Dollar Fall To Raise Dollar Oil Price?

According to this news story, the drop in the dollar could make OPEC demand a higher price of oil, up to US$100 per barrel. Actually, the dollar price of oil has already risen, but if OPEC were to aim at $100, and if they back it up with production cuts, then it could rise further still?

Is Singapore In A Depression Or Spectacular Boom?

Singapore is usually the first to report preliminary growth numbers, and that was the case this quarter too. Yet depending on what number you looked at, it could have either suggested that Singapore is in a depression or that it is enjoying a spectacular boom.

If you for example go to the statistics Singapore web page you can see in the center of the page the news that GDP contracted by an annualized rate of 19.8%, while in the left side bar you can see that GDP is up by 10.3%.

This is bound to lead to confusion for people who haven't been regular readers of this blog for some time or learned these distinctions some other way. In short, the 19.8% contraction number expressed growth in the American way, while the 10.3% growth number expressed growth in the Chinese way. Expressed in the European way, there was a 5.4% contraction. In case you are unaware of it, see my previous explanation of the difference between the American, European and Chinese way of expressing growth.

What then can be learned from this? First of all, that quarterly change in output in Singapore is even more volatile than in other countries. And secondly, given the fact that quarterly change is unusually volatile in Singapore, it makes more sense to look at the yearly change (the "Chinese" way of expressing growth), and the answer to the question of how Singapore's economy is performing is that it is doing great, and that the quarterly contraction simply reflected normal (for Singapore) volatility.

And thirdly, it illustrates given the second point, just how misleading the American way of expressing growth can be. The American way of expressing growth is based on the implicit assumption that quarterly growth will stay constant during four quarters. Yet that has clearly not been the case in Singapore where growth expressed in the American way was -1% in the fourth quarter of 2009, 45.9% in the first quarter of 2010, 27.3% in the second quarter of 2010 and then -19.8% during the third quarter of 2010.

The quarterly variations is less extreme in other countries, but very big too, and since this way of expressing growth gives people the misleading impression that output in for example Singapore actually rose by 45.9% in the first quarter and contracted by 19.8% in the third quarter, it is bound to be misleading

In a way the Chinese way of expressing growth is the best since it first of all expresses actual changes and also smoothes out quarterly volatility, but it has the drawback of missing or underestimating turning points The European way also uses actual numbers and directly spots turning points, though compared to the Chinese way it is bound to reflect erratic short-term fluctuations. The American way of expressing growth is therefore the worst way. However, because other financial news and commentary sites will use it and because many readers are used to it, I will usually in the case of countries with statistics bureaus that use it (primarily the United States) use it too.

Three Dollars-One Value

Right now we have the interesting situation that the three biggest dollars in the world-the U.S., the Canadian and the Australian, have almost exactly the same value. As of this writing, the U.S. dollar was valued only 0.06% higher than the Canadian dollar, and only 0.42% higher than the Canadian dollar.

Right now, there are only three major currencies with a higher value than the U.S. dollar: the British pound, the euro and the Swiss franc. With the Fed pushing ahead with "quantitative easing 2" while the Bank of Canada and even more so the Reserve Bank of Australia are tightening monetary policy, it seems likely that the pound, the euro and the franc will soon be joined by the dollars of Canada and Australia.

Inflationary Expectations Continue To Rise

Today, the yield spread between regular and inflation-protected U.S. treasuries rose above 200 basis points for the first time since the before the Lehman Brothers collapse in 2008. The regular yield is as of this writing (as usual, when you read this, these numbers have probably changed with a few basis points up or down) 2.46% while the inflation-protected yield is 0.43%, implying an expected inflation of more than 2% per year during the coming decade.

By contrast, on September 1, the regular yield was 2.58% while the inflation-protected yield was 1.02%, implying an expected inflation of just 1.56% per year.

Not coincidentally, gold rose to a new all time high in U.S. dollar terms today.

If, as many suggests, the Fed is actively trying to increase inflationary expectations, then it certainly looks as if they are succeeding.

Another Thing About Employment Report

I noted in my analysis of the U.S. employment report that the household survey was stronger than the payroll survey in terms of the number of people employed.

What I missed was however that the household survey was weaker than the payroll survey in terms of how much time the employed worked.

The payroll survey claimed that the average work week for those employed was unchanged. Yet the household survey claimed that part-time unemployment (or underemployment) increased dramatically, from 5.7% to 6.1%.

While it is possible that this discrepancy can be accounted for by a decrease in voluntary underemployment, the most likely explanation is that there is a statistical discrepancy between the two surveys.

As I've explained before, the household survey and the payroll survey should give the same result since they're supposed to describe the same thing. But because they use different methods in data collection, they often get different results.

The payroll survey is usually more reliable in terms of monthly fluctuations. But the likelihood that the real numbers differ in a certain direction increases when the household survey gives a certain result. And in this month, the household survey suggested that the change in the number of employed may have been stronger than what the payroll survey suggested, but that there might have been a decrease in the average work week (and therefore also in average weekly earnings) instead of the flat number suggested by the payroll survey.

California's Environmentalist Nightmare

You often hear from leftists that ending the use of fossil fuels and nuclear power will not be costly, and will in fact produce "green jobs".

But the experience from countries or states that have invested in it clearly shows that whatever "green jobs" are created comes at a very high cost for the government and in the form of losses of more "non-green" jobs. Stephen Moore has a very interesting article about the horrifying experiences from California that I recommed you to read.

Peter Diamond Is Not Qualified For Fed Board

One more thing about one of the economics laurates, Peter Diamond. He was previously rejected as a nominee for the Fed board by Senate Republicans who pointed to his lack of experience in the monetary economics area and his pro-inflationist views.

Does the fact that he is now a co-recipient of the Nobel Economics price make him more qualified?

In short: no. Remember, this price was about problems in bringing together buyers and sellers in for example labor markets. This has really nothing to do with monetary policy, and so the arguments againt Diamond are still valid. This is similar to how Paul Krugman's previous largely valid research in the economics of trade doesn't make him a good macroeconomic analyst.

Of course, it is possible for an economist to be a good analyst in more than one subject. But the fact that someone is good in one specialized field of economics doesn't prove that this person is good in other fields as well.

Relatively Sensible Economic Laurates This Year

This year's winners of the Nobel price in Economics, Peter Diamond, Dale Mortensen and Christoper Pissarides, are relatively sensible. The point of their theories is that in many markets we can experience simultaneous shortages and surpluses, because some buyers and sellers have a difficult time finding each other. One example of this is the labor market, where so-called "frictional unemployment" in the form of many jobs openings remaing vacant even as there are many unemployed willing and able to perform them, because jobseekers and employers are unaware of or don't realize that they could solve each other's problems.

Some would belittle these insights as being trivial, but that overlooks that many economic models in fact overlooks these insights. One example of this is the Classical models that assume that wage adjustments are sufficient to eliminate unemployment, or Keynesian models that assumes that increased "aggregate demand" can solve unemployment.

It should further be noted that the laurates note that more generous unemployment benefits will increase "frictional unemployment" as the unemployed will put less effort into finding a new job. That means that more generous unemployment benefits will increase unemployment even if wages are completely rigid. And it also means that even in a recession, as long as there are any job openings, increased unemployment benefits will increase unemployment.

Obama-Small Spender?

In fiscal year 2008, the last fiscal year that Obama had no influence over, core federal spending (excluding interest payments and financial market bailouts) was $2,723 billion. In fiscal year 2010, core federal spending was $3,292 billion.

This means that there has been a 2 year increase of 20.9% in core federal spending.

Yet Paul Krugman still claims that Obama is a "small spender". His arguments for it is pretty strange. The first argument is that aid to people with little or no income, such as unemployment benefits, food stamps and Medicaid isn't really spending-a quite odd and indeed false view of what constitutes government spending.

His second argument is that state and local governments have recently begun to reduce their spending. This is largely true, yet it is not relevant for analyzing the economic policy of Obama and the Congressional Democrats as they don't make these decisions. They can influence them through aid to the states-and that has in fact increased.

So in order to reach the conclusion that Obama is a "small spender" Krugman has arbitrarily excluded the spending that has increased the most and included spending that Obama doesn't decide on. That says more about Krugman than about Obama.

A Better Reason Not To Cheer "The Deficit Decline"

Stan Collender points out that the reduction in the U.S. federal deficit in fiscal year 2010 (October 2009 to September 2010) was according to preliminary estimates the biggest ever in nominal terms yet no one seems to cheer this news.

Collender explains this with people either believing for Keynesian reasons that a lower deficit is bad or that people points out that the deficit is still extremely high- the second biggest ever in nominal and real terms and the second biggest since World War II relative to GDP.

But there are other reasons not to get cheery about it, including for example that it makes little sense in this context to use nominal terms and far more importantly, that the underlying fiscal deficit in fact increased.

If you look at the preliminary report from the Congressional Budget Office, you'll see that the deficit fell by $125 billion, from $1,416 billion to $1,291 billion.

Yet the entire reduction, and more, was accounted for by the effects of financial market interventions. In fiscal year 2009, the net result of revenue from the Fed, TARP and aid to GSE (Fannie Mae and Freddie Mac) was a drag of $211 billion. By contrast, in fiscal year 2010, these items produced a net gain for the budget of $144 billion, an improvement of $355 billion.

Excluding these items, the deficit in fact rose by $230 billion, from $1,205 billion, to $1,435 billion. In addition, the cost of deposit insurance (only the change, but not the exact level is specified) fell by $55 billion, meaning that the underlying deficit rose as much as $285 billion.