Stefan Karlsson

Women operate mobile phones in front of the stock index display of a securities firm in Tokyo in this July 2012 file photo. A recent article in The Telegraph has Stefan Karlsson returning to the question of whether the US bubble was caused by a global savings glut created in Asia. (Koji Sasahara/AP)

The 'savings glut' question, resurrected

By Stefan Karlsson, Guest blogger / 08.16.12

A reader asked me to comment on this Telegraph-article where the author blames bubbles in both America and Europe on a global savings glut created in Asia, as opposed to central bank manipulation (it should be mentioned that the article acknowledges a role for central banks, but this is described as a secondary effect provoked by the savings glut). I have previously discussed the alleged role of the "savings glut" for the American bubble when advanced by Alan Greenspan, and here is what I wrote:

"This explanation really doesn't explain why the bubble started to inflate in 2001 and ended in 2006-07. Did the savings glut start in 2001 and then end in 2006? To the contrary, the external surplus of both China and oil-exporting nations fell in 2001, while they rose quickly in 2006-07. And, as explained below, given how the central bank sets interest rates, those flows will mainly affect money supply instead of interest rates. Greenspan himself makes this argument by pointing to how long-term interest rates did not rise after the rate increases in 2004-2005.

This is dishonest for more than one reason. First of all, the housing bubble started already in 2001, when he pushed through rate cuts of an unprecedented magnitude, from 6.5% to 1.75% in a mere year. Secondly, because of the increased popularity of adjustable-rate mortgages, short-term interest rates were just as important as long-term interest rates. Thirdly, movements in market interest rates always tend to precede movements in the federal-funds rate as market interest rates are really the future average federal-funds rate during the duration of the bond. If really long-term interest rates were determined only by global liquidity, then were long-term interest rates about 1.5% in Japan and 6.5% in Australia until only recently?

This is all the more telling given the fact that Japan has a very high budget deficit and a huge public debt, while Australia had a budget surplus and a very small public debt. And to further illustrate the point, after the Reserve Bank of Australia unexpectedly reversed its previous rate-hike policy and started to aggressively lower short-term interest rates, the 10-year yield has fallen some two percentage points, while the Japanese yield has stayed unchanged. And long-term interest rates did in fact rise from 3.3% in June 2003, when the deflation scare made everyone believe interest rates would stay low for long, to 4.7% in June 2004 when the Fed had already signaled the start of a series of rate increases. That long-term interest rates didn't rise further after that merely reflected that the series of rate increases after that was factored in by the markets."

In this June photo, Japanese office workers wait for their colleagues in front of a railway station in Tokyo. Japan's employment rate has fallen over the years, but the problem is demographic more than economic. The number of retirees is rising. (Koji Sasahara/AP/File)

Japan's employment: fewer people, fewer jobs

By Stefan Karlsson, Guest blogger / 08.08.12

Noah Smith has a chart showing a big decline in the employment rate in Japan:

Yet contrary to what he writes, this does not reflect an increase in unemployment, hidden or open. The reason is that this number refers to employment relative to total population older than 15. But if you look at 15-64 year olds alone, the employment rate has in fact increased, from 68.8% in 2001 to 70.2%, and increasing further to 71% in June 2012.  The unemployment rate has fallen from 5% in 2001 to 4.6% in 2011 and 4.3% in June 2012.

Unemployment is thus in fact lower than in a very long time. The reason why the ratio of workers to the total population has dropped is not that unemployment has increased -again, it has in fact dropped- but that Japan is rapidly becoming something of a nation of geezers.

Japan has, much like the other former leading World War II axis power, for decades had a very low birth rate something that together with Japan's "no gaijins allowed" immigration policy now results in a shrinking work force. Meanwhile, Japan's extremely high life expectancy means that the number of old people grows fast even as the number of young people shrinks fast.

Fans wave a British flag as they watch swimming competitions at the Aquatics Centre in the Olympic Park during the 2012 Summer Olympics in London last week. Britian's recent GDP growth has been more sluggish than it first appears, according to Karlsson. (Lee Jin-Man/AP/File)

British economic growth is weaker than it looks

By Stefan Karlsson / 08.06.12

British population figures for 2011 were finally added to the Eurostat database, and they showed an increase  in population by about 0.8%, slightly higher than the previous year. Population growth has been remarkably resilient, as other countries with weak economies, including Iceland, Ireland and Spain has seen sharp reductions in population growth both because of a drop in birth rates and because large scale net immigration was turned into large scale net emigration. Yet in Britain the high birth rate has remained more or less unchanged while net immigration has increased somewhat.

However, the relatively high growth in population also means that development in per capita GDP has been even worse than the headline numbers suggests. In the 2008-2011 period GDP fell by a cumulative 2.5% while population increased by 3%, meaning that per capita income fell by 5.3%. By contrast Germany who saw a 3% increase in GDP and whose population dropped by 0.5% saw a 3.5% gain in per capita income.  After adjusting for population, Germany's relative gain increases from 5.6% to 9.3% in just 4 years.

In this Thursday, Aug. 2, 2012 photo, ironworkers James Brady, left, and Billy Geoghan release the cables from a steel beam after connecting it on the 104th floor of 1 World Trade Center, in New York. US employers added 163,000 jobs in July. (Mark Lennihan/AP)

US jobs added, but report details aren't so rosy

By Stefan Karlsson, Guest blogger / 08.03.12

Markets gained on news that employment according to the payroll survey rose by 163,000 in July. However, the other survey, the household survey, showed a drop in employment by 195,000. And while that survey is on a monthly basis more volatile and unreliable it can be an indicator that the payroll survey underestimates or overestimates labor market strength if it deviates systematically from it. And since February, household survey employment is only up by 0.1% compared to a 0.5% gain in the payroll survey, indicating that the payroll survey likely overestimates job growth in recent months.

Two police officers patrol at St. Pancras Station in London, Thursday, July 26, 2012. Karlsson argues that the influx of money from the London-histed Olympic games won't do much to help a declining UK economy. (Emilio Morenatti)

London Olympics won't save the UK's economy

By Stefan Karlsson, Guest blogger / 07.26.12

Second quarter U.K. GDP was even weaker than I, and almost all other analysts, thought it would be, contracting by 0.7% (2.8% at an annualized rate) compared to the first quarter and by 0.8% compared to Q2 2011. The drop reflected to some extent effects of the Queens Diamond Jubilee and could also to a small extent be an illusion reflecting a lack of adjustment for terms of trade improvements, but there is little doubt that there is a real underlying contraction.

The fact that the Queens Diamond Jubilee was a one time event that will be reversed will be positive for the third quarter number. But what about the soon upcoming Summer Olympics that will be held in London?

Well, that too will provide support as it will increase the number of tourists in the London area and also enable for example hotels and hostels to charge higher prices.  However while the Olympics and the reversal of the Queens Diamond Jubilee might provide enough support to push third quarter growth above zero they won't end the underlying decline especially as exports are hit by the reduction in demand from the debt crisis and by the overvalued pound.

European Council President Herman Van Rompuy welcomes Estonia's Prime Minister Andrus Ansip (R) during the European Union leaders summit in Brussels June 28, 2012. EU leaders meet on Thursday for their 20th summit since Europe's debt crisis began. (Francois Lenoir/Reuters)

Estonian Austrianism

By Stefan Karlsson, Guest blogger / 07.21.12

One thing about the article that I linked to yesterday that I didn't mention was that it contained some Austrian, or at least semi-Austrian, insights, expressed by Urmas Varblane, professor of economics at the University of Tartu:

In the boom years, says Varblane, “GDP growth was not real. It was artificial,” fueled by cheap debt from abroad. The peak, Krugman’s point of comparison, was not “real,” he says. That Estonia has not reached it again is a good thing, Varblane and Ligi say. It never should have been there in the first place.

I can't speak for Varblane, but this shouldn't be interpreted that it would be wrong if GDP rose back and unemployment fell back to the levels of 2007. Quite to the contrary, one should strive for GDP to be at least as high and unemployment at least as low as then. What it means is instead first of all that it shouldn't be done in the unsound and unsustainable way as then. 

And secondly that because the 2007 level of production to such a high extent consisted of the production of malinvestments the level of genuine prosperity, production of things that were really wanted, was in fact much lower than GDP figures suggested. This in turn implies that using 2007 as a base year is misleading and that production of genuine prosperity has developed in a much stronger way.

British Prime Minister David Cameron speaks during a joint press conference with France's new President Francois Hollande at 10 Downing Street in London in this July 2012 file photo. Cameron's office said the leaders discussed "the economy, the situation in the eurozone (and) a number of foreign policy issues." Because of the pound's appreciation relative to the euro, British inflation has finally started to fall. (Facundo Arrizabalaga/AP)

Bullish in Britain: Will lower inflation boost the UK economy?

By Stefan Karlsson, Guest blogger / 07.17.12

Because of the pound's relentless appreciation relative to the euro, British inflation has finally started to fall, though at 2.4% it is still not lower than the euro area average.

This is now spun by some reporters as bullish for the U.K. economy because it means that consumer purchasing power increases. But while it is good that it is acknowledged that there are positive aspects of disinflation/deflation these people make the same mistake as those who argue that higher inflation is positive for the economy.

In terms of the direct effect, a price change is a zero sum game. A seller benefits from a higher price, or in other words benefits from higher price inflation, while the buyer benefits from a lower price or a lower rate of price increase, or in other words the buyer benefits from disinflation and deflation- But since everyone are both buyers (in their role as consumers) and sellers  as workers selling their selling their services in exchange for a wage or salary and/or as investors owning the company that sells products) the aggregate effect of both higher and lower inflation will be neutral.

This is not to say that inflation is neutral if you count in indirect effects, because clearly it isn't as it can for example distort relative price something that can both have redistributional effects between different individuals and for example create asset price bubbles or dramatic exchange rate movements. The latter means that inflation will have disruptive effects that  weakens growth. But in terms of its direct effect on aggregate purchasing power it is neutral (assuming of course that terms of trade isn't changed) as an increase in inflation means higher nominal income and a decrease in inflation means lower nominal income.

Interestingly the same newspaper that published the above mentioned story about the beneficial effects that the strong pound induced decline in inflation have, also published a story about how the strong pound has detrimental effects for exporters. Which is of course an illustration that the purchasing power increasing effect of lower inflation will for the U.K. economy as a whole be cancelled out by lower nominal incomes for exporters and suppliers of exporters, just as the previous purchasing power increasing effect that the previously weak pound had in terms of raising nominal income was cancelled out by higher inflation caused by the same weakness in the pound.

An Irish soccer fan withdraws money from a bank machine prior to a Euro 2012 soccer match between Spain and Ireland at the old town in Gdansk in this June 2012 file photo. Ireland's economy has stabilized, but Karlsson argues that the country's lack of growth is disappointing. (Peter Andrews/Reuters/File)

For better or worse? Making sense of Ireland's economic progress.

By Stefan Karlsson, Guest blogger / 07.16.12

For some unknown reason, Ireland, is always slower than almost everyone else in releasing GNP* and current account statistics, and this year it got delayed even more than usual. But now, two weeks in to the third quarter, we have finally gotten its first quarter numbers for the above two indicators.

It contained two good news and one bad news. The good news is that Ireland's current account surplus increased and that unlike Greece, Italy, Spain and Portugal (and Britain) Ireland's economy is no longer contracting. The bad news is that it doesn't really seem to recover either like the Baltic countries have started to do.

*=GNP is more appropriate for Ireland than GDP because its low corporate income tax has caused corporations to attribute their profits to Ireland in their internal accounting, causing Ireland to formally have an extremely large trade surplus combined with an extremely large investment income deficit.

Compared to a year earlier, GNP increased 0.2% as consumption fell while the current account surplus rose.  That Ireland has stopped contracting further is of course better than the development in other countries whose recessions deepen, but considering that GNP was 15% lower in Q1 2011 than in Q1 2008, stabilizing at that level is very unsatisfactory to say the least.

Though Ireland for seasonal reasons had a current account deficit the first quarter this year, the deficit  was smaller than in previous years, so the total balance the last 4 quarters improved from a surplus of €1.8 billion to €2.7 billion, roughly equivalent to 2% of GNP, something that is a big improvement from the 7% of GNP deficit seen in 2007. With the current account in a surplus and with the previously very bloated construction sector having already contracted by three fourths, it seems fair to say that Ireland has rid itself of the imbalances. that caused it to have a crisis in the first place.

So why hasn't Ireland started to recover the way the Baltic countries did once they had rid themselves of their imbalances?

There are probably many reasons for this, but one key factor is that while the key trading partners for the Baltic countries, Sweden, Finland, Russia and Germany had strong recoveries at that point, Ireland's most important trading partner, Britain has slipped in to a double dip recession, and other important trading partners in Europe aren't doing much bettter

In a March 2005, file photo provided by 'Meet the Press', Paul Krugman of Princeton Univsersity and The New York Times, speaks during the taping of "Meet the Press." (Ale Wong/Meet The Press/AP)

Paul Krugman versus Paul Krugman

By Stefan Karlsson, Guest blogger / 07.12.12

Tyler Cowen points out that Paul Krugman of the 1970s, the brilliant trade economist whose work later got rewarded with the Nobel price in economics, argued that devaluations are usually contractionary.

This conclusion puts him at odds with Paul Krugman of the last 20 years, the Keynesian economist who thinks devaluations is the key to prosperity always and everywhere (or at least everywhere where there isn't full employment.).

Bizarrely enough, it was the latter who got to attend the Nobel prize ceremony because the former has ceased to exist.