Monday, December 10, 2007

100% Chance of a Fed Rate Cut

From the Chicago Mercantile Exchange Group Fed Watch:

Based upon today's (December 10) market close, the 30-Day Federal Funds futures contract for the December 2007 expiration is currently pricing in a 100% probability that the FOMC will decrease the target rate by at least 25 basis points from 4.5% to 4.25% at tomorrow’s FOMC meeting.

In addition, the 30-Day Federal Funds futures contract is pricing in a 42% probability of a further 25-basis point decrease in the target rate to 4% (versus a 58% probability of just a 25-basis point rate decrease).

A Very Inconvenient Peer-Reviewed Climate Study

Canada Free Press: Climate warming is naturally caused and shows no human influence, according to an inconvenient new peer-reviewed study published in the December 2007 issue of the International Journal of Climatology.

Climate scientists at the University of Rochester, the University of Alabama, and the University of Virginia report that observed patterns of temperature changes (‘fingerprints’) over the last thirty years are not in accord with what greenhouse models predict and can better be explained by natural factors, such as solar variability. Therefore, climate change is ‘unstoppable’ and cannot be affected or modified by controlling the emission of greenhouse gases, such as CO2, as is proposed in current legislation.

These results are in conflict with the conclusions of the United Nations Intergovernmental Panel on Climate Change (IPCC) and also with some recent research publications based on essentially the same data. However, they are supported by the results of the US-sponsored Climate Change Science Program (CCSP).

Meanwhile, Al Gore said today in Norway, "We, the human species, are confronting a planetary emergency, a threat to the survival of our civilization that is gathering ominous and destructive potential even as we gather here."

(HT: Tom Hemphill)

2 Consecutive Mo. Increases in Pending Home Sales

A Glimmer of Hope for Housing?

WASHINGTON -- Existing-home sales are projected to trend up in 2008, with pending home sales showing a slight near-term rise, according to the latest forecast by the National Association of Realtors®. The Pending Home Sales Index, a forward-looking indicator based on contracts signed in October, increased 0.6% to an index of 87.2 from an upwardly revised reading of 86.7 in September. It was the second consecutive monthly gain, but remained 18.4% below the October 2006 index of 106.8 (see chart above, click to enlarge).

Mortgage Rates Lowest Since 2005, Increase in Mortgage Applications Highest Since 2004

Dec. 5 (Bloomberg) -- Mortgage applications in the U.S. jumped last week by the most in more than three years, led by a surge in refinancing as long-term interests rates dropped to two-year lows, according to this press release from the Mortgage Bankers Association (see chart above, 30-year fixed rates are the lowest since mid-October 2005).

The Mortgage Bankers Association's index of applications to buy a home or refinance a loan increased 22.5% to 791.8, the highest level since July 2005. Refinancing surged 32 percent and purchases rose 15 percent.

The biggest drop in 30-year fixed mortgage rates since 2003 may have convinced owners it was a good time to refinance, at a time when outstanding adjustable loans are resetting higher.

Bottom Line: Despite all of the gloom and doom we hear about the mortgage and credit markets (for example, see today's front page WSJ article "U.S. Mortgage Crisis Rivals S&L Meltdown"), reality and the data paint a much brighter picture.

Sunday, December 09, 2007

Move Over "Big Oil," Here Comes "Big Wheat"

And you thought oil prices were high.... what about wheat, soybeans, eggs and milk?

See Captain Capitalism post here, and USA Today article here: "Commodities go ka-ching; buyers go, 'Ouch'"

Everyday Low Prices, U.S. Is A Giant Wal-Mart

From, "Canada's Dollar Craze":

When I was a kid growing up in Detroit, my mother once said that she loved to visit Canada, right across the river, because “everything there is on sale.” It certainly seemed that way when the Canadian dollar traded at a fraction of the value of the U.S. dollar.

The United States is now benefiting from a flood of Canadians crossing the border to do their holiday shopping. The two neighbors have traded places: America is now the country where “everything is on sale.”

The chart above (click to enlarge) shows the 40% decline in the value of the U.S. dollar since 2002 vs. the Canadian dollar, transforming the entire U.S. economy into a giant Wal-Mart for Canadians, with "everyday low prices."

The War on Gambling: Cops Raid VFW Poker Game

In his latest video for, Drew Carey reports on how Dallas cops carried out a paramilitary-style raid on a poker game at the VFW Post #1837, which has now been forced to close its doors.

The raid is part of a broader move by local police to shut down poker games, arrest players, and seize property - even in low stakes games benefiting charity, like at the VFW. And it's emblematic of the government's misguided war on gambling, such as the recently enacted federal ban on Internet wagering.

In most jurisdictions throughout the country, consenting adults are banned from gambling -- unless of course they want to bet on low-odds games run by the government. State lotteries, that is.

Govt. Solution: Pressure to Renege on Contracts

The government sure has a funny prescription for restoring confidence in America's credit markets. It purports to solve the nation's credit crunch — a slowdown stemming from investors' loss of trust in instruments such as mortgage-backed securities — by pressuring millions of borrowers and lenders to renege on their contracts and bilk mortgage investors.

Unless there was fraud, both borrowers and lenders should be expected to live up to the terms of their contract, unless they mutually agree to changes. Innovations such as ARMs enabled many smart borrowers to improve their prospects by using the extra cash flow for purposes such as starting a business or getting a new degree. These responsible borrowers and their lenders should not be punished for the imprudence of others.

John Berlau of the Competitive Enterprise Institute, writing in USAToday

Why Do Bloggers Blog For Free?

George Mason economist, blogger, and author ("Discover Your Inner Economist") Tyler Cowen explains why (BTW: Tyler was on my Ph.D. dissertation committe at GMU) in an interview with UPenn's Wharton:

Knowlege@Wharton: You are a writer and co-founder of the popular economics blog How does your inner economist explain blogging? What is the incentive for people like yourself to offer high-quality goods and services online for free?

Cowen: Blogging is fun. I've made friends through blogging, but most of all I have learned a lot. I think it has made me a better economist. I would also say it's helped me to discover my inner economist. Because when you are blogging for real people, they don't want techno babble. They don't want jargon. They're like, "What can you tell me that I actually care about?" Most of the ideas in this book, in one way or another, came out of blogging.

Knowlege@Wharton: So we can be motivated to do a lot of work, even highly skilled work, just because it's fun?

Cowen: Absolutely. A lot of science works on the same basis. It's true that scientists get paid, but typically they don't get paid more, or much more, for discovering something that will make them famous. They do it because they love science, or because they want the recognition or because they just stumble upon it. Einstein was never a wealthy man but he worked very hard. So blogging is a new form of an old idea: that people do great things for free. Adam Smith didn't get paid much for writing Wealth of Nations, even though it's a long book that required a lot of work. He had an inner drive to get his ideas out there.

MP: Hey, maybe there is such a thing as a free lunch (blog)?

Saturday, December 08, 2007


Welcome to University of Michigan-Flint NetPlus! MBA students enrolled in my classes for Winter semester: MGT 551 Business Economics and MGT 566 International Finance. Check back often for updates here.

Carpe Diem!

Professor Perry

Upcoming Economic Data Releases and Events

Lots of upcoming economic data and events next week (consensus forecasts in parentheses):

Tuesday: FOMC meeting (.25% cut in Fed Funds)

Wednesday: Oct. Trade balance (-$57b deficit, up from Sept.)

Thursday: Nov. Producer prices (+1.5%) and Nov. Retail Sales (+0.50%)

Friday: Nov. Consumer prices (+0.60%), Industrial Production (+0.10%)

Read more here from Global Insight.

Cartoon of the Day

From Detroit News cartoonist Henry Payne, who also has an editorial in today's WSJ, "Murder City," about America's most dangerous city: Detroit.

Friday, December 07, 2007

Some Perspective on Subprime Mortgages

The graphs in this post were created using data from the Mortgage Bankers Association's (MBA) most recent release on delinquencies and foreclosures, and a previous MBA report here.

Note in the graph above that 34.6% of U.S. homeowners own their houses free and clear of any debt, 50.5% of homeowners have prime mortgages, and 6.1% of homeowners have FHA or VA mortgage. Subprime borrowers make up only 8.5% of all homeowners.

In other words, more than 91 out of every 100 homeowners are NOT subprime borrowers, and only 4.4 out of every 100 homeowners is a borrower with an adjustable subprime mortgage, which are the only mortgage category with delinquency troubles.

For example, consider the graph below that shows the percent of foreclosures started in the third quarter 2007, by mortgage type.

What is very interesting is that subprime fixed mortgages make up a lower percentage of the foreclosures started than either prime ARMs or prime fixed! So it is certainly the case that subprime credit in general is not necessarily a problem, but it is subprime adjustable rate debt that is the real source of the problem.

Bottom Line: 95.6% of homeowners are NOT subprime borrowers with adjustable rate mortgages.

More on the Subprime Bailout: Moral Hazard

New York Sun: Wall Street critics are coming out in force against President Bush's proposal to prevent subprime mortgage lenders from foreclosing on some homes.

Chief among the complaints is the notion of moral hazard — that borrowers who voluntarily took on too much risk are now being rewarded for their bet.

Let's review moral hazard:

Moral hazard is the prospect that a party insulated from risk may behave differently than it would if it were fully exposed to the risk. For example, an insured party's behaviour might be more risky than it would have been without the insurance. Moral hazard arises because an individual or institution does not bear the full consequences of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to bear some responsibility for the consequences of those actions.

Financial bail-outs of lending institutions by governments, central banks or other institutions can encourage risky lending in the future, if those that take the risks come to believe that they will not have to carry the full burden of losses. Lending institutions need to take risks by making loans, and usually the most risky loans have the potential for making the highest return. A moral hazard arises if lending institutions believe that they can make risky loans that will pay handsomely if the investment turns out well but they will not have to fully pay for losses if the investment turns out badly. Taxpayers, depositors, other creditors have often had to shoulder at least part of the burden of risky financial decisions made by lending institutions.

Moral hazard can also occur with borrowers. Borrowers may not act prudently when they invest or spend funds recklessly. For example, credit card companies often limit the amount borrowers can spend using their cards, because without such limits those borrowers may spend borrowed funds recklessly, leading to default.

Bottom Line: Because of moral hazard alone, the subprime bailout is a BAD idea.

Top 10 Economics Blogs You're NOT Visiting....

But should be..........

According to Mike Moffatt at About.Com:Economics.

Carpe Diem makes the list...

Top 6 Reasons The Subprime Bailout is a BAD Idea

No Government Methadone for Reckless Credit Junkies

Top 6 Reasons The Subprime Bailout is a Terrible Idea, using information from yesterday's WSJ editorial:

1. Investors and mortgage servicers have incentive to avoid foreclosures on their own. Investors typically lose 30% to 50% of the unpaid mortgage balance when a home has to be resold due to foreclosure. So they have every incentive to renegotiate subprime loans that are expected to become delinquent. And that process is already well under way.

2. The U.S. economic and legal systems are built on the sanctity of contract, and even the hint that government is compelling investors who now own these mortgages to take less money puts the U.S. on a very dangerous road.

3. It will raise the future risk premium that investors will demand for investing in U.S. real estate, which means it will be costlier to get a mortgage in the future.

4. Which borrowers will qualify for the lower interest rate payments? Almost all subprime borrowers will argue that they should benefit from loan forgiveness, especially if they've been responsible and sacrificed to make their payments. More than 95% of homeowners are making their payments on time, and it would be unfair for them to pay more in taxes to assist those who've been less responsible.

5. The evidence suggests that even when troubled borrowers receive a generous reset on their mortgage payments, as many of 40% of those borrowers still eventually default. The refinancing plan might only delay the day of reckoning and lead to bigger losses in a falling market.

6. Part of the plan would allow states to float more tax-exempt bonds to refinance subprime borrowers. This is clearly a taxpayer-financed bailout.

Bottom Line: The subprime bailout would be like a taxpayer-funded methadone program for reckless credit junkies and investors. We should learn to "Just Say No" to bad ideas like this.

Housing Quiz: Which House Has....??

One house has hot and cold running water, electricity, central air conditioning and flush toilets. The other does not. One owner has a computer, a high speed connection to the Internet, a DVD player with a movie collection, and several television sets. The other has none of these things. One owner has a refrigerator, a vacuum cleaner, a toaster oven, an iPod, an alarm clock that plays music in the morning, a coffee maker, and a decent car. The other has none of these. One owner has ice cubes for his lemonade, while the other has to drink his warm in the summer time. One owner can pick up the telephone and do business with anyone in the world, while the other had to travel by train and ship for days (or weeks) to conduct business in real time.

Read more here from Coyote Blog, via Cafe Hayek.

Why The Goldilocks Economy Can Handle $3 Gas II

In a previous CD post, I wrote about the relative affordability of today's $3 gasoline, measured as share of disposable income. After the Federal Reserve released data today on third quarter household net worth ($528,000 per household), I thought it would be interesting to look at the cost of gasoline as share of per-capita household net worth.

Using data on household net worth from the Federal Reserve, historical gasoline price data from the EIA, and population data from Economagic, the graph above show the historical series of 1,000 gallons of gasoline purchased at the average retail price in a given year, as a share of per-capita "household new worth" in that year.

In 1949, the retail price of gas was only 27 cents, but it took 4.2% of per-capita new worth to purchase 1,000 gallons of gas, making gasoline almost three times as expensive then compared to today, when it only takes 1.44% of per-capita net worth to buy 1,000 gallons of gas at $3.

To be as expensive as gas in 1981, measured as the cost per 1,000 gallons as a share of per-capita net worth, gasoline today would have to sell for about $6.50 per gallon.

Bottom Line: Gas today, even at $3, is relatively affordable and is actually cheaper than the decades of the 1940s, 1950s, 1960, 1970s and 1980s, when the price of gas is measured relative to our increasing household wealth. Goldilocks can handle $3 gas.

Thursday, December 06, 2007

U.S. Household Net Worth At Record High of $59T

RECORD: $528,000 Net Worth Per Household

WASHINGTON (Reuters) - The net wealth of U.S. households rose to $58.60 trillion in the third quarter as financial asset gains outpaced slowing real estate values, a Federal Reserve report on Thursday showed (see chart above).

In the July-September period household net worth grew for the 20th consecutive quarter and established a new record high. The record $58.6 trillion posted in the most recent quarter was up from the second quarter's $57.98 trillion, the previous record high. Compared to last year, household net worth has increased by $4 trillion, which translates to more than $36,000 of additional net worth per American household.

Household wealth has increased by almost $20 trillion in the last five years, and the average American household now owns about $528,000 worth of stuff (assets, real estate, etc.), free and clear of any debt! In 2002, average household wealth was about $370,000, and today it's more than half a million dollars. Therefore, in just the last five years we've become more than a third richer (+43%), which is truly amazing!

Bottom Line: In spite of $100 oil, $3 gasoline, a weak dollar, and subprime mortgage troubles, Americans are wealthier than ever before, and probably wealthier than any country on the planet, with average household wealth of more than $500,000!

Jaw-Dropping Compensation: $1m College Coaches

This year, for the first time, the average earnings of the 120 major-college football coaches hit $1 million, a USA TODAY analysis finds. That's not counting the benefits, perks and myriad bonuses in their contracts.

Four coaches — Oklahoma's Bob Stoops, Alabama's Nick Saban, Florida's Urban Meyer and Iowa's Kirk Ferentz — already have cracked the $3 million mark, leading a spiral that shows no sign of slowing.

At least 50 coaches are making seven figures, seven more than a year ago, and up from only five in 1999. At least a dozen are pulling down $2 million or more, up from nine in 2006.

a link to a searchable compensation database for college football coaches, and here is a link to the latest AAUP report on faculty salaries (see Table 4).


1. Where's the outrage about this from college students? College students around the country often protest about the "unfairness" of low wages in foreign "sweatshops" making university apparel. Shouldn't they be protesting the "unfairness" of "excessive" football coach pay and relatively low ("sweatshop"?) wages for college professors? After all, the universities that the students attend pay their college professors with PhDs less than 10% of what they are paying the football coaches (see chart above).

2. AFL-CIO spokesman R. Trumka said “Workers are rightfully outraged when they learn about jaw-dropping executive compensation packages. It’s time to put the brakes on runaway CEO pay.”

Where's the outrage among UAW workers and taxpayers in states like Michigan where college football coaches at UM and MSU make $1 million to $1.5 million per year? Isn't it time to "put the brakes on runaway college football coach pay?"

3. Isn't rising compensation for college football coaches a perfect example of the rising income inequality over time that generates so much outrage? Certainly the gap in salaries between college coaches and college professors has risen over time, just as the gap in salaries between college professors and college secretaries has probably risen over time. An historical analysis would probably show an increasing share of total university payrolls going to the football and basketball coaches, or to the highest paid 1%, 5%, or 10% of university personnel (including presidents and deans).

Bottom Line: If the general public can understand that market forces ultimately determine the compensation of college football coaches, perhaps they can understand that market forces also determine CEO salaries; and since the salaries of both are rising over time, perhaps they can understand that rising income inequality is the natural and expected outcome of an increasingly competitive marketplace, which increasingly rewards scarce talent? One can always be hopeful.

Wednesday, December 05, 2007

Economics of Handicapped Parking

I have several problems with handicapped parking:

1. Too many people get handicapped parking permits who probably shouldn't qualify. Notice in the sign above, it shows a picture of a WHEELCHAIR. How many people do you see parking in handicapped parking spaces who actually get out of their vehicle in a wheelchair? Almost none. If we restricted handicapped parking to people in wheelchairs, we would need only a fraction of the currently available handicapped spaces.

2. Most parking lots have WAY too many parking spaces allocated for handicapped parking, resulting in an extremely inefficient allocation of the most valuable real estate of any parking lot. I don't know this for sure, but I suspect this is because of government mandates.

For example, I just left a parking lot at the University of Michigan, Flint campus, near the center of campus, representing some of the most valued parking spaces on campus. There are 20 handicapped parking spaces in that lot, and ALL 20 of the parking spaces were VACANT as I left campus at about 8 p.m. I'll have to check that lot during the day, but my initial impression is that the university has OVER ALLOCATED handicapped parking spaces. I don't think there would ever be any cases when ALL 20 spaces would be used.

I'm not sure what a pure private market solution to handicapped parking would look like, but I'm pretty sure it would be more efficient than the current situation. After all, private companies like airlines figure out how to accommodate handicapped travelers using market pricing, without any of the inefficiencies (lots of unsold seats) of handicapped parking.

A couple of solutions come to mind:

1. A football stadium, university or Wal-Mart could provide shuttle service to handicapped drivers from remote lots, instead of reserving prime parking spaces that go unused much of the time.

2. Couldn't a stadium, university, or Wal-Mart be allowed to dynamically adjust the number of handicapped parking spaces over time (daily, weekly, monthly) to meet the actual demand, instead of allocating spaces based on some government-imposed formula?

I couldn't find much about the "economics of handicapped parking," but here is one
article from the Mises Institute.

Milton Friedman's Gentle Smackdown

Milton Friedman deals with a
difficult questioner in this Q&A at Cornell University in 1978. Somebody on YouTube labeled this video "Dumb Hippie vs. Jedi Master." Here is Part 1 of the interchange.

Real Compensation Growth Highest in 7 Years

According to today's report from the BLS, hourly compensation increased 5.9% from the third quarter of 2006 to the third quarter of 2007, the largest four-quarter gain since an increase of 6.7% from the fourth quarter of 1999 to the fourth quarter of 2000. On an inflation-adjusted basis, real hourly compensation in the nonfarm business sector increased by 3.3% during the same period, matching the third quarter of 2003. The 3.3% growth was the highest since the third quarter of 2000, and is almost 3 times the average of 1.35% since 2001.

Stocks rally on strong economic data: DJIA is up by 200 points today.

Goldilocks Rocks; Stock Market Rallies

NEW YORK (AP) -- Wall Street rallied Wednesday after new data showed the U.S. economy is in good shape. Investors were encouraged after the Labor Department reported worker productivity advanced by an annual rate of 6.3% in the summer, the fastest pace in four years (see chart above).

MP: Note also that the 6.3% growth in U.S. worker productivity was 2.5 times the average growth of 2.5% since 1995, and was the fourth highest quarterly growth rate in since 1995.

"The best news for the market is good news on the economy," said Jack Ablin, chief investment officer at Harris Private Bank. "There might be a general malaise among homeowners these days, but as long as more people are getting paychecks then the economy can withstand the stress."

"We've really got to revisit how fast the economy has been slowing down," said James Paulsen, chief investment strategist at Wells Capital Management. The new reports have "reminded us that there are huge portions of the economy enjoying the easing of credit conditions, which hasn't been largely discussed."

Monster's Online Employment Index UP in OCT

The November report should be out any day, but above is the October Monster Employment Index, and here are some October 2007 Index Highlights:

• The Index climbed to its highest level since May, demonstrating greater overall online job availability at the outset of the fourth quarter

• Year-over-year growth rate rose moderately to 9% – a slight improvement from August and September

• There were expanded online opportunities in October for management; and business and financial operations; suggest a reassuring corporate hiring outlook

• Demand within construction and real estate industries declined, reflecting continued hardship in the building and housing sectors

• New England reports largest rise among regions, while Cincinnati, Kansas City and Cleveland registered the highest rate of increase on the month among the top 28 metro markets

Note: The Monster Employment Index is a broad and comprehensive monthly analysis of U.S. online job demand based on a real-time review of employer job opportunities culled from a large, representative selection of corporate career sites and job boards, including Monster. The Monster Employment Index presents a snapshot of employer online recruitment activity nationwide.

What About Outsourcing TO The US: INSOURCING

The International Organization for International Investment (OFII) recently released the “Insourcing 50” list of the 50 largest U.S.-based subsidiaries of foreign-headquartered companies. Topping the list are BP Global (UK), Royal Dutch Shell (Netherlands), Toyota (Japan), HSBC (UK), and Honda (Japan).

According to the OFII, "This list demonstrates the extensive business activity generated by foreign-owned businesses that insource into the United States. Revenue generated by these businesses is an indication of investment in infrastructure, jobs and markets in the United States."

U.S. subsidiaries of foreign companies employ 5.1 million Americans, with a total annual payroll of $336 billion, at an average compensation of $66,000, according to the OFII's
Insourcing Statistics.

Bottom Line: We hear a lot about U.S. companies outsourcing jobs overseas, but we haven't heard much about the outsourcing of 5.1 million jobs TO the U.S. from foreign companies headquartered outside the U.S. Outsourcing, like trade, works both ways.

Tuesday, December 04, 2007

Happy 6th Birthday, U.S. Economic Expansion

Nobody else reported this, so let me be the first to belatedly wish the U.S. Economic Expansion a hearty "Happy Sixth Birthday"!

According to the
Business Cycle Dating Committee of the National Bureau of Economic Research, "a trough in business activity occurred in the U.S. economy in November 2001. The trough marks the end of the recession that began in March 2001 and the beginning of an expansion."

So technically the current economic expansion actually started in November 2001, so the 6th year of the expansion is now officially a month old already, and we are in the 74th month of expansion.

The NBER's historical business cycle
data show that the average economic expansion since WWII lasted 57 months (4 years, 9 months), so the current expansion is already 17 months longer than average.

Not bad for the disparaged "Dangerfield Economy," which gets no respect. And forget about "Goldilocks," this should be called the mighty "Paul Bunyan Economy."

US Banks: Stronger Than At Any Time in History?

The top chart above is the ratio of all nonperforming loans to total loans, at all U.S. commercial banks, from 1988-2007 (third quarter). The bottom chart is the ratio of nonperforming commercial loans to total loans during the same period.

Both graphs reflect the relative health of the U.S. banking system through the third quarter of this year. Compared to the early and mid-1990s, nonperforming loans (total) are 3-4 times lower today, and nonperforming commercial loans are 7-8 times lower today. Considering also that only 3 commercial banks in have failed during the last three years, out of about 8,500 banks, the commercial banking system in the U.S. has probably never been stronger at any point in American history than today.

What Is Global Warming NOT Repsonsible For?

What do all of these problems and illnesses have in common: asthma, childhood insomnia, dermatitis, suicide, floods, West Nile fever, landslides, food poising, cancer deaths, Lyme disease, wild fires, melanoma and the I-35W Minneapolis bridge collapse?

They are all supposedly caused by global warming. Check out the list of 600 things caused by global warming here from Numberwatch website, and check out the article "Global Warming as Religion and Not Science," about how global warming has become the core belief in a new eco-theology.

(HT: Cafe Hayek)

Subprime Crisis May Be Windfall for Indian BPOs

NEW DELHI: The sub-prime crisis in the US may turn into a windfall for India’s outsourcing industry. According to consultants and BPO insiders, the new lending laws, being worked out in the US, will significantly increase outsourcing by American banks to India. These new laws will be fairly stringent and will require greater outsourcing as lowering costs assumes prime importance. All of which will be a huge opportunity for Indian BPO and IT companies which already have some of America’s top banks as clients.

Over 40% of India’s $8-billion business process outsourcing firms’ revenue comes from the banking, financial services, and insurance sectors.

“With more stringent norms for loan origination coming into force, the US companies will have no option but to offshore to keep costs low."

(HT: Sanil Kori)

Could Be Worse: We Could Have EU's Jobless Rate

BRUSSELS, Belgium: Unemployment in the 13 nations that use the euro fell to a new record low of 7.2% in October, the EU statistics agency Eurostat said Monday, as Europe's recent growth spurt cut jobseeker queues that are the longest in the industrialized world.

The difference between the EU and USA?

In Europe, a 7.2% jobless rate is celebrated as an historical record low (see chart above).

In the U.S., a 6.0% unemployment rate in 2003 was condemned and criticized as a "jobless recovery" during the economic expansion that started at the end of 2001.

Bottom Line: In terms of unemployment rates, the U.S. economy, even during its worst years of recessionary labor market conditions like 2001-2003, is still better than the European economy during its best years.

Update: Some comments have suggested that unemployment rates are calculated differently in the U.S. and Europe, making a comparison misleading or invalid. Comparing the official German unemployment rates from
EUROSTAT and the adjusted German unemployment rates from the BLS "approximating U.S. concepts," I agree that there might be a difference. But the official German jobless rates are actually LOWER than the rates adjusted to U.S. standards.

For example, the official rates for German unemployment from April-August 2007 are 8.5%, 8.5%, 8.4%, 8.4% and 8.3%, and the adjusted rates approximating U.S. concepts for the same months are 9.0%, 9.0%, 8.9%, 8.8% and 8.7%.

In other words, the German unemployment rates adjusted according to BLS standards are almost .50% HIGHER than the official rates. If that is the case for the rest of EU contries, the adjusted jobless rate for the EU might actually be higher than the official rate of 7.2%.

How To Have a Rational Dicussion, NOT

When people have to resort to words like "greed" or "exploitation," it is hopeless to try to have a rational discussion with them.

~Thomas Sowell from his "Random Thoughts" column today

I would add "fair trade" to the list of words/terms that preclude rational thought and discussion.

Want A World of Idiots? Taxpayer Bailout Will Work

A taxpayer bailout of distressed homeowners would be expensive, unfair to the vast majority of homeowners and renters who have made prudent financial decisions, and set a troubling precedent that would invite reckless behavior in the future. What's more, a bailout will not stop the inevitable correction in home prices, and is unlikely to prevent the associated economic repercussions.

It is self-evident that any bailout fund will be complex to administer, as well as arbitrary and unfair. While the plight of many who were caught up in the housing mania is tragic, a bailout package would almost certainly reward the least deserving. Those facing the greatest risk of foreclosure -- and presumably those who would get most of the taxpayer aid -- are those who bought a much more expensive house than they could afford, spent the equity of their once-affordable home, or lied about their income to qualify for a loan they otherwise would not have received.

Policies designed to suspend the laws of economics inevitably produce unintended consequences. Today's housing bust is itself the unintended consequence of an easy Federal Reserve monetary policy designed to cushion the economy from the fallout of the bursting of the tech bubble. Congress should reject a taxpayer bailout.

From today's WSJ editorial by Andy Laperriere

Bottom Line: If we make the world safe for idiots (and reckless borrowers) with taxpayer bailouts, we'll create a world full of idiots (and reckless borrowers).

Yikes! The Downside of The Euro's Appreciation

From Jessica Hagy's Indexed Blog.

Monday, December 03, 2007

November Car Sales Rise: Good News or Bad News?

According to Motor Intelligence, light vehicle sales in November were 16.2 million unit on a seasonally-adjusted annual rate (SAAR), see chart above (click to enlarge). That exceeded the average estimate of 15.9 million in a survey of eight analysts and 12 economists.

Compared to October, sales on a SAAR basis increased by 2.6% in November, and compared to November 2006, sales increased by close to 0.50%. During the last year, auto sales (SAAR) have averaged 16.2 millions per month, the same as sales in November. Given the subprime mortgage crisis, and all of the talk about credit tightening, rising oil prices and a pending recession, vehicle sales of 16.2 million units in November seems like pretty good news, doesn't it?

Well you would never know that from the media reports today, here are some examples:

November auto sales weak

US Nov. auto sales weak; Ford, GM cut output

US auto sales weaken in Nov. as caution mounts

Carmakers warn of tougher times ahead in US

Pessimism Over '08 Could Crimp Auto Production

US auto sales fall 2% in November

Auto prospects for 2008 look grim

Carmakers report so-so November, expect weak 2008

Weak November a hint of what's to come for auto industry in 2008

Quote of the Day, Revisited

"Civil rights used to be about treating everyone the same. But today some people are so used to special treatment that equal treatment is considered to be discrimination."

~Economist Thomas Sowell

Fraser: US Drug Policies Produce Better Outcomes

From a new study by Canada's Fraser Institute (news release here, full report here) titled "Cost Burden of Prescription Drug Spending in Canada and the United States":

Even though Canadian prices for brand name drugs are lower than U.S. prices for identical drugs (by 51% on average), consumers in both countries spend roughly the same percentage of their personal income on drugs because the price of Canadian generics is more than double U.S. prices for identical drugs (115% more expensive).

The root causes of high generic drug prices in Canada are government policies that shield retail pharmacies and generic drug manufacturers from competitive market forces that would naturally put downward pressure on generic drug prices.


World Stock Markets Set Another New Record

According to recently released global stock market data from the World Federation of Exchanges, world stock market capitalization reached another all-time record of $63.1 trillion in October (see graph above, click to enlarge). The $3.3 trillion monthly increase in stock market value from September was the second largest monthly increase in history, just slightly behind the $3.4 trillion record set in December 1999 at the height of the Dot-com boom.

Compared to last October, world stock markets have increased in value by 33.4%, adding almost $16 trillion of new stock market wealth to the world economy in just the last 12 months.

Over the last five years, more than $42 trillion of stock market wealth has been created, as the global market capitalization rose from about $20.4 trillion in September of 2002 to more than $63 trillion in October 2007. In other words, more global wealth (measured by stock market value) was created in the last 5 years ($42 trillion total, or almost $6,500 for every person on the planet) than was created during the thousands of years it took to create the first $35 trillion of stock market value, a level first reached in 2000 (see chart above).

Among the world leaders for increases in stock market capitalization from October 2006-October 2007 (measured by percent increase in local currency) were the Shanghai SE Index (+366%), Luxembourg SE (+163%), Hong Kong (+102%), India (+88%), Brazil (+85%), and Peru (+81%).

Bottom Line: Let's assume that losses from the subprime mortgage crisis reach $300 billion over the next year as predicted, and those losses spread to other countries, as has already happened. Compared to the $16 trillion of global stock market wealth created in the last year, those subprime mortgage losses would be only 1.875% of the increase in world stock market capitalization. Stated differently, for every $1 of loss in the subprime mortgage market, more than $53 of new wealth has been created elsewhere in world stock markets.

And compared to the total stock market capitalization of $63.1 trillion, the subprime losses of $300 billion would be less than 1/2 of 1%. It'll probably take a lot more than a $300 billion credit problem to unsettle the $14 trillion U.S. economy and the $63 trillion world stock market!

Sunday, December 02, 2007

NYC's Population By Day vs. Population At Night

What a difference 12 hours makes. Click to enlarge.

(HT: Captain Capitalism)

Where Is The Outrage Over Foreign Grad Students?

According to this WSJ editorial from last week, foreign students received 33% of all research doctorates awarded by U.S. universities in 2006, up from 25% in 2001, and foreign students earned 44% of science and engineering Ph.D.s.

Given their past hostility to globalization and outsourcing, where are protectionists like Lou Dobbs, Pat Buchanan and John Kerry? Shouldn't they be complaining vociferously that foreigners are taking away research and teaching assistantships from Americans at U.S. research universities? Where is the outrage over "Benedict Arnold American university and college presidents" taking away funding from American graduate students and giving it instead to so many foreigners? After all, most doctoral students receive funding in the form of research or teaching assistantships, so aren't these foreign students taking away jobs from Americans?

What is the difference between Microsoft shifting its employment of Ph.D. software engineers from the U.S. to research centers in Bangalore, and the U. of Chicago, Cal Tech and M.I.T. increasing the percentage of acceptances and financial support for engineering students from India in their Ph.D. programs?

If Microsoft's hiring of an Indian engineer takes away a job from an American engineer, don't the foreign students earning 44% of science and engineering doctorates likewise take away opportunities from American students to attend graduate school?

Q: Where is the outrage?

Mortgage Rates Fall to Six-Month Low of 6.1%

MINNEAPOLIS -- Amid the depressed housing market there's some good news: Mortgage interest rates last week dipped to 6.1% (the lowest level in more than six months, since early May, see chart above) -- within shouting distance of the historic lows that propelled home sales into the record books.

America's Ridiculously Large Economy III

Following previous posts (here and here) on America's ridiculously large economy, here is how the growth in U.S. nominal GDP would translate, in terms of how the typical increases in national output compare to the economic output of various U.S. states:

4% growth in current-dollar GDP ($560 billion of additional output) would be equivalent to adding two new states to the U.S. the size of Washington ($293.5b) and Maryland ($258b).

5% growth in GDP (average growth since 1997) would be equivalent to adding a new state the size of Florida to the U.S. economy.

6% growth in GDP (average growth from 2004-2006) would be equivalent to adding two new states the size of Georgia ($380b) and Ohio ($461b).

7% growth (achieved in some individual quarters like the fourth quarter of 2006), would add almost $1 trillion (corrected) of output to the U.S. economy, equivalent to adding a new state the size of New York to the U.S. economy.

Bottom Line: In an average year, the U.S. economy grows by an amount equivalent to adding the entire economic output of a state like Florida ($713 billion) to the U.S. economy, or a country like Australia ($755 billion). In a great year, the U.S. economy grows by an amount equivalent to adding the economy of another New York state to the U.S. economy, or adding the economy of an entire country like Russia to the U.S economy.

Good News: The Dollar Is Falling

George Mason economist Tyler Cowen explains in today's NY Times why the falling dollar has been good for the U.S. economy:

So far the Federal Reserve and the Bush administration have shown little concern over the falling dollar (almost 20% since 2001, see chart above). This isn’t because of neglect or lack of interest; trillions of dollars worth of currency are traded every day, so policy makers have only a limited ability to push around long-term exchange rates, even if they wanted to do so.

In the case of the dollar, we need to stop thinking of its value as a marker of economic success. The American economy has its problems, but so far the low value of the dollar has proved more a benefit than a cost.

Read more

Saturday, December 01, 2007

America's Ridiculously Large Economy II

According to the BEA, the U.S. economy grew by almost 6% (in current dollars) in the third quarter, and by 6.6% in the second quarter (on an annualized basis). In dollar terms, that translates into $200 billion of additional economic output in the third quarter of 2007 (or $800 billion on an annual basis) and $217 billion in the second quarter ($868 billion annually).

This brings up the question: Given the ridiculously large size of the U.S. economy ($14 trillion), what does each percent in nominal GDP growth translate to, in terms of that amount of additional U.S. economic output compared to the size of various national economies? Here is how it breaks down:

1% of current-dollar annual growth in U.S. GDP ($140 billion) would be the equivalent of adding the entire economies of either the Czech Republic ($142b) or Israel ($142b) to the U.S. economy.

2% growth would be like adding Denmark's entire economy ($276b) to the U.S.

3% growth would be like adding more than Turkey's entire economy ($401b) to the U.S.

4% growth would be almost like adding the entire Dutch economy ($660b) to the U.S.

5% growth would be almost like adding the entire economy of Australia ($755b) to the U.S.

6% growth would be like adding Mexico's economy ($840b) to the U.S.

7% growth would be like adding Russia's entire economy ($985b) to the U.S.

Bottom Line: Over the last year, from the third quarter of 2006 to the third quarter of 2007, the U.S. economy has grown by 5.3% (same as the 10-year average), or more than $700 billion in current dollars, which is almost the equivalent of adding the entire national economy of Australia ($755b) to the U.S. economy. And if the economy were to grow annually at the same rate as the second quarter (6.6%), it would be like adding more than the entire economy of Mexico to the U.S. economy, and almost like adding the entire Russian economy to the U.S.

A slowdown in the U.S. economy to something like 2-4% growth in nominal GDP would mean that instead of increasing output equivalent to adding the economies of Australia or Mexico to the U.S. economy in a given year, we would have to "settle" for only adding output equivalent to an economy like Netherlands, Turkey or Denmark. Still not a bad outcome for the "Dangerfield Economy."

Cartoon of the Day

A little late, but a good one from Henry Payne....

America's Ridiculously Large Economy

Following up on the previous CD post below, the chart above (click to enlarge) shows the 20 largest U.S. metropolitan areas by 2006 GDP using BLS data available here and the countries with comparable economic output using GDP data available here from the IMF and World Bank.

Consider that the top 10 cities in the U.S., all with GDP of $224 billion or higher, would rank among the top 30 countries in the world by GDP if they were a separate country. The top 20 American cities would all rank individually in the top 50 countries of the world by economic output if they became a separate country.

Consider also that the 10 largest cities in the U.S. produce the same amount of economic output ($4,300 billion) annually as Japan, and the top 20 largest U.S. cities produce the same output ($6,000 billion) as the economies of U.K., France and Canada combined.

When you consider how ridiculously enormous the U.S. economy is, diversified across a huge number of industries in 50 states, with individual cities producing more economic output than most countries around the world, it's truly mind-boggling. In the press, America's "Dangerfield economy" is often portrayed as fragile and delicate, ready to collapse into recession at any moment, when in fact, it's ridiculously larger and more stable than most people give it credit for.

Maybe Economic Size Does Matter

This previous CD post about the size of the U.S. economy, and Greg Mankiw's post with a link to a video about the size of the U.S. economy vs. oil-producing Gulf States, inspired me to do the analysis in the chart above (click to enlarge). Data on 2006 GDP by country were obtained here, and data on GDP by metropolitan area were obtained here from the BLS.

Consider that Iran's entire economy ($222 billion) is about the same size as Detroit ($213 billion), Qatar ($47 billion) is slightly smaller than Birmingham, AL and Jordan is just slightly larger than Flint, MI.

Bottom Line: We lose sight of how enormous the U.S. economy is (GDP of $14,000,000,000,000) in absolute value, and also have probably never even considered that individual cities in the U.S. like San Diego produce as much economic output per year as the U.A.E. And even with the world's second largest reserves of conventional crude oil, the annual economic output of Iran is barely larger than Detroit's economy.

The huge size of the U.S. economy ($14 trillion), diversified across a large number of industries and an enormous geographical area, must provide a high degree of economic stability, and should help stabilize the economy against recessionary pressures. When it comes to size, strength and stability, no other country in the world even comes close. A $14 trillion economy can take a lot of shots and remain standing, and it'll take more than a subprime mortgage crisis and housing troubles to knock Goldilocks down.

Friday, November 30, 2007

The Mountain Wingsuit

(HT: Ryan Stinson)