my doxy

Orthodoxy is my doxy; heterodoxy is your doxy.
--William Warburton

Commentary on politics, finance, and sometimes other tidbits when I can't restrain myself.

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Monday, July 21, 2014
I know people have been surprised at the increase in US oil production over the past decade as result of shale development, but today I heard a foreign policy analyst on an NPR talk show make a throwaway comment that the US no longer needs to import oil. I also regularly hear people saying that the US going to be self-sufficient in terms of petroleum sometime in the not too distant future, usually they give a date between 2020 and 2030. In reality, our net imports are currently at a level around 60% of our production, and there is basically no likelihood that we will ever stop being a net importer. So where do they get these ideas?

Wednesday, February 11, 2004

Why isn't the US at full employment?

No one thinks that the US is currently at full employment--job growth well below population growth, rising long-term unemployment, and stagnant wages would seem to make this clear. But why? When have US monetary and fiscal policy ever been looser than they are now?

I am not certain that anyone knows the answer to this question, but I think we need to look at the usual suspect, "price-stickiness", or perhaps price-stickiness enhanced by other kinds of stickiness.

First, people are well-known to exhibit price-stickiness in the wages they will accept--they have an idea of how much their work is worth, and are not inclined to take jobs which pay significantly less than that. It may be that some people's notion of their value was inflated during the strong economy of the 1995-2000 period. It may be that wages in their sector of the economy are being deflated by domestic or foreign competition, or by technological change. In any case, unless they are in dire straits, people are not likely to quickly take a job which does not meet their expectations, even if their expectations no longer correspond to reality.

Second, people are well-known to exhibit sector-stickiness--an industrial worker is unlikely to consider switching to a health-care job until other industrial options are exhausted. Also, credentials and experience in one sector are likely not easily transferrable to another.

Third, the American population is aging, and very likely is less likely to migrate within the US for employment reasons than in the past--we could call this geographic stickiness. In the 80's we saw the "black tag people" moving from Michigan to Texas for work, because the Michigan economy was very depressed and Texas was booming, but now there don't seem to be any really strong regional job markets in the US, so even if people were so inclined, they might not know where to go.

It may also be that the relative strength in the asset markets (especially the residential property market) may enable people to live without work for longer than has historically been the case.

Now the thing about stickiness arguments is that stickiness isn't expected to last forever--people get retrained, expectations adjust, geographic attachments wane--but there isn't really any way to know how long those things might take. And as the economy keeps shifting, we can expect that people will continue to go through this process. The US does have some programs in place to help, but it seems clear that they are inadequate--I suspect that if widespread concern about trade and outsourcing are not to completely screw up the world economy, the US needs to get a better system of worker assistance in place.

Thursday, June 05, 2003

Easings appear to be on schedule

As was expected, the ECB eased a half-point today, and I just read that the T-bill has a 93% chance of a .25 % easing in June priced in.

I suspect there will be more to come.

Wednesday, June 04, 2003

Avoid Treasuries

Note: My wife hates it when I give investment advice--I can't help it today.

If you are not a central bank or a trader, buying T-notes or bonds at current quotes is unwise. If you can't stand not owning bonds, buy a short corporate fund--it will stink less. You can buy TIPS if you want--the return isn't too good down here, but it would be safer.

The only way buying T-securities at these prices could be a good idea is if there is deflation or near-deflation for quite a while. That is doubtful (see previous post). Presumably the reason rates have gotten this low is that central banks (including the Fed) are buying them. They don't need to make profits, but I presume you would prefer to. This is not the way.

In the early eighties, when bonds had double-digit yields, people avoided them--the experience of the 70's said they were "certificates of confiscation". Now, most likely, they really will be.

Monday, June 02, 2003

Deflation in the US--I think not

There has been a lot of talk in the press about the possibility of a general deflation in the US; even Fed Chairman Greenspan has lent it credence,although as a remote possibility.

It is possible this could happen if nothing was being done about it, but I do not think that is likely.

One of the benefits of the federal government issuing TIPS is that it gives us an easy way of telling what the market thinks inflation is going to be, by looking at the rate spread between regular Treasury securities and their inflation-protected equivalents. Currently, the market seems to be pricing in an inflation rate of 1.5% - 2%, so it appears that market participants do not expect deflation.

The Fed has made it clear that they will use whatever means are necessary to prevent deflation. It is possible that they would not be willing to live with the consequences of those means, but my current presumption is that when the Fed prints a lot of money, and the dollar continues to fall, the Europeans, Japanese, and Chinese will not want their currencies to rise too much against the dollar, and will have to inflate their currencies as well. We have already seen Japan intervene to keep the yen from rising too much, and it would not be surprising to see a ECB rate cut next week. China and much of the rest of Asia is maintain a de facto currency peg to the dollar, and you would probably see increased Asian central bank purchases of US debt used to recycle the excess dollars those countries accumulate.

Such a policy mix is not sustainable, and probably will have various drawbacks in the longer-term, but it is almost certain to prevent deflation.

The strongest objection to this scenario that I am aware of is the fact that Japan has tried to reflate and it hasn't been able to--some would say it is in a liquidity trap where monetary policy is ineffective.

There are three main reasons why I think Japan is different:

  • Japan was first

  • Japanese production and consumption patterns are very different

  • Japanese demographics are very different

  • but going into those details will require a separate post.

    Tuesday, March 18, 2003

    WorldCom writedowns--dumb money or victim of technology

    Brad DeLong references the New York Times discussion of WorldCom's recent writedown of $80 billion, including $35 billion in tangible assets. The basic question is: why was capital so badly misallocated?

    Gretchen Morgenson in the Times doesn't appear to have a view on that, except that it was "dumb money". DeLong seems to think it was technological change, specifically the advent of DWDM. It could have been either of these things, but if we look at when WorldCom actually spent the money, we have to lean toward the "dumb money" argument, probably with some fraud thrown in. WorldCom had capital expenditures of over $31 billion from 1998 to 2001. Using Google, we can determine that Ciena complained in early 1998 their orders were going to be weaker because "WorldCom's long-distance capacity deployment currently is ahead of schedule due to aggressive DWDM rollout during 1997." So we can't really believe this was unknown to Worldcom while they were spending that additional $31 billion.

    Of course, we also know that WorldCom charged billions of dollars of current expenses to its capital accounts, so the numbers I am using for capex may be inflated relative to what WorldCom actually bought, but it still appears that the bulk of WorldCom's capital investment was made after they knew about DWDM. Dumb.

    Saturday, January 11, 2003

    Milton Friedman's dividend tax alternative

    I don't generally expect to agree with Milton Friedman on policy issues, as our philosophies differ quite a bit, but if this description of his views in Gene Epstein's column on the Bush tax proposal in the January 13 Barron's is correct, I completely agree with him on the following:

    "Milton Friedman describes a much fairer approach: Abolish the corporate income tax, whicle taxing interest income to bondholders at ordinary rates. And require stockholders to pay a personal income tax on their pro rata share of the company's earnings, regardless of how much is paid as dividends and how much retained."

    This is essentially the same way that S corporations are currently taxed. The main argument against this was that accounting for the phantom (reported but necessarily received) income seemed like a pain, but compared to the problems in accounting for how much US corporate tax was paid on the earnings being paid as a dividend or, worse, embedded in a capital gain over an arbitrary number of years, as the Bush proposal would require, it seems like a walk in the park, and has the advantage, as one would expect of a proposal by Prof. Friedman, of being economically defensible.

    It would also make shareholders less willing to let corporations reinvest earnings, which based upon historical observation is probably all to the good. Under the Bush plan and the current system, shareholders have an incentive to prefer corporations keep their excess cash, which they hope will morph into lightly-taxed capital gains. Unfortunately, cash hoards tend to be converted into unsuccessful expansions or dumb acquisitions--what Peter Lynch calls di-worse-ification--as corporate managers tend to prefer increasing the size of their domains to maximizing shareholder returns.