Posted by Joseph Y. Calhoun, III

It was a light week for economic data but the news was generally positive once again. Week after week, month after month the economic data has continued to surprise the naysayers. I still have serious doubts about how this recovery has been built but there can be little doubt at this point that the recovery is fairly robust. It is primarily a product of monetary policy and that worries me since that is how the last two recoveries were also built and I am getting too old to deal with another bubble. The Fed printed their way out of the 2001 recession and the result was massive malinvestment in housing. They’re doing it again and one wonders where the malinvestment will manifest itself this time. Ah well, I guess malinvestment is better than nothing at this point. Someday we’ll actually address our problems but it doesn’t appear it will be this recession.

The light data week started with the Goldman and Redbook retail readings on Tuesday which showed big rebounds from the snowed in numbers of the last few weeks. Goldman’s same store sales metric jumped 2.9% week over week. By the way, I spent the week in Chicago visiting my daughter (who is attending the School of the Art Institute of Chicago) and when temperatures moderated the city fairly jumped to life. Tuesday was a beautiful spring-like day with afternoon temperatures around 60 with sunny skies. I went out for a jog and passed 4 parks packed with parents and kids. I think the harsh winter has people itching to get out of the house and my guess is that they’ll be spending when they do. It has never paid to bet against the US consumer.

Mortgage purchase applications rose for the second straight week (+5.7%). This might be a precursor to a surge in sales before the expiration of the tax credits in April. It could also have something to do with the weather warming up - I don’t want to read too much into these numbers.

Wholesale trade numbers showed rapidly improving sales (+1.3%)  and falling inventories for durable goods. A lot of people pooh poohed the 4th quarter GDP report because much of the gain was a result of inventories falling more slowly. It has been suggested that GDP gains built on inventory gains are temporary and that may be true but it should be noted that the inventory building hasn’t even started yet. Indeed the inventory to sales ratio is just now at the level I suggested months ago would be the trigger for a rise in production. So if inventory rebuilding is temporary so be it, but it is going to have a positive effect on GDP for at least another quarter.

The disappointments for the week were released on Thursday. The trade deficit shrank in January with both exports and imports falling. Neither was due to significant prices changes but imports fell faster than exports producing a slight drop in the deficit. These numbers were for January though and activity likely rebounded in February. China reported big gains in exports and imports in February. And it shouldn’t be forgotten that exports are up over 23% year over year. The other disappointing release of the week was the jobless claims report which showed only a small drop in claims. This is the one report that continues to worry me week to week. There have been some positive trends in the jobs reports - temp jobs and manufacturing - but we are not likely to get significant growth in jobs until claims fall under 400,000 on a weekly basis and that is still a ways away (462k).

Retail sales for February were up 0.3% and up 0.8% ex autos. And excluding both autos and gasoline, sales were up 0.9%. Sales are up 3.9% year over year and this was a very solid report. As mentioned above, it has never paid to bet against the US consumer; sales continue to  beat expectations.

The last report of the week was the U of Michigan mid month consumer sentiment report which showed a small drop from February. I don’t usually pay much attention to these reports, but the market has reacted negatively to the last two reports so I feel I should comment. These reports are interesting but are, at best, coincident indicators. They don’t lead the stock market or the economy and as such don’t provide much guidance for investors. Sentiment will improve after conditions have already improved.

The economic recovery continues to surprise most analysts and investors and it is gaining strength. If history is any guide at all, it is also likely just getting underway.

Click here if you’d like to receive our free weekly e-newsletter. Here’s last week’s edition.

Posted by Joseph Y. Calhoun, III

Interesting chart pattern developing in the Euro. On the daily chart the Euro is making a rounded bottom and appears to be headed for the downtrend line:

I would not be surprised to see a run up to the  142 area that would close the gap on the chart. Just as we had a one sided market not long ago with everyone short the dollar, the opposite is the case now with everyone seemingly short the euro. I suppose it will depend to some degree on what happens with Greece but that looks more and more likely to be resolved without major disruption outside of Greece. The better play frankly may be gold which should get a bump higher if the euro rallies:

Click here if you’d like to receive our free weekly e-newsletter. Here’s last week’s edition.

Posted by Joseph Y. Calhoun, III

George Selgin has a new paper out titled,  Central Banks as Sources of Financial Instability. An exerpt:

The present financial crisis has set in bold relief the Jekyll and Hyde nature of contemporary central banks. It has made apparent both our utter dependence on such banks as instruments for assuring the continuous flow of credit in the aftermath of a financial bust and the same institutions’ capacity to fuel the financial booms that make severe busts possible in the first place.

Yet theoretical treatments of central banking place almost exclusive emphasis on its stabilizing capacity—that is, on central banks’ role in managing the growth of national monetary aggregates and in supplying last-resort loans to troubled financial (and sometimes nonfinancial) firms in times of financial distress. This one-sided treatment of central banking reflects both the normative nature of much theoretical work on the subject—that is, its tendency to focus on ideal rather than actual central-bank conduct—and the (usually tacit) assumption that however much central banks might depart in practice from ideal, financially stabilizing policies, they at least succeed in limiting the amplitude of booms and busts, compared to what would occur in the absence of centralized monetary control.

I propose to challenge this conventional treatment of central banking by arguing that central banks are fundamentally destabilizing—that financial systems are more unstable with them than they would be without them. To make this argument, I must delve into the history of central banking and explain both why governments favored the establishment of destabilizing institutions in the first place and why there is the modern tendency to regard central banks as sources of financial stability. I hope to show that the modern view of central banks as sources of monetary stability is in essence a historical myth.

As I have argued for years now that the Fed is the source of out troubles, naturally I tend to agree with Selgin’s appraisal of their performance. Read the whole thing and decide for yourself.

Click here if you’d like to receive our free weekly e-newsletter. Here’s last week’s edition. 

Posted by Joseph Y. Calhoun, III

Yesterday, I engaged in a bit of debate with Invictus at The Big Picture over a post there called, An Epidemic of Laziness? During that debate, due to being in a somewhat foul mood about other things, I may have been a tad less civil than I would normally be and so if I offended anyone over there at TBP, I apologize. And so, let me see if I can clarify a bit with a short note to Invictus:

I do believe the results of the Austrian study I linked to are valid because while there are cultural differences, Austrians are human too and respond to incentives just as Americans do. One of the interesting things about economics is that incentives tend to work pretty much the same across cultures although to me it is the micro differences between cultures that are often most interesting. However, since this seems to be a sticking point for you I am willing to concede the point and move on. There are plenty of studies which support my viewpoint; I only linked to a few. Like I said before, this isn’t particularly controversial in economics.

I am somewhat confused about what you find offensive about Kyl’s remark that “unemployment relief doesn’t create new jobs” and that “paying unemployment compensation is a disincentive…to seek new work.” This statement, if you accept the vast majority of the economic literature, is not controversial and is literally true. I added the modifier “at the margin” to clarify the statement but even without the modifier the statement stands. Kyl did not say that it is a disincentive to everyone and while I don’t want to speak for him, I doubt that’s what he meant. So are you offended that some humans respond to the incentive of extended benefits by remaining unemployed voluntarily? Or are you offended that Kyl pointed it out?

As for Tom Delay, well, I have to admit that I find nearly everything about the man offensive. If he were found dead tomorrow, hogtied inside a house tented for termites with a bruise on the back of his head, I’d say, “nothing to see here, move along”. And I have serious doubts as to whether the exterminator understands the concept of economic incentives or the effects of policy at the margin. So, if you feel the need to ream Tom Delay at any point in the future, you won’t hear a peep out of me.

What I’ve been trying to get at is exactly this idea that incentives in the current environment don’t matter. It seems this is becoming an accepted way to view things and I think it is being used as an excuse to enact policies that we normally wouldn’t accept. I am not an economist as I’m a more practical kind of fellow but I’m not dumb and I’ve been studying the topic for nearly 30 years now. For me, economics is not about the equations and models that have become so prevalent over the last several decades (although with an engineering background I have no problem understanding the math); economics is the study of human behavior. In short it is about how humans respond to the incentives placed before them. Incentives matter regardless of the economic environment and one of the more interesting things about it is that as humans we often respond to incentives in unconcious ways. The brain works in mysterious ways. Even if the incentives are weak or the effects they cause are weak, they matter because they effect behavior for some individuals. In some cases the actions of individuals at the margin make a large difference in the outcome of a policy that seems relatively benign on the surface. Think butterfly wings and weather. Incentives always matter.

Someone earlier in the thread asked why Republicans always try to make their point with anecdotes. That is particularly rich considering the recent health care summit where every Democrat on the panel started with a sob story about the pain and suffering of someone due to the lack of health insurance but even if it is true, there is nothing wrong with making an economic point with anecdotes. In fact, I think it is often more enlightening than a page of equations describing the behavior of mythical individuals within an economic model that resembles the real world only superficially. The anecdotes mentioned on this thread, if true, all add evidence to the debate. All of us probably knows someone - and those of us who self identify as Southerners probably know several someones - for whom the difference between an unemployment check and a paycheck is measured in six packs or boxes of shotgun shells or most frighteningly, both. The people I know who fall in that category often make up the difference between the unemployment check and the paycheck by working off the books so their cash income is basically unchanged. The question before us is whether we just ignore those people -and keep paying them benefits- or acknowledge them and deal with them. As I said earlier in the thread, when do we cut off these extended benefits? At what level of unemployment will it be acceptable? Burying our head in the sand and saying that we are offended by the notion that some Americans are lazy bastards who will milk the system does not further the debate.

As for the political nature of your post, you are right of course. You are free to make political points if that is what you desire. But if your political point is that Republicans are meanies and Democrats are not, that isn’t particularly original or insightful. I don’t particularly care for politicians of any stripe and tend to lump them together in a group I label, “Impeding Social Progress” or “Liars” or ”Waste of Oxygen”. I tend toward the public choice theory and believe that politicians of all stripes are just doing what all the rest of us do -responding to the incentives placed before them and acting in their own best interests. You are free to believe that Democrats really care more about their fellow citizens than Republicans but I find it hard to swallow.

As for Zandi, well I tend to think more along classic economic lines and so don’t find his brand of Keynesianism very convincing. Or anyone else’s for that matter. It doesn’t matter to me what party or candidate he works for. I surely didn’t mean to imply that I support The Heritage Foundation either though. My political leanings are libertarian so most of my think tank reading is done at places like FEE and Cato.

Like everyone else out here I’m just trying to figure out what is the right thing to do to fix the mess that is the US economy. I think the folks there at The Big Picture are too and I’ll keep reading and commenting when I think it’s important to add my two cents. As BR said in the thread, good debate and very interesting to read all the comments.

Click here if you’d like to receive our free weekly e-newsletter. Here’s last week’s edition.