Stimulus report card = A

Update on inflation numbers.

Looks like since the end of February, after a brief deflationary downturn, inflation has chugging right along at the historical trend of 2.9 % on an annual basis.

Up to now, it appears as though the stimulus is working.

For those who swear it was a disaster, and can use evidence other than some version of an unemployment statistic, please leave a comment, because I am not a student of economics, and I enjoy learning from those who know more about it than I.


Chart: consumer price index all goods (including food and energy) 1999:2010


Chart: consumer price index all goods (including food and energy) 2004:2010

What was the goal of the stimulus package? to "turn the economy around"?
How does one measure an economic turnaround?

Its defined by changes in quarterly GDP growth.

What is GDP?

GDP

GDP is an estimate of the dollar value of all of the final goods and services produced by the economy. It is measured by all of the products consumed by the economy.

Sustained growth of profits by corporations and individuals will drive GDP growth.
Strong GDP growth in the long run will eventually lead to high employment rates, up to a theoretical limit known as "full-employment", assumed to be around 95% (this is debated) as corporations compete with one another in the labor market for a chance to take advantage of the future GDP growth.

As the employment approaches its theoretical limit, any additional GDP growth may result in the corporations relative demand for fixed supply of goods and services putting upward pressure on prices as the economy reaches full capacity (inflation). Persistently high inflation erodes the purchasing power of future profits and will put downward pressure on gross investments, and force a contraction in GDP growth.

When GDP starts to contract, this puts downward pressure on product prices as corporations are no longer interested in chasing profits through seeking increased future revenues, but rather by shedding operating costs and current liabilities. This race to the bottom is simultaneously associated with dropping prices (deflation) and dropping employment. This drop in prices only further depresses GDP, and in very bad recessions if the corporations do not quickly shift back to chasing profits and future revenues, it may begin to have downward pressure on nominal wages, and turn into a depression.

So expectations about future price growth (inflation) can have a big effect on an economy's gross consumption and investment activity. Deflation fears will force a contraction in consumption as the economy is more concerned with reducing costs than with chasing revenues, and
Inflation fears can force a contraction in gross investment due to the diminished real returns of future profits.

How does an economy control inflation expectations?

Very carefully. By manipulating the supply of money, the central banks can influence expectations about future inflation, although it is more of an art than a science. Some may argue that this tinkering should be kept at an absolute minimum, preferably managed by a computer, as it can have devastating effects for entire economies if they make a mistake by overshooting/undershooting.

How much inflation/deflation is too much?

Economists seem to think that 2.5 - 3.5 % annual inflation is a good rule of thumb, that it is better to air on the side of inflation, rather than deflation, and the reason apparently has to do with the way the labor market works, that employees are much more willing to take no raise at 2% inflation than a -2% drop in wages at 0% inflation. An employer faced with the situation of having to reduce payroll costs can do so only by either inflating out, or by reducing head-count, and almost never by cutting hourly wage rates.

So, when the housing market started to collapse, the economy shocked itself into a deflationary contraction. At this point, the FEDs had two choices, do nothing, or attempt to ease fears of deflation by increasing the money supply and hopefully get back on track at 3 % inflation. Since doing nothing will almost certainly attract criticism of incompetency, they chose to increase the money supply in the form of bailouts and stimulus packages.

The stimulus package

Earlier in the heat of the financial crisis, credit was disappearing and consumer spending was shrinking rapidly. The economy started to contract into a deflationary period, with food, energy and cyclical consumer product prices dropping steeply from their peak in 3Q 08. The fear was that if the trends continued, and the stimulus package not strong enough to thwart the trend, the short term contraction in prices would continue, and lead to long term downward pressure on the labor market and nominal wages and a halting of economic activity in general.

The purpose of the stimulus package was to prevent the economy from spiraling down into a deflationary economic free fall.

The risk associated with the stimulus package and FED bailout of the financial sector was long term inflation risk, since injecting massive amounts of cash into the economy at once opens the economy up to the problem of to many dollars chasing too few goods, otherwise known as inflation. The FEDs knew this, and made a conscious decision to sacrifice fears of long term inflation in order to fight short term deflation risk. The idea is that if they inject just the right amount of cash, it will be enough to turn around the trend of plummeting deflation, but no so much as to result in an ignition of runaway inflation.

The results (6 months in . . .)

Starting in February, the deflationary contraction turned around into an inflationary trend, but rather than an explosive runaway Banana Republic style disaster, it has been a mild inflationary trend more or less comparable to the US average for the past 30 years 2.9%

If the trends continue like this, I would say the stimulus/bailouts was a bullseye.

What about the employment rate?

Unfortunately, employment trends lag all of the other economic indicators. corporations look for sustained GDP growth before they begin gradually ramping up their payroll numbers. Luckily, if you have a 4-year degree, you probably won't have to worry about the employment rate. If you don't have 4-year degree, I'm really suprised that you are still reading this blog, and would recommend that you go get a 4-year degree.

Questions to ponder

1. Could the graceful turnaround in 2Q 09 been explained by some other outside factor? ( Obama's magical powers, Aliens, China, God, the awesomeness of the American people, Google) ?

2. will the current trend continue?

By the way, if you suddenly find yourself frequently debating whether some very large global event was caused by God, China, Obama, Google, or the FEDs, there is a very rational explanation for that apparent correlation.

Voice Recognition Parse to Text - New Generation of IT Products on the way!

New Generation of Speech Recognition Software

This guy found hardware/software at a research trade show in China IBM division that accurately converts human speech into text, and is able to translate the text into any given language. Something like this could be the tipping point of a new wave of innovation and productivity improvement.

Apparently IBM has been in the voice recognition business for over 40 years, and has been gaining ground on making the necessary improvements and overcoming the barriers to market acceptance. Most of us are familiar with the "I'm sorry, I didn't understand your last response" inadequacies of the current over-the-phone software, and of course,

this embarrassing live-demonstration of MS Vista's voice recognition feature that may have contributed to the delay of MS Visa release
http://www.youtube.com/watch?v=2Y_Jp6PxsSQ

but at IBM, there are signs the days of awkward and malfunctioning voice recognition software may soon be a thing of the past.

IBM voice recognition presentation, in 2001 pretty slick
http://www.youtube.com/watch?v=ZZsL9UCn_3A

http://www.theatlantic.com/doc/200904/chinese-innovation/3
China's Way Forward - James Fallows, The Atlantic

At the far-opposite end of Greater Beijing, in a special government-sponsored research park, I visited the China Research Lab of IBM. The lab’s director, Thomas Li, has a life story like those I have heard at many successful tech and manufacturing companies. He was raised in Taiwan, by parents who had grown up on the mainland. He went to America for his doctorate, had a successful career with a U.S. firm—and then decided, for reasons of opportunity and sentiment, to be part of everything going on in mainland China. In 2002 Li moved with his family to Beijing, where he directs a 200-person team of mainly Chinese-trained computer scientists.

One product demo made me wish I could get out a checkbook on the spot. It addressed two of the real-world problems most difficult for computers to handle: converting spoken language to written text, and converting written text from one language to another. Computers have “done” both of these tasks for years, but they have not done them accurately enough to be worth the bother. Having watched many similar demonstrations, I was startled by this one. My wife and I were the only native speakers of English in the room. But when each of us spoke into the voice-recognition system, it produced nearly perfect real-time versions of what we said. I had been speaking with deliberate clarity, so as a test I said the following words at fast conversational speed: “I never worry that my apartment is bugged in Beijing, because I figure there aren’t that many non-native speakers who can understand high-speed slangy American speech.” Those very words, except “slangy” (which had become “slinky”), were on the screen. Hmmmm.

Although everyone in Li’s lab speaks English, differences in accent can be a barrier in discussions with native speakers. So on video conference calls with their IBM colleagues in Armonk, New York, the Chinese scientists listen to what is said in English—and see a nearly real-time English transcription running across the bottom of the screen, which greatly aids their comprehension. I am sure it is not perfect, but I have seen enough such projects through the decades to be impressed with this one. Based on another demo I saw, it is already mature enough to allow spoken words—from TV, radio, commercials, YouTube—to be indexed and therefore retrieved as accurately as ordinary text. The words could then be translated and searched, in the original language or others, so that video clips, say, would be easy to find by a phrase (“axis of evil”) someone says in them.

Poignant Orszag-ian insight

The Relationship between Quality, and Medicare Spending by State, 2004

If a picture is worth a thousand words, then in this case I would say a good chart is worth a million. The chart compares Medicare spending per beneficiary, and quality index for each state in 2004.

The results ?

Priceless.

This chart is a wonderful demonstration of the most fundamentally important inference one can make in any scientific study.

I gained a new appreciation for Peter Orszag, Obama Administration's Treasury Secretary, when I saw this slide in a presentation he gave on education and healthcare to the Association of American Universities this morning (21 APR). The presentation does not come with audio, unfortunately, although he touched on the main points of his presentation in Orszag's blog entry on healthcare reform, posted shortly after the delivery of his speech. His points were right on target on the issue of aggregate educational achievement in the US, an issue that has long been neglected in the talk about US productivity slowdown since the 90's.

Many of you have heard me go on about how important it is to reform health care in order to bend the curve on long-term costs and get our nation on firmer fiscal footing [...] When we say that health care is consuming too much of our GDP, we are not just citing an abstract statistic [...]

One might think that health care costs were unrelated to educational trends, but that would be wrong. For years now, there has been a long-running trend toward declining State investments in public universities, as growing health care costs come to crowd out States’ investment in higher education. For example, from the late 1970s to the early part of this decade, State appropriations for higher education have declined from about $8.50 out of every $1,000 in personal income to only a little more than $7 out of every $1,000 in personal income – a decline of roughly 15 percent [...] At the same time, these pressures yield tuition hikes, program cuts, and a general strain on our public universities [...]

The fewer college grads we produce, the slower overall economic growth and the higher the salaries for those fortunate enough to go to college. And since we know that those from lower-income families are less likely to go to college and graduate [...], the overall result is that we perpetuate inequality.

Bingo

Some may see this as another excuse for the Administration to push their partisain spending agendas on education and healthcare, which may be a very valid interpretation of the situation.

Keep in mind, however, that the problem of educational achievement in the US is a problem recognized across party lines, and made especially clear in the report issued by the America’s National Academy of Engineering : Rising above the Gathering Storm. Since the report was issued in 2006, it has had a tremendous bipartisain impact on attitudes about innovation and competitive advantages in the global economy.

Although Peter may have done this out of his own initiative to push the Administration's agenda, it's also possible that he was simply responding to a letter from the AAU, asking him to address the issue.



The X-axis in this case is 2004 Medicare spending per beneficiary (span: 0 - 10,000 USD), and the Y-axis is composite measure of quality care for that same year (span : 0 - 100).
Each data point represents a different US state.

Don't mess with the Hong Kong Monetary Board

Exert from Wikipedia article on the 1997 asian financial crisis

Country----- Strategy------- Result

Indonesia---- allow float ------- total collapse
South Korea- allow float -------hit hard temporarily
Singapore ---allow float --------smooth sailing
Thailand ---- fight inflation ---- total collapse
Philippines - fight inflation----- president impeached
Malaysia ---fight inflation ------strategy was too late
Hong Kong -fight inflation ------speculators "got served"

Hong Kong strategy -

Fight inflation and preserve fixed exchange rate AT ALL COSTS, Result - recovery

Between 20 October and 23 October the Hang Seng Index dropped 23%. The Hong Kong Monetary Authority then promised to protect the currency. On 15 August 1998, it raised overnight interest rates from 8% to 23%, and at one point to 500%. The HKMA had recognized that speculators were taking advantage of the city's unique currency-board system, in which overnight rates automatically increase in proportion to large net sales of the local currency. The rate hike, however, increased downward pressure on the stock market, allowing speculators to profit by short selling shares. The HKMA started buying component shares of the Hang Seng Index in mid-August.

The HKMA and Donald Tsang, then the Financial Secretary, declared war on speculators. The Government ended up buying approximately HK$120 billion (US$15 billion) worth of shares in various companies,^[20] and became the largest shareholder of some of those companies (e.g. the government owned 10% of HSBC) at the end of August, when hostilities ended with the closing of the August Hang Seng Index futures contract. The Government started selling those shares in 2001, making a profit of about HK$30 billion (US$4 billion).

Thailand strategy - fight inflation, then give up - Result - complete financial collapse

On 14 May and 15 May 1997, the Thai baht was hit by massive speculative attacks. On 30 June 1997, Prime Minister Chavalit Yongchaiyudh said that he would not devalue the baht. This was the spark that ignited the Asian financial crisis as the Thai government failed to defend the baht, which was pegged to the U.S. dollar, against international speculators. Thailand's booming economy came to a halt amid massive layoffs in finance, real estate, and construction that resulted in huge numbers of workers returning to their villages in the countryside and 600'000 foreign workers being sent back to their home countries.^[17] The baht devalued swiftly and lost more than half of its value. The baht reached its lowest point of 56 units to the US dollar in January 1998. The Thai stock market dropped 75%. Finance One, the largest Thai finance company until then, collapsed.^[18]

The Thai government was eventually forced to float the Baht, on 2 July 1997. On 11 August 1997, the IMF unveiled a rescue package for Thailand with more than $17 billion, subject to conditions such as passing laws relating to bankruptcy (reorganizing and restructuring) procedures and establishing strong regulation frameworks for banks and other financial institutions. The IMF approved on 20 August, 1997, another bailout package of $3.9 billion.

Singapore strategy - Managed "soft" landing- Result - smooth recovery

As the financial crisis spread the economy of Singapore dipped into a short recession. The relatively short duration and milder effect on its economy was credited to the active management by the government. For example, the Monetary Authority of Singapore allowed for a gradual 20% depreciation of the Singapore dollar to cushion and guide the economy to a soft landing. The timing of government programs such as the Interim Upgrading Program and other construction related projects were brought forward. Instead of allowing the labor markets to work, the National Wage Council pre-emptively agreed to Central Provident Fund cuts to lower labor costs, with limited impact on disposable income and local demand. Unlike in Hong Kong, no attempt was made to directly intervene in the capital markets and the Straits Times Index was allowed to drop 60%. In less than a year, the Singaporean economy fully recovered and continued on its growth trajectory

Gallup Daily

US Budget 2010 - Out of Control

Markets rally after news of crackdown on tax havens ?

If low taxes are supposed to be the market's best friend, what about NO TAXES?

According to supply-side economics and Andrew Laffer, the market is OK with low taxes.

But judging by the market's positive reaction to the G20 summit,
they are NOT OK with no taxes.

After the conclusion of yesterday's G20 Summit, it will be much harder to horde your money away from Uncle Sam, Onkel Hanz, Oncle Pierre, or even 华伯父 .

One of the conclusions from the G20 summit yesterday was that the member countries agreed to enforce sanctions on "tax haven" countries noncompliant with Article 26 of the Organization for Economic Cooperation and Development's (OECD) model tax convention for income and capital, which deals with tax information sharing agreements between countries. Also from the summit, they asked the OECD to publish a list of tax havens and their compliance with the information sharing regulations.

In anticipation to the recent G20 decision, Switzerland and Lichtenstein have agreed to comply with Article 26,

Which looks like the famous tradition of confidentiality between banks and customers in Switzerland going back to the 1934 Swiss Banking Act has now come to an end.

EU Members and the US have long been critical of these "tax havens" for robbing them of taxes they otherwise feel were rightly theirs to collect. Their cries of "theft" have largely fallen on deaf ears, until September 11, when they used the argument that the same information protection that guards tax evaders from governing authorities, may also shelter funds used for money laundering and terrorism activities. This anti-terrorism twist, along with a renewed thirst for tax funds to finance economic stimulus programs appeared to have finally won over some of the more conservative G20 members, such as China, on the matter.

There is still some hope for those who love offshore bank accounts. As of now, the information sharing is limited, and has little jurisdiction over civil disputes. So those funds in the Cayman Islands may still be safe from pesky child support settlements .

G20 declares door shut on tax havens
http://www.guardian.co.uk/world/2009/apr/02/g20-summit-tax-havens

OECD Article 26
http://www.oecd.org/document/53/0,3343,en_2649_33767_33614197_1_1_1_1,00.html

OECD "harmful tax practices"
http://www.oecd.org/document/53/0,3343,en_2649_33767_33614197_1_1_1_1,00.html

Example of Germany's battle with Lichtenstein for account information
http://news.bbc.co.uk/2/hi/business/7253191.stm

Switzerland agrees to comply with G20 on "case-by-case" basis
- G20 wants full compliance "or else"
http://uk.reuters.com/article/bankingfinancial-SP/idUKL296678920090402

Swiss Banking Act of 1934
http://en.wikipedia.org/wiki/Swiss_bank