Send Message
View as an RSS Feed
  • A Sobering Perspective on China's High Speed Rail  [View article]
    While I haven't looked at China's high speed rail program that closely, I think that the article author is missing the point a bit. There is probably pork and potential capital misapplication, but (for better or worse) the dictators in China (and they are, ultimately, dictators - never forget that) have a very clear and cogent view of the future.

    Oil (and liquid/gaseous transportable hydrocarbons in general) is not going to get any cheaper any time soon. Their (electric) high speed rail infrastructure may not be economically viable today (even with liberal economic growth) at the current price of oil - but the question is in ten years it is economically viable? I find the answer - if it is competing with air travel or other hydrocarbon based transport - a likely yes.
    Feb 21, 2011. 04:24 AM | 7 Likes Like |Link to Comment
  • Intel Plans Even More 'Made in America'  [View article]
    This shouldn't come to a surprise to anyone. Firstly because Intel has always built a lot of fabs in the US. As Moon Kil Woong noted, fabs don't employ a lot of people. Today's fabs are entirely lights out - the only people who work there simply perform necessary maintenance on the machines and load chemicals and raw silicon into loading bays from the shipping docks. That's it.

    Intel's massive fab will probably employ anywhere from 700-1000 people - or, relative to capital costs, about $5.5 million/employee (that's why these articles always say 'thousands will be employed in the construction' - because fabs almost never have a thousand active employees post construction). And these are not high end engineers - no, most of these are relatively menial low end physical jobs. So it shouldn't be any surprise that they still build fabs here - capital is cheap and plentiful, and the labor costs don't really cost that much (especially when you consider that most fabs, unless completely retooled, last only about 6-8 years before it is decommissioned). Further, the biggest cost of the fabs is not the buildings or even the complex filtration systems - rather, it is the machine tools that do all of the chip lithography. It doesn't matter where you build your fab - when you need dozens of machines that cost in the tens of millions of dollars each, it's going to be expensive to build a fab.

    Intel isn't making a sacrifice to build a fab in the US. Fabs are ungodly expensive - but the labor costs that go into building the factory and subsequently staffing it are so minuscule to the other capital costs that are involved in building a fab that the physical location doesn't matter much. Building the fab in China may be a couple hundred million dollars cheaper, but in return for a couple hundred million, Intel gets to avoid the Chinese political game and win some brownie points with US politicians.
    Feb 21, 2011. 02:51 AM | 5 Likes Like |Link to Comment
  • The effects of food inflation largely explain how the top economy wonks in the world's two largest economies can have such fundamentally different policy views. The weight of food and energy in consumer budgets and price indexes is at least twice as large in emerging markets as in the U.S. and other developed economies.   [View news story]
    Uh, probably because they comprise a larger portion of the average persons expenditures? In the US, someone might spend $4k a year on food (real food, not food service) while earning $40k; in an emerging market, they may spend $2k a year on food but earn only $10k.

    Come on, this news currents post is just trolling.
    Nov 19, 2010. 04:07 PM | 3 Likes Like |Link to Comment
  • Goldman and Bernanke Are Wrong About Inflation  [View article]

    In the short run there is a small leading correlation but in the short run the change is dominated primarily by velocity. You can clearly see how velocity correlates to the peak periods of inflation in the 70's and 80's. The only exception to the rule was during the early-to-mid-90's where the money supply did not grow and velocity increased to soak up the growth.
    Nov 9, 2010. 05:09 PM | Likes Like |Link to Comment
  • Can the Chairman Plausibly Make Mistakes?  [View article]
    @Tom: The ratio only went down because the monetary base increased significantly while the M2 money stock remained relatively stable. If the multiplier was to go back up to its original ratio (unlikely), then the money supply would more or less double.

    This chart shows the change in the monetary base, M2, and the money multiplier and how they interplay: research.stlouisfed.or...

    Edit: While making the chart I see that TIF already replied - sorry to be redundant. :)
    Nov 9, 2010. 08:33 AM | 1 Like Like |Link to Comment
  • Can the Chairman Plausibly Make Mistakes?  [View article]
    Well played - this is probably the best writeup on the potential effects of QE2 I have seen. Everything seems to be either "It's brilliant!" or "It's the end of the world!" Neither of those positions are entirely correct, and you seem spot on with your analysis.

    I reacted in a similar manner when Bernanke made the "rejection" comment. Rather than reassure me, it frightened me solely because the complete rejection of the downside risk is not a rational approach to decision making given that we are in uncharted territory here. If any of the underlying assumptions are incorrect (such as the IOER hypothesis), the downside risk is immense.

    I place a low risk of "super-normal inflation" as an outcome of these policies - but to simply reject the notion (as Dr. Bernanke apparently has) is childish.
    Nov 9, 2010. 07:55 AM | 2 Likes Like |Link to Comment
  • Goldman and Bernanke Are Wrong About Inflation  [View article]
    While I don't necessarily disagree with the assessment that inflation may end up being higher than anticipated, your claim that money supply is the single strongest factor that determines inflation is somewhat flawed (at least in the short run). Over the long run that is true, but in the stagflation seen in the 70's, the growth of the money supply and monetary base were not that significant (relative to inflation). Rather, the velocity of money increased rapidly (combined with relatively depressed output growth) leading to significant inflation despite a "relatively" stable money supply.

    I'm not sure if this link will work properly but here's a graph that shows the relatively steady growth of M1/M2/MB through the 70's but sharp uptick in inflation that shows this:
    Nov 9, 2010. 07:25 AM | Likes Like |Link to Comment
  • Could QE2 Cause the Fed to Go Broke?  [View article]
    LKofEnglish: As long as the USD has some non-zero value (and I mean absolute rock bottom zero), it is more or less impossible for the Federal Reserve to go broke. It is possible that they will no longer be able to execute monetary policy (in which case you could consider that they have "failed" as a central bank), but they cannot go broke.
    Nov 8, 2010. 10:27 AM | Likes Like |Link to Comment
  • Could QE2 Cause the Fed to Go Broke?  [View article]
    As your analysis noted, it is impossible for the Fed to go broke in the conventional sense. I think that perhaps a better way to describe "broke" in this case would be "limited in its ability to fully execute monetary policy."
    Nov 8, 2010. 09:44 AM | Likes Like |Link to Comment
  • The New York Fed's statement provides some details on the Fed's easing plan: The $600B in new purchases isn't all; continued POMO reinvestments could total $250B-300B during the same period - $850B-900B total, about $110B per month. NY Fed expects average duration of securities bought to be between five and six years.   [View news story]
    Oldreliable67: What decade is this, the 80's? With coupon rates around 2.75% on 10 year notes the duration is more in the 8-9 year range.
    Nov 3, 2010. 02:58 PM | Likes Like |Link to Comment
  • Oct. ISM Manufacturing Index: 56.9 vs. 54 consensus and 54.4 prior (revised). Prices index 71 vs. 70.5 prior. Employment 57.7 vs. 56.5. Inventories 53.9 vs. 55.6. New orders 58.9 vs. 51.1. "With 14 of 18 industries reporting growth in October, manufacturing continues to outperform the other sectors of the economy."   [View news story]
    This is October; the previous report was for September.. All indications are that October is shaping up to be a good overall month (at least nominally).
    Nov 1, 2010. 10:36 AM | 1 Like Like |Link to Comment
  • Sept. Personal Income and Spending: Personal income -0.1% vs. +0.2% expected, +0.4% in Aug (revised from +0.5%). Spending +0.2% vs. +0.4% expected, +0.5% prior (revised from +0.4%). PCE core price index flat vs. +0.1% exected, +0.1% prior.   [View news story]
    Shh, you might frighten the permabears.
    Nov 1, 2010. 08:47 AM | 2 Likes Like |Link to Comment
  • Gold vs. Bonds: Which One Is the Wealth Preserver?  [View article]
    What is wealth protection? Wealth protection is (at least to me - maybe my definition is off - but I don't believe it is) about the preservation of present capital with a high degree of certainty. If you have to make assumptions ("the Fed is going to print money", "the USD will devalue", etc) in order to defend the valuation of your investment, then it is not wealth protection.

    The best form of wealth protection is short term (<1 year) highly rated debt. A money market basically. It trends closely with, and generally beats, inflation and will pretty much never result in a nominal principal loss. The only way such an investment loses significant amounts of money requires some creative thinking. That is wealth preservation.

    Now if you're asking what a better investment is - then you can talk about gold versus longer term bonds versus equities versus others. But "wealth preservation" and "investment" are not synonymous. Investment infers an attempt to maximize return with acceptable risk. Wealth preservation infers an attempt to preserve capital with minimum risk. These are two entirely separate concepts and should not be confused.

    Gold may be a good investment, but it isn't a place to preserve wealth.

    Also, Shadowstat's figures fail the common sense test. The CPI calculations were changed for a good reason: they somewhat overestimated inflation, especially in a modern economy. I believe that CPI understates inflation to some degree - but the Shadowstat's figures also overstate it. Using the Shadowstat's figures (assuming CPI approximately equals the deflater), the GDP deflater should be about 3.5 times higher than it is today. Using Shadowstat's figures, real GDP has declined by about 35% since 1980. Taking account population growth, this would mean that real per capita GDP has declined by about 50% since 1980. Even the most rose-colored and nostalgic view of the past wouldn't support such a notion when hard economic data (average square foot of a house, car size and quality, televisions/phones/cars per household) all diverge from such a dystopic figure.
    Nov 1, 2010. 04:24 AM | 4 Likes Like |Link to Comment
  • QE2: Another Bank Bailout - Not a Main Street Recovery Plan  [View article]
    I have to disagree, in part, with the main point of this article. I don't think that the argument is actually wrong (that this helps bankers), but I don't believe that the intention is what the article postulates.

    In my opinion, QE2 is about creating inflation. It's as simple as that. QE1 was perhaps about cleaning up muck in rescue of the banks, but QE2 is simply about creating inflation. Reading Bernanke's academic papers shows that he loves inflation: it is a cure all for so many problems - especially when following a debt-financed asset bubble. Ben's critique of the monetary policy following the Great Depression notes how the deflation post-1929 exacerbated the problem by making debt-burdened consumers and mortgagors contract their spending to virtually nothing.

    For example, Ben would likely argue that heavy inflation can "cure" the housing malaise that faces the country. 28% of all residential mortgages are at negative equity or near negative equity. Housing prices remain expensive compared to historical averages relative to real income and a rebound in housing prices seems somewhat unlikely given the huge inventory of homes in default or in foreclosure. A negative equity position in a mortgage creates huge problems: First and foremost, it can create structural employment issues: people can't sell their house and therefore can't move. Secondly, it can kill consumer confidence for those who are in a negative net worth position overall. Lastly, it creates a large incentive for 'strategic default', especially in states where personal liability on a primary residence mortgage more or less doesn't exist (e.g., California). This creates a vicious cycle of oversupply with limited demand since those who strategically default are unlikely to be able to re-enter the credit/mortgage market post foreclosure.

    Inflation creates a nominal cure for negative equity debt. The real price of homes can continue to fall but the nominal price of homes can begin to rise. This reduces negative equity stakes, reduces incentive for default, improves consumer confidence, and results in reduced structural issues due to free movement to new locations. Inflation is the way that Ben hopes to deleverage the American consumer. This is, in my opinion, why he is so adamant at increasing inflation. He doesn't just want 2% - he wants the "catchup" 5+% for a few years to help wipe the slate clean. QE is, theoretically, great at achieving this because it can help maintain relatively low real interest rates (as inflation picks up, nominal rates will have to rise of course) over the short run while pumping the inflationary fires.

    The risk here is, of course, that the inflation is going to be asset-specific and not a general price level rise. This is essentially the fear that all this will do is flame another asset bubble. From a monetarist's point of view, inflation should theoretically be a broad spectrum rise in price level - but obviously history has shown that this can be a rather false assumption. It will be interesting to see how general the price level rise will be (if inflation does take root) or whether it will be focused in certain asset areas. It will also be interesting to see whether nominal wages rise at the rate of inflation in an otherwise depressed labor market where employers have a favored bargaining position. Then again - as Bernanke noted in his 2003 "Ups and Downs of Capitalism" paper - lower real wages would be a catalyst for hiring. Yet another benefit of inflation: nominal wages (which are supposedly sticky) remain constant/slowly rising, but real wages fall, bringing a potentially overpriced labor market back into equilibrium. Although aggregate real wages fall, real per capita income would still rise if the increase in employment is greater than the real wage drop resulting in overall growth.

    My personal position is that I don't necessarily disagree with the theoretical arguments that Ben lays out. My issue is that the execution, as a general rules, tends to be flawed: central banks are neither agile nor omniscient enough to strategically force a general rise in price levels. Price level rises will always be concentrated and ultimately distort market segments, resulting in longer term issues that most likely outweigh the short term benefits of such a policy.
    Nov 1, 2010. 03:50 AM | 3 Likes Like |Link to Comment
  • One More Sign That Deflation Is History  [View article]
    More than anything this just further points out the inherent conflict that exists between the Fed's mandates (obviously the two glaring ones being stable price level and full employment).

    I suppose that, in light of this evidence (right on target with 2% inflation), the argument that the Fed would be making for more easing is that they are trying to balance the marginal cost of inflation versus the marginal cost of unemployment. Assuming for a moment that we accept (although this may be flawed postulates) that quantitative easing increases both inflation and employment then the Fed is trying to minimize the perceived costs of inflation and unemployment by raising inflation (a relatively low cost problem) to counteract unemployment (a high cost problem). That to me is more conceptually solid than the "oh, we want to 'catch up' to where the price level 'should' be given the 2% price target" argument I've seen bandied around in some Fed speeches.

    In the end, though, it's all just the same nonsense: market distortions that probably end up doing more harm than good in the long run in return for some short term improvement.
    Oct 29, 2010. 12:51 PM | 1 Like Like |Link to Comment