcomes:

1) Raise prices in Japan

2) Lower prices elsewhere

3) Result in a permanently lower real exchange rate for the yen ( Continue… )

A man is reflected on a stock quotation board at a brokerage in Tokyo. Rising Japanese bond yields are worrying Japanese officials. (Issei Kato/Reuters/File)

Japanese bond yields inch up. Are 'Abenomics' to blame?

By Stefan Karlsson, Guest blogger / 05.28.13

At first after "Abenomics" was launched, the already very low yields on Japanese government bonds fell further, from about 0.8% to 0.35%,  which kind of made sense since Abenomics meant mass purchases of government bonds, and increased demand on something will of course mean a higher price, which in turn in the case of bonds implies lower yields.

However, lately, yields have started to move up again, rising above the pre-"Abenomics" level to 0.91% as of this writing, something that worries many Japanese officials. But how could yields rise when the Bank of Japan makes record large purchases? Well, because private demand has collapsed as investors have increasingly started to believe that the Bank of Japan through its purchases will actually achieve its new stated inflation target of 2%, a slump in demand that some have called a "bond buyer's strike."

And if inflation is going to be 2% why would anyone in their right mind want to hold bonds that have nominal yields of less than 1%? The answer is of course that no one should and that investors should protect their savings by investing in fixed assets instead.  ( Continue… )

A woman shops at a Nordstrom store in Chicago. The fact that both the US and large parts of Europe pursue deficit reducing policies right now contributes to lower consumer price inflation relative to asset price inflation. (Nam Y. Huh/AP/File)

How monetary inflation leads to consumer price inflation

By Stefan Karlsson, Guest blogger / 05.21.13

A reader has asked why monetary inflation sometimes, like today, causes asset price inflation and sometimes, like in the 1970s, causes consumer price inflation.

Well, there are several aspects to this issue. First of all, inflation numbers from the 1970s aren't entirely comparable to the current ones because the methodology has been changed repeatedly, with for example "hedonic adjustment" and "chain-linking" something that interestingly has always meant that estimated price inflation has been lowered. Whether you think all, some or none of these changes are justified is irrelevant because regardless this means that in relative terms 1970s numbers are overestimated compared to current ones.

The most important factor determining whether or not monetary inflation will mainly cause consumer price inflation or asset price inflation is simply what the early receivers of newly created money choose to do with them. They essentially got three choices: to simply hold on to the money, to buy financial assets or use them for consumption. If it is the first, then nothing happens, no prices will increase. If it is the second, then we will see  asset prices increase. If it is the third, we will see consumer prices increase. Clearly right now, most early receivers choose to use them to buy stocks and other financial assets.  ( Continue… )

A view shows Big Ben from Westminster Bridge in London. Net immigration to Britain is declining, Karlsson writes. (Kieran Doherty/Reuters/File)

Could UK claim title of Europe's biggest economy?

By Stefan Karlsson, Guest blogger / 05.20.13

Matthew Lynn at Marketwatch claims that his country, Britain, will become Europe's biggest economy. But that is just nationalist wishful thinking from his part. First, let's review the current situation, here was the 2012 GDP in local currency for the three biggest:

Germany € 2,644 Billion
France € 2,028.5 Billion
Britain £ 1,540.5 Billion

(Source, the respective national statistics bureaus)

If you "translate" Britain's number using the current exchange rate of about €1.18/£, this is the result:

Germany € 2,644 Billion
France € 2,028.5 Billion
Britain € 1818 Billion

In other words, the French economy is roughly 11% bigger and the German economy is roughly 45% bigger than the U.K. economy.  ( Continue… )