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What We Read Today 13 March 2014

Econintersect: Every day our editors collect the most interesting things they find from around the internet and present a summary "reading list" which will include very brief summaries of why each item has gotten our attention. Suggestions from readers for "reading list" items are gratefully reviewed, although sometimes space limits the number included.

  • Euro-Area Factory Output Unexpectedly Falls, Led by Energy (Patrick Henry, Bloomberg) January output was down 0.2% from December vs. and expected increase of 0.5%. This not good news, to say the least. Everybody seems to be having growth problems except the U.S.. Divergences get corrected sooner or later.

Today there are 13 articles discussed 'behind the wall'.

The last four involve an extended discussion of some very unhelpful assertions by others that can be criticized for being incomplete and based on unstated assumptions that do not apply to the current economy.

  • Japan: Negative current account will pressure currency (Claus Vistesen, Credit Writedowns) Japan has gobe where it has never gone before (see graph). The author thinks this will force the yen much lower and that this is a precursor to the Japanese government bond market blowing up (higher interest rates). He sees the bug finally hitting the windshield.



  • PIMCO sees Australian housing slow melt (House and Holes, Macro Business) "There's a lot of hope resting on the shoulders of irrational housing investment. Steve Keen suggested a bust was coming for Australia on the heels of the U.S. bubble bursting. He has not wavered from that analysis in spite of being ridiculed by some.
  • Russia: Economic Vulnerabilities (Marc Chandler, Credit Writedowns) Chandler says the Russian moves against Ukraine are like "the bully at the school yard, the aggressiveness conceals weaknesses". The integration of Russia into the global economy makes the country much more susceptible to market forces than the Soviet Union ever was. Chandler says this is a source of non-statist economic pressure on Russia and ultimately will force a political solution.

The last four articles discussed start with two that have some serious shortcomings and use the second two too supplement the discussion we develop. We may expand on this topic and write a more complete work-up as an article. Input from readers would be appreciated with comments on what we have here.

  • The Negative Multiplier Effect Defined (Bob Krum, Bob News & Comment) The logic used by Bob Krum to create a negative multiple relates to what John Tamny wrote in the article following this one. Krumm finds that $1.2 trillion was lost to the economy of the $2.4 trillion increase in the national debt.


As far as the Krumm argument goes one might infer that $1.2 trillion was "wasted", "lost", "unaccounted for", "evaporated" or chose any other similarly nebulous term. The argument is incomplete without some discussion of what might have happened to the money.

Econintersect is not privy to a secret cash flow statement so we can only offer some suggestions. First, the closest we can come to the debt increase shown is from the total for 2011 plus 2012 which is $2,516 billion, according to the Office of the Management of the Budget. Perhaps Krumm was using an eight quarter period that was not two fiscal years. But the difference between $2.4 trillion and $2.5 trillion is insignificant compared to the missing $1.2 trillion.

The value shown for GDP increase corresponds to 2Q 2011 to 2Q 2013 so this may relate to the interval for which the total of deficits was estimated.

Therefore we will look at where the missing money might be found on the nation's balance sheet looking at changes from 30 June 2011 to 30 June 2013. Using the data in the second and third articles below, there was an increase in home equity over the two years 2012 and 2013 of $4.1 trillion. The second half of 2011 prices declined by about 3% and in the second half of 2013 by about 4% (Case-Shiller National Home Price Index) so the change for the period 30 June 2011 to 30 June 2013 is about $4 trillion.

Very little of that was from new homes. In 2012 368,000 new homes were built with an average sales price of $292k, for a total value of $107 billion. There were more homes in 2013 so there is another factor for GDP between $11 billion and $200 billion. So one place that "lost money" might have gone was into a balance sheet item of net home equity. Only the $200 billion or so for new homes (as well as money spent on home improvements) would show in GDP. Certainly more than $3 trillion in home owner balance sheet improvement has occurred. We cannot show a cash flow sheet that demonstrates the connection between deficit spending and this asset "inflation" but it is a possibility.

Switching gears, in 2011 the U.S. stock market capitalization increased by $3 trillion. In 2012 there was little change and in 2013 an increase of $4.8 trillion. A rough estimate for equity appreciation would then be about half of the total for 2011 plus 2013 (eliminating half of each year and including a flat 2012) or about $3.9 trillion.

So what has happened is that deficits have only contributed about half to things measured by GDP but have created other economic activity. Two possibilities are rising values for homes and stocks. These two balance sheet items have increased by close to $9 trillion over the same time that Krumm has "lost" $1.2 trillion. If we could "follow the money" (cash flow) then we would have a multiplier of 0.5 for GDP items but 4.5 for GDP + balance sheet items.

In the second article below it is seen that over the same eight quarters discussed here, total net worth of households and private nonprofits increased by about $11 trillion.

Of course, we now need to face the debate about whether that is a good thing or bad. It involves a discussion of possible bubbles. We leave that for another day.

  • A balanced federal budget;
  • A system where banks lend only what they have in deposits (with whatever fractional reserve is allowed).

Otherwise he misses the boat. The points that require one or the other of the above conditions are emphasized:

First off, there's no such thing as fiscal stimulus of the spending kind. Though it's well known at this point, governments can only spend money they've first taken from the private sector. In short, governments can at best merely steal demand from certain economic sectors in order to fund generalized waste and a bigger state. There's no economic growth to speak of, rather there's decline.

Secondly, it bears mentioning once again that no act of saving ever detracts from demand. Roubini's suggestion that governments must spend when individuals don't defies what saving entails. Indeed, short of stuffing dollars/pounds/euros/yen/yuan under mattresses, when individuals save, their funds are either shifted to others with immediate consumptive needs, or lent to businesses eager to grow.

  • U.S. Household Net Worth Hits Record High (Neil Shah, The Wall Street Journal) Year end 2013 saw the total net worth of U.S. households and non-profits reach a value more than $4 trillion above the previous peak in 1Q 2007. The current net worth os $20 trillion higher than the low of 1Q 2009 and $14 trillion above the dip in 3Q 2011. And home equity net value has exploded over the last two years, up more than 25% as a percentage of home value (40% increased to 51.7%). The total value of U.S. homes was $25.7 trillion at the end of 2013. The gain in aggregate home value over the last two years was $2.78 trillion (about 11.3%). See article following this one.




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