|
|
By Toby Baxendale, on 26 November 09
Our good friend of the Cobden Centre, Sean Corrigan, is a wealth of fresh economic insight. Here in this small piece, he shows us that, if you strip out Government from GDP figures, you actually see what the private, productive sector of the economy is doing.
Sean does this for Japan. It shows that the current GDP recovery that has been reported widely in the press for this country, when you strip out the Government part of the economy, has actually gone backwards for 6 successive quarters. It has retuned to a level not seen since the early 80’s.
Sean is of course quite right to strip out government, as doing a bit of QE here and a bit there will inflate GDP figures for sure, but do little to grow the economy as we have previously explained before in this article . Now government can spend your money as a taxpayer on things that it views to be priority, i.e. transfer payments to the worthy and not so worthy and building cap ex projects such as railways, providing services such as justice etc, but this just redistributes what you as a taxpayer has earned and moves it form A to B.
To be clear nothing new is created from a wealth perspective, as it was already created by you, the taxpayer, to be given to someone else, directed by the government. More than ever, we need to be looking at how the productive sector is performing in all economies and not how the transfer, sector i.e. government, is doing. This is the engine of recovery and not the government side of the economy for the reasons stated.
I hope Sean or one of our readers would like to prepare this data for the UK. I suspect it would show a similar dismal story. In fact, when we hear of all these nations lifting out of the recession, I have a nagging doubt in my mind that this is the case.
The other interesting measure Sean uses is Debt to Private GDP. In Japan it has risen a staggering 28% in 18 months and is now sitting at 237%. In the UK we are told we now have a Debt to GDP ratio of 59%. What do we think it is in the UK? Without doing the numbers myself, I would suspect for us the Debt to Private GDP is over 100% as government is well into the high 40% + range of the economy.
A third insight is the Japanese MI money measure which is 31% up YOY and that correlated, with a time lag to inflation, so beware Japan for the inflationary Tsunami!
By Steven Baker MP, on 23 October 09
Via The Times Online, we learn that many economists ”revolt over surprise recession data”:
Economists today cast doubt on official data showing that British gross domestic product (GDP) contracted by 0.4 per cent between July and September, claiming the surprise fall is far worse than economic reality.
The shock figures from the Office for National Statistics (ONS) revealed that the country remained mired in recession during the third quarter — the sixth consecutive quarter of contraction, signalling the country’s longest downturn since records began in 1955.
Economists had widely expected that the country had emerged from recession between July and September.
Well, yes, many economists had expected that but as I have explained before, most economists allow themselves to be misled by a superficial reading of numbers distorted by central bank action.
We can and must do better.
By Ewen Stewart, on 16 October 09
 UK Household Savings Ratio (click to enlarge) Equity Strategist Ewen Stewart makes the case that the national debt will within 5 years be over £150,000 per family of 4 with debt repayments of twice the present defence budget, up from £31 billion in 2008/9 to £70 billion in 2013/14. He explains the root causes of our difficulties and indicates a route to recovery.
It’s all over. What a fuss about nothing. The economy will soon be growing again and, look, the FTSE100 is up almost 50% since the March low. Even house prices, according to the Halifax, have risen 6 months in a row. The doom mongers were wrong. Central Banks and Keynesian public spending programmes, together with QE, have worked. Brown indeed has saved the world!
Well that would be one interpretation and a very short sighted one too, for this recovery shows all the hallmarks of a drug addict who claims to be going straight injecting a further mighty dose of the substance that has caused such decay in the first place to prolong the party.
The problem is that the underlying fault lines in the UK economy remain and, thanks to the Government’s response, are even more pronounced.
The underlying problem is, in my view, an addiction to debt, a banking system which is over-leveraged, and now government finances that are out of control. This country that has been living considerably beyond its means for a very long time. Artificial efforts to prop this up, through printing money or inappropriately low interest rates, at best are a short term delaying tactic and at worst risk stoking a loss of confidence and ultimately inflation.
It is my central conjecture that much of the economic growth over the last decade was less the result of genuine private wealth creation but more the result of a number of unique factors which were both unsustainable in their nature and damaging to long term growth. If this view is correct the scale of the over-leverage and the action required to alleviate the problem become even more pronounced.
Continue reading “Happy days are here again? Another view from the City”
By Steven Baker MP, on 2 September 09
 Responding to an article in The Times, Steven Baker indicates the origins of our views on the economic situation and its causes, of our prospects and of the best route to sustainable prosperity.
For the Times, Jim O’Neill, Chief Economist at Goldman Sachs, writes:
Based on the evidence I have seen this month, it looks as though the world moved out of recession in the second quarter. When we see the evidence for this, in the third-quarter data, it is likely that many areas will have returned to close to trend growth.
He goes on to explain the emotional and subjective criticism he has received in response to previous articles, the evidence and his optimistic outlook for the world economy, concluding:
Since March, close to the time that developed stock markets bottomed, our GLI has shown a vigorous bounce and, indeed, for the past two months the monthly increases have been the sharpest we can find. The chart of the monthly changes, as you can see, looks pretty much like a V, not a W. Right now, it suggests a much stronger bounce in the world in the next six months than consensus and, along with other data, is why in our latest forecasts we predict that world GDP will recover by 4 per cent in 2010. This will include the UK because, despite all its challenges, it is an economy small and open enough to be greatly influenced by the rest of the world.
Now, we have already explained why the FTSE is rising, the cause of the appearance of prosperity (also Corrigan) and that uninterrupted growth in the stock market never indicates favourable economic conditions. We have shown that our understanding of the nature of money produces a measure which, in contrast to the Bank of England’s M4, correlates to economic activity. We have introduced a better measure of private prosperity than GDP. We have indicated here and here alternative prognoses for the global economy. Our primer introduces our supporting literature.
Mr O’Neil is a senior economist and Goldman Sachs makes a great deal of money. So why do we disagree?
There are three important schools of economic thought: Keynesian, Monetarist and Austrian. We follow the Austrian School. In contrast to the others, it has a robust capital theory and an understanding of the interest rate as the price which coordinates the economy across time. Unfortunately, Mr O’Neill’s economic thinking causes him to look at the immediate empirical evidence and make pronouncements which, while superficially justified, lack a deep theoretical understanding of the situation, that is, the distortions in the capital structure of production.
Of course, this is not to assert that money cannot be made by bankers in the short term under the present system. The question is whether that system of thinking can explain our predicament and the best route out.
Continue reading “Now it’s looking like V for victory over recession – Times Online”
By Toby Baxendale, on 17 August 09
Sean Corrigan, Chief Investment Strategist at Diapason Commodities Management, in his 13 August briefing, comments on the illusion of prosperity created by new money and discusses the growth of the US Federal Government deficit in the face of historic falls in receipts plus increases in outlays.
Sean emphasizes in practice the point made by Hayek that new money creates an illusion of prosperity which lasts only as long as the supply of new money:
With a commendable – if belated ‐ recognition of the unstable nature of the Chinese maxi‐flation process (which is about as well‐founded as a seaside hotel in a storm‐surge), the market’s heightened fears of even a partial abatement of the PBoC’s largesse triggered the largest correction in the runaway Shanghai composite suffered in six months. At the same time, the market has yet to resolve its migraine—inducing cognitive dissonance over the state of those Western economies where monetary expansion is also proceeding apace and where it is similarly being channelled through state‐owned, ‐controlled, or ‐ supported entities, if not quite, so far, on the prodigious scale that Beijing has managed.
And on the US Federal Government deficit, Sean gives the historic context before indicating how 60% of new debt this year has been directly monetized, “magicked into cash”:
The potential implosion in US creditworthiness is being led by a fall in Federal Government receipts which was only once greater, in 1931, while the rate of increase in outlays in peacetime has only been exceeded in the New Deal years of 1931, ‘34 & ‘36 when, of course, they were starting from a much lower base. The difference between the two has only twice been wider – amid the global disaster of 1931 itself ‐ and in 1942 – America’s first full year of participation in WWII. In detail, 12‐m trailing outlays are rising at 20% YOY ‐ the fastest nominal pace since 1976 ‐ while receipts have fallen 14.8% YOY ‐ their fastest drop in at least 40 years. The percentage cover for outlays has been a pacesettingly poor 56% so far in calendar 2009, taking the deficit to no less than 78% of receipts and to a staggering 14% of private GDP where it is on track to reach between $1.6‐$1.8 trillion for the full year ‐ equivalent to the entire GDP of Spain, Russia, or Brazil.
Please refer to the report for full details.
By Toby Baxendale, on 10 August 09
Sean Corrigan, Chief Investment Strategist at Diapason Commodities Management, has kindly agreed to the reproduction of his briefing “Material Evidence” by the Cobden Centre. For this, 29 July 09, edition, Toby Baxendale provides commentary on Sean’s preferred measure of national economic performance: rPNNPpc. Corrigan shows that real wealth in the USA is now back to pre-1995 levels.
As most Austrian-school economists are never given jobs by the mainstream in academia, they are forced use their knowledge to create wealth: they largely succeed. The linked PDF is from one of the great contemporary thinkers and writers in economics: Sean Corrigan.
 Sean Corrigan, Material Evidence, 29 July 09 Now, if governments — as the monopoly issuers of money — pump an additional 10% of newly-minted cash into the economy through ‘quantitative easing’, it will come as no surprise to find an increase in the number quoted as GDP.
This, of course, is just a game of smoke and mirrors. As I have pointed out elsewhere, it is only the forgoing of consumption through real savings that allows investment in longer and more complex — and thus more productive — methods of production to create sustainable, growing wealth. So, what we as eager participants in the economy want to know is not the value of some inflated figure, but what Corrigan calls Real, Private, Net National Product Per Capita or rPNNPpc.
What is “Real, Private, Net National Product Per Capita”?
Governments can only take wealth that has been previously created. They dispense this confiscated wealth at will, perhaps to people who are less productive, perhaps creating expensive capital projects, or perhaps even destroying people and wealth by waging war in other countries. Sean writes:
[L]et us discard the government portion [of GDP] since the economic worth of this is not only highly contentious ‐ being priced at cost, being involuntary in its provision, and arguably being composed of as many negative ‘bads’ as positive goods – but is also moot because it can only represent a forced redistribution of wealth already created elsewhere, in the private sector.
After excluding government, Sean then deducts capital consumption: this is just replacement of existing capital that has been worn out. You can then see the real wealth of the nation and work out a per capita amount based on population. Sean deflates his figure by the median Consumer Price Index for the time series to arrive at rPNNPpc:
[I]n the attempt to make a fair comparison across an era of a chronic erosion of the value of the unit of account – and cognisant of all the inherent distortions involved therein — we will deflate the result using the median CPI index. What this leaves us with may be rather a mouthful — being a measure of real, private, net national product per capita – but it is also a reasonable first estimate of the effective income flow experienced by the average person.
Emphasis mine. Corrigan’s plot of rPNNPpc is revealing:
Corrigan shows that real wealth in the USA is now back to pre-1995 levels, wiping out gains from the recent credit bubble as well as the preceding tech bubble. In comparison, the official data for GDP shows only the last couple of quarters in decline. Corrigan writes:
To get some sense of the scale of the collapse, the fall to date has been half as big again – and more than twice as rapid in its progression – as that suffered around the second oil shock of 1979‐82, otherwise the worst since WWII.
I suspect the figures for the UK would show a similar effect.
By Steven Baker MP, on 27 July 09
Via No need to panic about GDP | Anthony Evans | Comment is free | guardian.co.uk :
GDP doesn’t tell us how economic activity affects living standards. It fails to distinguish between a bubble and sustainable growth. It doesn’t forewarn about inflation. And perhaps most importantly – it doesn’t help the average person on the street know whether they’re more likely to become unemployed. After all, declining incomes actually increase the demand for many types of goods and services, which is why plenty of workers are prospering in the downturn. As the old saying goes, statistics are like bikinis – what they reveal is interesting, but what they conceal is critical. And macroeconomic aggregates are more of a full Victorian bathing suit.
…
The industry built around forecasting gives economics an aura of scientism that is destined to disappoint. A narrow focus on statistical releases can blind us to the bigger picture. The crisis isn’t just a failure of monetary policy, but a failure of the monetary regime.
|
|
