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The trade deficit doesn’t foretell GDP changes

A banal assertion is often made in the financial press when trade deficit figures are released. If the deficit widens, the financial media will tell you that this is bad for the current-quarter GDP number. If the deficit narrows, you’ll hear the opposite. Once again, the financial media proves itself useless for anything more than presenting objective facts, as this analysis is 100% wrong. It is true, in an accounting sense that more imports means less net-domestic production. This ‘leak’ in national income to the outside world must be offset by either hoarding of the importer’s currency, sending the currency… Read More

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China And Japan’s (Disappearing) Debt Problems - “Escherian Economics”

The econosphere is again rumbling about Chinese debt and China banks, evidently forgetting the long serious faces made many times about Chinese debt and China banks in the recent past.  But China keeps growing. Yes, 2004 is ancient history, but China had a larger bad loan problem then, in a smaller economy. So what happened? Briefly, the People’s Bank of China prints money and buys bad loans, or gives money to banks (bail outs). Today, the PBoC has an inflation target of 3% and the nation has a 2.5% inflation rate, and a real growth rate of about 6%. Since… Read More

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If the Fed wants to cool the S&P500 there is only one winner

In a series of speeches and interviews, various regional Fed presidents have again reiterated their desire to raise rates sooner rather than later. Nothing new here as this occurred several times during 2015 and 2016 but resulted in just one hike in December each year. Things always get more interesting when a senior member of the permanent voters on the FOMC, from the Board of Governors or the NY Fed, suggests going sooner. Yesterday, after the market close, Bill Dudley, the number two on the FOMC and a permanent voter from the NY Fed, hinted “sooner rather than later”. Speeches from Brainard… Read More

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The growth Mnuchin wishes

Steven Mnuchin Interview: Treasury Secretary Steven Mnuchin laid out ambitious goals to secure a U.S. tax-code overhaul by August and to deliver economic growth at rates not seen in more than a decade. Mr. Mnuchin, in his first interview since his confirmation last week as Treasury secretary, said slower economic growth since the financial crisis had primarily been an anomaly and a result of Obama administration policies that can be reversed. He said the Trump administration is aiming for a sustained 3% or higher annual growth rate, a projection not widely shared by other forecasters. “We think it’s critical that we get back to… Read More

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UK RGDP saved by accelerating NGDP

The second estimate of UK RGDP released today showed an even more stark acceleration in UK NGDP than in the first estimate. Back in January, we had to use the Nominal (Current Prices) Gross Value Added as a proxy for NGDP as the headline number is only released with the second estimate. GVA is a good proxy for GDP as it is merely GDP less taxes on output, but still gets revised like all other national income data. There were the normal revisions to both RGDP and NGVA by the second estimate as more data for the final month of the quarter… Read More

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How to make the economy look good so monetary policymakers can “get a license to kill”

The concept of economic potential is key to the making of monetary policy. When there is a large positive gap – the difference between potential and actual output – the economy is in a recession. Such a situation requires monetary stimulus to trigger a recovery, i.e., the closing of the gap. The chart illustrates The 2001 recession lingered. The Fed policy rate dropped to 1%, but the economy remained in a slump. A recovery only began when the FOMC introduced “forward guidance” in mid-2003. When Bernanke took over the Fed, the gap had essentially closed. His policies, in particular the… Read More

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One is a waste of time, the other doesn´t want to waste any time

The “one” is Trump, the “other” Janet Yellen: As I noted on previous occasions, waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession. The Fed waited more than seven years to begin the rate hiking process. Maybe she´s worried about who Trump is going to put on Board and if she´ll be on Board next year. However, trying to go faster will probably make her lose the status of “most successful fed Chairperson” ever she´s beginning to amass (1, 2):… Read More

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EZ Q4 NGDP growth flat, though Germany "dangerously" accelerates in Q4 QoQ

As usual, we have a long wait for the EuroZone NGDP data to be released. We do get some large countries reporting and can use them to estimate for the whole of the monetary bloc. We also get Germany’s data and that is very important due to its 30% economic weight and nearly 50% moral weight inside the Zone. For the EZ as a whole we estimate that there was a modest acceleration in NGDP from 2.5% to 2.6% Q3 to Q4. The growth is very much in line with that seen over the last several quarters, and in line… Read More

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Equity rally led by investors piling into banks: likely wrong move

Investors adding new money to the market and to the bank sector in particular, drive the current rally in US equities. Two reasons: deregulation and higher interest rates. We have discussed the deregulation issue already, creating a longer-term risk to the economy, as investment banks can now play chicken with the Fed all over again, and spreading risk throughout the financial system. Expectations for higher short-term rates, sooner rather than later, have given another reason to invest in banks. We have seen this cycle many times over the last few years. When the Fed threatens or even delivers rate rises, the… Read More

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Bank of Canada Triples down on inflation targeting

In “Getting to the Core of Inflation” we read: Over the past 26 years, we have reduced consumer price index (CPI) inflation and maintained it at a level close to our 2 per cent target, with no persistent episodes of inflation outside our inflation-control range of 1 to 3 per cent. Because inflation has been low, stable and predictable, Canadians have been able to make better economic decisions and achieve better economic outcomes. That’s a solid track record, so, as you can imagine, it would take some compelling evidence for us to consider major changes to the policy. Given its effectiveness,… Read More

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