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Stefan Karlsson

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 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 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… )

Refugees shout slogans during a protest of asylum seekers calling for fairer treatment by the authorities in Berlin this past October. German immigration is picking up as the economies of other European nations lose steam. (Thomas Peter/Reuters/File)

Germany's declining population gets sudden immigration boost

By Guest blogger / 05.09.13

For years, Germany had slightly negative population growth, due mainly or entirely to negative natural population growth due to a too low birth rate, but also due to the lack of net immigration.

2012 numbers on births and deaths in Germany aren't yet available, but the German statistics bureau has now released migration numbers(auf Deutsch). It showed that net immigration has increased dramatically, to 369,000, or about 0.45% of the current population. Immigration has increased particularly dramatically from countries like Spain and Greece, but is still small compared with immigration from Poland, from which more immigrants (176,000) arrived than from Spain (29,000), Portugal (14,000), Italy (42,000) and Greece (33,000) combined.

With the German labor market continuing to strengthen while the Southern Europe's continues to deteriorate, the now still modest inflow from Southern Europe is likely to increase further in 2013. With more than 6 million unemployed, the mere 29,000 inflow from Spain in particular is, despite the 45% gain compared with 2011, still remarkably and surprisingly low. This likely reflects that Spaniards in particular are reluctant to move away from homes whose values are now far below what they bought them for and often well below the size of their mortgage loans. In all countries, unemployment benefits and the language barrier also limit emigration.

German immigration statistics has a separate category for migration of ethnic Germans, and for that category, there was actually net emigration, most likely to even richer (and even lower unemployment) German-speaking countries Austria, Switzerland and Liechtenstein.

A man looks at an electronic stock board of a securities firm in Tokyo. Is a rise in stock prices a good thing? (Koji Sasahara/AP/File)

Do high stock prices mean economic inequality?

By Guest blogger / 05.07.13

The left-leaning Economist's view again declares that "Abenomics"  is a success. That is hardly surprising (they've done that countless times in the past), but what is, or should be, astonishing is the standard by which they think it is an access-namely that the Japanese stock market has had an unprecedented rally, rising some 60% in value in just 6 months.

But why should that be a good thing? Remember any price change isn't intrinsically good or bad for everyone. Higher prices are good for sellers, including future sellers, and bad for buyers, including future buyers. In this case this means that higher stock prices are good for those who already hold stocks. And the people who disproportionately hold those stocks are "the one percent", which is to say the one percent richest. So here we have a leftist website not only cheering on redistribution to the wealthiest, but making it the standard for judging whether policy is successfull!

Note that higher stock prices can either reflect higher profits, or higher valuations (or both). In the case of higher profits this could in turn either reflect higher economic growth or a higher profits share of national income. The author of the article would probably defend himself by arguing that the rally reflects the former, but there is no sign of that in actual data as for example industrial production shrank by 7.3% in the year to March, a steeper decline compared to when "Abenomics" was launched. And historically, while corporate profits and stock prices have usually moved in the same direction as economic growth, the movements in economic growth has only been a small fractions of the movements in stock prices and even profits. And this link has been progressively weaker in recent years as stock markets have rallied even as economic growth in most countries have been weak at best, and often even negative. And in the latest months, the stock market rallies in Japan and elsewhere has had no connection at all to indicators of economic growth, which if anything has weakened.  ( Continue… )

A software company recruiter meets job seekers at a career fair at the Rutgers University in New Brunswick, N.J. The US economy added 165,000 jobs in April, according to the latest jobs report. (Mike Segar/Reuters/File)

Jobs report: why the economy isn't as strong as you think

By Guest blogger / 05.03.13

I always find it fascinating how single minded financial markets, and financial journalists, are in their focus on only the number of jobs according to the payroll survey while ignoring other indicators who are at least as important.

Case in point is how the markets now rally in response to how the payroll job number was a few tens of thousands higher than expected ,which is to say a few 1/100 of a percentage points higher, while ignoring how average weekly pay fell by 0.4% (as the average work week fell by 0.6% while average hourly earnings rose 0.2%). This means that total income received by workers fell, yet the report is still treated as a sign of economic strength.

The household survey confirms the picture of more people working, but at fewer hours, as the number of full time unemployed continued to drop while the number of part time unemployed (people who have part time jobs and want to work more hours but can't find a full time job) increased both compared to the previous month and compared to April 2012.

There is no doubt that the U.S. economy is recovering, but this report confirms that the pace of recovery remains very slow.


Pablo Picasso's "Mother and Child" hangs in an exhibition at the Art Institute of Chicago. Intellectual property will be counted as capital expenditure, not input cost, in GDP calculations, beginning this summer. (Caryn Rousseau/AP/File)

How art will raise GDP by 3 percent

By Guest blogger / 04.25.13

Washington Post reports that the U.S. will, starting this summer, start to include "research and development and the creation of artistic works", or in other words IP as part of capital expenditure, rather than as input cost. The relevance of this is that it will raise GDP (likely by about 3%) as input costs are subtracted from GDP while capital investment is included.

There are three possible way to measure output. One is to include the value of all transactions, the second is to include the value of only consumption and gross investment, the third is to include only consumption and net investment. GDP is essentially the second approach.

The problem with the first approach is that makes no distinction as to how much value was created in a certain transaction, creating the result that if a company outsourced one step in the production process rather than performing with its own employees then output would be considered higher even if the value of the final product wasn't bigger.  ( Continue… )

Pedestrians pass the New York Times building in New York. A New York Times op-ed piece by David Stockman has really upset leading liberal pundits, Karlsson writes. (Richard Drew/AP/File)

David Stockman NYT piece rankles liberal pundits

By Guest blogger / 04.01.13

Well, it seems that David Stockman has really upset leading liberal pundits through the article he got published in the NYT.
Paul Krugman's first response contained basically no factual content and instead just asserted that Stockman is "a cranky old man" (being as much as 6 years older than Krugman himself....) who won't accept reality and rants incoherently. His second response was more factual, but simply focused on a few numbers presented by Stockman that was of almost no relevance for his case.

Jared Bernstein's response was somewhat better than Krugman's reponses, but still failing. Bernstein for example criticize Stockman for supposedly failing to differentiate between years governed by Republican and Democratic Presidents, not noting that Stockman is explicitly critical to Republican Presidents too, especially Bush Jr. but also the others including the one he worked for (Reagan).

Bernstein's least bad theoretical argument against Stockman was that "Sovereign debt is neither bad nor good–its assessment must be situational. " and that if politicians assess the situation better than private investors then government debt to finance investments can be good. Indeed, but that's of course a very big "if", and requires evidence that government politicians and bureaucrats are smarter than private entrepreneurs, and Bernstein doesn't present any evidence for it and simply asserts it.  ( Continue… )

A European Union flag billows in the wind with the Parthenon temple in the background on the Acropolis in Athens. To ensure a crisis like the one in Greece wouldn't happen again, the EU decided upon a new "stability pact" which set specific deficit targets for all countries, Karlsson writes. (Petros Giannakouris/AP/File)

Euro countries take deficit limits with grain of salt

By Guest blogger / 04.01.13

When the euro was created there was a number of criteria countries that wanted to join had to meet, most notably regarding budget deficits and debts. But in the end, they decided to ignore it, as only Luxembourg of the original 11 countries met all the criterias, and neither did Greece when it 2 years later joined even according to the official numbers (as Greece "cooked its books" the real numbers were of course far worse).

And then later, as the two biggest countries, France and Germany, exceeded the 3% limit, they used the political  influence that goes with being the two biggest countries to avoid the punishment they according to the rules were supposed to have, using the argument that the problems were only temporary and that they'll better themselves.

Germany actually did  better itself,  as is illustrated by how Germany has had the highest per capita GDP growth in Western Europe in the latest 5 years and has in sharp contrast to almost all others achieved a balanced budget and dramatically lowered unemployment.

However, France didn't better itself quite as much (and has since Francois Hollande unfortunately became President in fact taken a turn for the worse), and what's worse, this violation of the rules made others, including Greece, feel that they can break the rules as well, causing, together with the fraudulent accounting practices of the Greek government, the Greek crisis, that indirectly created problems elsewhere, and very directly caused the problems in Cyprus( Continue… )

Bank of Cyprus customers use the ATM as the bank remains closed for the second day in central Athens on Wednesday. There is simply no option for Cyprus apart from a deal which wouldn't result in losses for depositors that would be multiple times larger than the one negatotiated, Karlsson writes. (Thanassis Stavrakis/AP)

Cyprus is running out of options

By Guest blogger / 03.20.13

Two things in combination have, barring extreme altruism or stupidity from other countries, made losses for depositors in Cyprus of some kind almost inevitable (apart from maybe the Russian solution discussed in the end of this post).

First, Cyprus created an extremely oversized banking sector, with balance sheets multiple times its annual GDP, by becoming a haven for Russian oligarchs and other foreigners. This was made possible in part because it had low tax rates, but more importantly because it didn't ask any.questions of how their depositors got their money, enabling so-called "money-laundering".

Second, EU leaders thought that it would be a good idea to "solve" the fiscal problems of Greece by making private bond-holders "agree" to a "voluntary" write-down of the value of its debt- The problem is that one institution's debt is another's asset, and with Cypriotic banks heavily invested in Greek debt due to Cyprus' close ties to Greece, this meant that Cypriotic banks made heavy losses. In short, the "solution" to the Greek problem caused the Cypriot problem we're now discussing.

As a result, Cyprus' banks lost sums of money  that were enormous relative to the small size of Cyprus' economy. It seems in fact that the losses were nearly as large as the size of Cyprus' annual GDP. It's as if America's bank required a capital injection of $15 trillion.  ( Continue… )

Protesters hold up their hands as they protest outside the parliament in capital Nicosia, Cyprus, Monday. The only way to make a bailout politically acceptable was to make sure that the oligarchs would pay, Karlsson writes. (Petros Karadjias/AP)

Cyprus tax opponents get an unlikely ally: Vladimir Putin

By Guest blogger / 03.19.13

The key reason why Cyprus, unlike other bailed out countries, has been ordered to impose a steep one time tax on deposit holdings is of course because Cyprus has a reputation for being a bank center for Russian oligarchs of considerable wealth, and considerable crookedness. And so, bailing out the banks of these Russian oligarchs would be interpreted as bailing out the oligarchs. And to say that it would be a "tough sell" to get support for what is perceived as the bailout of oligarchs in the countries bailing out Cyprus is the understatement of the year.

The only way to make a bailout politically acceptable then was to make sure that the oligarchs would pay. Of course, the way this is designed, regular Cypriotic savers become collateral damage in the quest to punish the oligarchs.

Anyway though, the point is that the more this is perceived as punishing Cypriot savers the more opposition will there be against the tax, and the more this is perceived as punishing Russian oligarchs the more support will there be for it. And so the last thing opponents of the tax needs is anything that creates the perception that opposition to the tax is based on a desire to protect the oligarchs.

And so what does, Vladimir Putin, patron of the oligarchs (those who support him that is, those that didn't have been disposed of) do? Express outrage over the tax! Not what those fighting against it needed....

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