2014-10-25

Chronic Pain and reflections on this blog

My contributions to this blog have obviously decreased substantially since the glory days of the Global Financial Crisis and its immediate aftermath.

The reason is health. I now suffer from chronic pain and I can longer work. The pain means I have to take painkillers which, in turn, blunt my intellect and make it harder for me to find the intellectual power to write the posts I used to write. I spend a lot of time in bed. I rarely make it out of home. My wife works to support our family, and we receive some government welfare to make ends meet.

Once the next recession hits I'll probably take up the blogging cudgel once again. Nevertheless I'm wary about making predictions since a little too many of mine have fallen by the wayside, and, unlike others who tend to make predictions of doom and get it wrong, I tend to get a bit embarrassed and annoyed that mine do not come to pass - although it does force me into working out WHY I was wrong in the first place, which is a great way to learn.

I'm a little concerned that all the work I have done here has been for nought. I know that many in the economics community had read my blog but I have no idea if any of my thoughts or ideas impacted anyone or helped changed some sort of way of thinking. I'm always concerned that my status as "self-taught economist" can sometimes result in being judged more like a crank than as someone who has something very valuable to share with the world of economics and policy.

I've always believed that my role on planet earth was to make things better for all. This came through my own Evangelical Christian beliefs, but also with my desire to change societal systems to produce better outcomes. Economics was a hobby from about 1995 onwards, and I learned enough to come up with my own ideas which, in many cases, ended up being previously thought up by others. But the fact that I had come up with ideas that had been thought up by others gave me the impetus to keep going.

A recent trend in economic policy seems to be "macro-prudential" - the idea that steps can be taken to reduce asset-price bubbles without having to rely upon interest rate rises. I did propose a form of targeted monetary policy a while back, but I don't know if this was thought up independently to the macro-prud movement (which is currently working in New Zealand and which is now being worked on in Australia).

America continues to be a mess. The political framework erected by the US Constitution is way out of date. While the US Constitution should be rightly praised for its broad principles, the actual political framework is a relic of pre-modern 18th century thinking. It won't be changed anytime soon.

The right to free speech has been corrupted by the powerful, who tell lies and misrepresent the truth. The whole Iraq has WMDs of the early 2000s and the Obama is a secret Muslim born in Indonesia of recent years is a result of this. All I want the media to do is to report facts and disseminate opinions based upon these facts. Is that so hard? Apparently yes. The result is the belief by many conservatives in the US that the country is in the midst of a crisis brought about by socialism and an evil/ineffectual president. Should rights also be balanced by responsibilities?

Anyway I am rambling. It would be nice to know if my work on this blog has had some benefit. Please contact me if it has. Thanks.

I will continue blogging. One day. Watch this space.

Edit: I have updated the Angry Bear link. If you're wondering how popular I used to be, click here.

2014-04-02

The Reserve Bank of Australia (RBA) needs to devalue the Australian dollar

I just read this

The Reserve Bank of Australia (RBA) needs to devalue the Australian dollar.
One reason why Australian industry is losing out to Asian companies and corporations is NOT because they are somehow inefficient or uncompetitive, it's because many Asian nations deliberately keep their currencies low in order to boost their industry.
Australia allows the Foreign Exchange (forex) market to determine the price of the Australian dollar, while nations like Singapore, China and Japan actively intervene to run current account surpluses and boost their industrial sector.
The forex market is NOT operating the way a market should, and by allowing the Australian dollar to "float" has turned our country into a nation of consumers and borrowers, while our trading nations have turned into nations of producers and savers who desperately need us to borrow and consume more and more and more.
To protect jobs and to protect the nation, the RBA needs to actively intervene in the forex market to devalue the Australian dollar. The goal of this should not be a pegging of the currency, but rather a balanced current account.
The result will be higher inflation and higher interest rates, but it will protect jobs.
People would rather be employed and for things to be a bit more expensive than be unemployed and be able to buy cheap stuff from Kmart.

(ps I don't support the fossil fuel industry, but this plant closure is hardly going to affect Australia's consumption of petroleum.)

2013-03-07

Rolling the dice?

As a self-proclaimed Cassandra, one of the more annoying things is watching how reality doesn't follow the script that I wrote.

2013-02-10

Targeted Monetary Policy

An Idea I had while commenting on Reddit:

I think one lesson learned from this experience is that monetary policy needs to be directed towards particular sectors of the economy rather than being a broad action.

This would mean that the agency involved in setting monetary policy (a country's central bank) would actively and directly engage in important internal markets. And by engage I'm talking about buying and selling.

Of course the guiding principle should be price stability rather than making profits. A central bank can make huge profits or losses - but since it has the power of seigniorage, neither should affect it in any way (it can't go bankrupt).

It would work like this:

Let's say that an asset-price bubble appears in the share market. P/E ratios are going through the roof and people are making money simply by buying in the morning and selling in the afternoon.

The Central Bank would then directly enter the market by selling shares - shorting. This process would continue until P/E ratios begin to drop to realistic levels.

**Of course one important factor is that the share market would know and expect a direct entry into the market by the central bank once p/e ratios began getting too high. Knowing that the central bank would respond would affect their own behaviour and thus the market would end up being self-correcting**

Apply this same principle to asset price bubbles in other areas of the economy, such as property, resources, etc. ie any sector which is undergoing substantial growth and which constitutes a significant portion of the economy. The Central Bank would not act if the sector of the economy is very small, for example.

Also apply this same policy tool to achieve a reverse effect when prices are low and getting lower.

2013-02-03

The US Gun debate - a problem in terminology

The image to the left is very clear. It says "No Guns". It is a symbol used by those on the Anti-Gun side of the current firearms debate in the US.

And it appears that the Anti-Gun lobby has some populist weight behind it. Poll after poll of Americans show clearly that they disagree with the arguments and logic of the Pro-Gun people, and want stricter laws, stricter background checks and bans on certain types of weapons.

But there's a problem here with terminology. The "Pro-Gun" people are called "Pro-Gun" because they support the 2nd Amendment, they support the right of people to buy and use firearms. What the phrase "Pro-Gun" does not support is the idea that people can buy their own personal tanks, surface to air missiles or nuclear weapons. Yet the phrase "Anti-Gun" is problematic, because it does not adequately reflect the ideas of those who wish for stricter laws. You see, for someone to be "Anti-Gun" means that they are against guns. Get rid of all guns, remove them from people's homes, etc etc etc. This is not the point of view of the (majority of) opponents of the "Pro-Gun" side.

Here in Australia we have laws against civilians owning assault rifles (automatic and semi-automatic) and other weapons that are the domain of the military. We allow people to buy and use handguns, though with a restriction on the amount of bullets they can carry. We also allow people to buy and use hunting rifles. Although our per capita gun ownership is a couple of magnitudes lower than the US, we still have people owning guns and, while we do have some level of firearm violence and misuse, the per capita numbers are very low.

And you know what? I think Australia's gun laws are pretty good. I don't think there's a need to tighten them. I'm happy that people can't purchase AR-15s but I would be unhappy if people were unable to purchase handguns. You see I have no problem with the idea of people owning a handgun or shotgun for home defence - some parts of Australia are quite remote and police response time would be measured in hours, not minutes. These people need guns. Farmers need rifles to shoot pests and put down sick animals. A metally fit and law-abiding citizen may choose to own a handgun. I'm happy for these people to have access to these firearms. But to have less restrictive firearms laws here would be a mistake. I'm happy where things are - they should not move either one way or the other.

So as you can see, while I support all reasonable means to reduce gun violence in the US - and this includes tightening access to certain firearms and banning others outright - I'm not "Anti-Gun". I don't wish to disarm the community completely, and I do not wish that Americans would universally disarm either. Yet the debate seems to be between those who are "Pro-Gun" and those who are "Anti-Gun". As a result, one of the arguments that the Pro-Gun side has used is the spectre of disarming a country and turning into tyrrany and to Nazism - which fits in very well with all the right wing garbage about Obama being the Muslim Kenyan Socialist Communist Nazi Black Panther that the completely ignorant and arrogant and easily confused eat up every day.

In essence, it's a straw man. The more radical and unhinged Pro-Gun side scream that the commies are gunna take their gunz, disarm America and give it over to the godless United Nations (probably headed by the Antichrist), with Jews, Blacks and Gays taking turns to rape and slaughter good Americans. But that's not what Obama is trying to achieve; it's not what I'm trying to argue, and it's not what the majority of Americans would want either. Having stricter gun laws does not mean universal disarmament and an eventual Communist takeover.

But it's easier to be labelled as "Anti-Gun" rather than "Stricter and more sensible gun laws".

2013-02-02

Government Contracts and Money Velocity - an adjunct to fiscal policy

Fiscal Policy is used by governments as a way of expanding or contracting an economy. Such a policy occurs during the business cycle, whereby a fiscal expansion is enacted when the economy is slowing, and a fiscal contraction is enacted when the economy is in danger of overheating. Traditionally, Fiscal Policy requires legislation to be passed to increase or decrease spending, or to increase or decrease tax rates. Fiscal Policy is problematic in that it becomes a political issue, rather than an economic one. In order for fiscal policy to enacted quickly and properly, political influence must be somehow reduced, and the effects of the policy need to be broadened rather than aimed at a narrow area of the economy.

One solution to this is to ensure that government contracts - the money that governments pay the private sector for providing various goods and services - are given variable payment dates. Usually, when one business purchases goods and/or services from another business, payment for these goods and services is often delayed for a time. One example of this delay would be an invoice that is payable 30 days from the end of the month of the invoice. In this case, an invoice dated 15th May would be due on 30th June. Such invoicing arrangements are common in the private sector. One advantage that this system brings the buyer is the chance to build up liquidity - by delaying payment for a time, the company has an increased cash flow. This invoicing system, therefore, affects Money Velocity - the speed at which money travels through an economy. Increased money velocity is linked with economic expansion and inflation, while reduced money velocity is linked with economic contraction and deflation.

Since governments in Western countries are the largest economic and business entities in their respective economies, the way in which a government pays its bills to the private sector can have a huge impact upon an economy's money velocity.

The process of paying back money owed to the private sector can thus be used as a form of Fiscal Policy - with money being paid back to private suppliers sooner or later depending upon the state of the economy. Once legislation approving this policy is passed, all government contracts from then on would be subject to variable payment dates depending upon macroeconomic need. Payment dates for invoices would be moved from the original date - paid sooner for expansionary policy; paid later for contractionary policy.

As an example, let us assume that a government department agrees on a contract with a private business for the supply of stationary. As this government department buys from this business, the standard invoice (as an example) is 30 days from the end of month of the invoice.  Now let us assume that the economy needs expansionary policy. As a result of this, the invoice due date changes to 15 days from the end of month of the invoice. Thus the stationary company ends up with its money sooner, thus increasing the velocity of money. Now let us assume that, instead, the economy needs contractionary policy. As a result of this the invoice due date changes to 45 days from the end of month of the invoice.

There are a number of advantages to this model:

  1. This policy would fall under the scope of "automatic stabilisers" in the sense that any changes needed to the economy can be enacted straight away.
  2. There would be less need for legislative debate amongst politicians about if and how changes to government spending should be made (in the case of debating Keynesian stimuli)
  3. The effects of the policy will be broad - affecting the areas of the economy which deal directly with government contracts.
  4. The policy will be budget neutral - it would neither increase or decrease a budget deficit in real terms over the course of the business cycle.
  5. It does not replace current Fiscal Policy, but rather adds to it and may even reduce the need for such policy over the longer term.
  6. The government department responsible for enacting this policy need not be secretive but can operate faithfully in full view of the public. There is no reason for hiding information for the sake of national security - this needs to be the case given the chance that those who benefit from government contracts could attempt to corrupt the decision making process.
Important points to consider:
  1. Size of government: will the effect on the economy be bigger if governments are bigger (as a proportion of GDP)? Will the effect be smaller if the government is smaller?
  2. Should this system include welfare payments and payments to government employees? (I think not, but it is a point to discuss)
  3. How much should the government department reponsible for this policy be allowed to be influenced by central bank information? Should the Central Bank be responsible for this policy, and enact it along with Monetary Policy?
  4. Would such a policy function well in a single-currency area like the Eurozone?
  5. Would such a policy function well for non-national governments, such as state governments and municipalities?
  6. What should be the natural limits of this policy? Could super-expansionary policy involve paying for goods and services before they are supplied or even ordered? Could super-contractionary policies involve debt default?
  7. How would such a policy affect governments who purchase goods and services from foreign suppliers?
  8. Should some private sector suppliers be exempt from this policy? (I think not, but it is debatable)

2013-01-31

US Economy shrinks

www.bea.gov:
Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- decreased at an annual rate of 0.1 percent in the fourth quarter of 2012 (that is, from the third quarter to the fourth quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 3.1 percent.
Who would've predicted this?
According to data... another US recession is likely to begin between now (2011 Q4) and 2012 Q4