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What We Read Today 16 July 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.

  • Study: Friends share similarities in their DNA (Malcolm Ritter, R&D Magazine) It is highly speculative why, but a research study has found that 1,367 pairs of close friends share more DNA characteristics than the norm for about 1.2 million pairs of strangers. This raises some interesting questions about biodiversity in natural selection since the likelihood of procreation can be assumed to be greater between friends than between strangers.

extremism-opinions-middle-east-pew-2014-july


There are 14 articles discussed today 'behind the wall'.

The first four articles discuss the latest CBO debt projections for the U.S.

Please support all that we do at Global Economic Intersection with a subscription to our premium content 'behind the wall'. There are between 75 and 100 articles reviewed most weeks. That is in addition to the 140-160 articles of free content we provide.

You get a full year for only $25.


mational-debt-projection-cbo-2014

  • The Budget and Economic Outlook: Fiscal Years 2002-2011 (CBO, January 2001) This report projected that the federal debt held by the public would shrink from $3.4 trillion in 2000 to $800 billion in 2011 due to continuous budget surpluses. Instead of the national debt contracting by 76% as predicted the inverse actually occurred and the debt almost tripled to $9.6 trillion. See also next article.

national-debt-projection-cbo-2001

  • The Long-Term Budget Outlook (CBO, Oct0ber 2000) The long range projection in the fall of 2000 was that federal budget surpluses would occur for the next 50 years. If that had happened (ignore the fact that it is a ridiculous impossibility) the debt owed by the public to the government would have to be a huge amount of money. The CBO estimated it would be about 7% of GDP by 2020. By 2050 the government would own much of what is now the private sector. This is the same CBO that is now telling us the national debt will grow for the next 25 years. Econintersect suggests that credibility is the biggest issue with CBO long-term projections.

national-debt-held-by-public-cbo-2000-oct

  • A long march ahead for China's lumbering state giants (Peter Cai, China Spectator) One of the biggest impediments to China;s rebalancing reform are the large state-owned industries which constitute a large inertia mass for the status quo. These giants are worth about $15 trillion and employ 40 million people. But, awkward as the task appears to be, the government is proceeding with some exploratory programs. One of these will involve turning state-owned companies into "capital management companies" in the manner which Singapore has successfully run their government-owned businesses. A second model will be to share ownership with private investors. And, strange as it sounds, the third reform being attempted is to strengthen Communist Party control in some companies.
  • BRICS give greenback the bird (Houses and Holes, Macro Business) There is little in the news about the Sixth BRICS summit, but some significant things are happening. Here is what H and H is getting from the meeting:
From the BRICS Summit overnight comes currency swap lines, deeper trade integration, non-dollar exchange mechanisms and a $100 billion dollar competitor to the International Monetary Fund. That's 3 billion people that just exited the US dollar reserve system when dealing with one another. Probably the most serious challenge to US dollar hegemony of our lifetimes.
  • IMF wrong on QE (Bill Mitchell, billy blog) Hat tip to Roger Erickson. The IMF has suggested that if Eurozone inflation remains too low the ECB (European Central Bank) should consider a large-scale asset purchase program (LSAP), otherwise known a QE (quantitative easing). Mitchell maintains such a proposal is quite ignorant (Econintersect words, not Mitchell's). Mitchell points out that we should not send monetary policy to do fiscal policy work. He offers two kernels. One is the graphic representation of inflation and inflation expectations over the interval of QE in the U.S. (below) from December 2008 to date. The other is a quote from a letter John Maynard Keynes wrote to FDR in December 1933:
Some people seem to infer from this that output and income can be raised by increasing the quantity of money. But this is like trying to get fat by buying a larger belt. In the United States today your belt is plenty big enough for your belly. It is a most misleading thing to stress the quantity of money, which is only a limiting factor, rather than the volume of expenditure, which is the operative factor.

qe-inflation-billy-blog-2014-jul-15

  • The Quiet Movement to Make Government Fail Less Often (David Leonhardt, The New York Times) It is not in the public eye but there are process analysis efforts underway in the federal government to determine what works and what is inefficient. Efficiency and effectiveness are the objectives, rather than increased government operations.

... in a divided country, where Congress only rarely passes far-reaching legislation, a more effective government may be the best way for both sides to get more of what they want: a government that is limited enough to protect individual freedom and ambitious enough to improve people's lives.

The United States government has historically been good at the big stuff, from fighting wars to breaking new scientific ground. It's everything else that tends to present a problem.

  • The low volatility paradigm and diminishing return expectations (Walter Kurtz, Sober Look) The lower the volatility of returns the lower the risk premium spread for high yield bonds. In this market at least, volatility seems correlated with risk perception. Three things to remember: (1) The Great Moderation, (2) the calm before the storm and (3) Hyman Minsky. One thing to add to the graph below: Date stamps for the data points might be very informative.

hy-spread-volatility-2003-to-date-sober-2014-jul-15

  • What's So Beautiful About Deleveraging? (Barry Ritholtz, Bloomberg) A valuable lesson here. Whenever you see a graph for a ratio, look at the components. Below we have a graph showing apparently strong debt deleveraging. However, liabilities have been coming down very slowly. The decline in the graph is primarily driven by a rapidly rising denominator (assets). Follow the link to see the component data graphs.

liabilities-divided-by-assets

Click on graph for larger image.
china-new-credit-westpac-600px


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