Friday, April 18, 2008


Checking in from the Atlanta airport, on my way to Togliatti, Russia. I will post as I get a chance over the next 10 days during my travels to Russia!!

Thursday, April 17, 2008

The 15% Depreciation of the USD vs. China's Yuan

Chinese Yuan/USD, 5-year trend.

Emerging Markets, Weak Dollar to the Rescue

Bloomberg--International Business Machines, the largest computer-services company in the world, said Wednesday that profit in the first quarter had jumped 26% on strong orders overseas, far exceeding analysts' expectations. IBM has cut its dependence on U.S. clients by expanding in faster-growing countries such as Brazil, Russia and China, where sales climbed 26% last year.

RTT News--Healthcare products maker Johnson & Johnson (JNJ) on Tuesday reported a 40% rise in its first-quarter profit on higher sales in its consumer business and in the absence of a charge that was incurred in the year-ago quarter. The first-quarter results also included a favorable currency impact.

Johnson & Johnson's total U.S. sales were up 2.8% to $8.48 billion from $8.25 billion in the first quarter of 2007. International sales contributed $7.72 billion to the sales, rising 13.7% from $6.79 billion in the previous-year quarter.

Recession Odds On Intrade Fall from 70% to 20.5%?

Not sure what's going on here, but the odds of a 2008 U.S. recession on just fell from 70% to 20.5%.

The Accountants' Full-Employment Tax Code

From Don't Mess With Taxes: Above is a graphic showing the number of pages in the tax code from its inception in 1913, when the code contained 400 pages. That number held pretty steady until 1945, when it ballooned to 8,200 pages. The code hit 14,000 pages by 1954 and there was no stopping it. So far this year, we're up to 67,506 pages of tax law.

HT: Ben Cunningham

The Rich: The Most Mobile People in World income, capital gains, and estate taxes are key concerns, watch out for state taxes. New York State is considering a millionaire's tax—something tried in New Jersey with mixed results.

"People picked up and moved," Jack Meola, a tax attorney and partner at Amper Politziner & Mattia says of the New Jersey experience. "The rich are the most mobile people in the world. I have clients with no state domicile. They're doing business all over the world. They've put their homes in trusts, so they personally have no jurisdiction. One client lives on a boat. Most move to nontaxing jurisdictions, like Las Vegas and Florida."

These mobile individuals set up trusts so that when their businesses are sold, they don't feel a tax pinch.

For the state, the effort backfires, he notes. Diminishing populations of wealthy individuals result in a trickle-down effect that builds pressure on low-income people to carry the tax impact.

Economics 101: If you tax something, you get less of it.

(Via Taxing Tennessee)

Dallas Fed: Selling Our Services to the World

DALLAS--Americans can maintain good jobs and high living standards by exporting their services to the world, according to the Federal Reserve Bank of Dallas' 2007 annual report essay. U.S. companies are prepared to meet the world's growing demand for services, Dallas Fed President and CEO Richard Fisher says in an opening letter.

"We export more services than any other nation -- by a long shot," Fisher writes. "Better still, most of what we sell abroad are highly valued services -- industrial engineering, entertainment, health care, and the work of architects, lawyers and other professionals."

With their rising incomes and large populations, China and India may provide the biggest potential marketplaces for U.S. services. "The emerging giants we sometimes fear may offer our greatest opportunity," says the report.

Most of our workers are already in the service sector, where they've been dealing with people, not machinery or land. "The combination of diversity and experience puts us ahead of most other countries in the ability to deliver services to a global marketplace.

Federal Reserve Bank of Dallas 2007 Annual Report

Video: Opportunity Knocks: Selling Our Services to the World

Richard W. Fisher speech "Selling Our Services to the World"
Chart above was created using these data.

Carpe Diem on CNBC

Thanks to Larry Kudlow for mentioning Carpe Diem last night on CNBC, he featured the graph above from this CD post on mortgage resets (graph courtesy of Dennis Gartman).

Only 2 Banks Have Failed in 2008

Number of FDIC-insured banks in U.S.: 8,533

Number of FDIC-insured banks that have failed in 2008: 2

Economic Hysteria

Annual Growth, Commercial Bank Loans, to 4/14/08

Media hysteria over the mortgage crisis is almost certainly misleading countless people about prospects for the real economy.

The focus of the gloomy economic news is on a "credit crisis" or "financial crisis." Yet postwar US financial crises have never resulted in economic disaster. Think of the savings & loan (S&L) crisis of 1986-1995 — a period that also saw Black Monday (Oct. 19, 1987), when Dow stocks fell 22.6%. The S&L crisis lasted from 1986 to 1995, and was undoubtedly the worst US financial crisis since World War II (see chart above of bank failures). Yet the real economy grew by 2.9% a year over that period.

Some papers can't get anything right. An April 6 New York Times piece ("Almost as if The Sky Were Falling," on stock prices) claimed that the "focal point for the stock market's difficulties" is that "banks have been reluctant to lend money to one another, or to anyone else."

If banks were reluctant to lend to "anyone else," then bank loans wouldn't have increased by 8% percent (as Fed data say they have) since last August (and by more than 10% since last year, see chart above), when the mortgage crisis first emerged. The phrases "credit crisis" and "credit crunch" are not about bank loans, as most suppose, but about difficulties in selling or valuing exotic securities.

~Cato Institute's
Alan Reynolds

Marching Backward on Trade

On economic grounds, there's no reason to reject the Colombia free trade agreement. Colombia's exports already enter the U.S. market duty-free under the 1991 Andean Trade Preference Act. Meanwhile, many U.S. exports to Colombia face stiff tariffs -- up to 35% on autos, 15% on tractors and 10% on computers -- most of which would ultimately go to zero under the agreement.

The tariffs dampen demand for U.S. exports by raising their price and putting them at a competitive disadvantage. Whirlpool annually exports about $50 million worth of refrigerators, washer-dryers and dishwashers to Colombia from plants in Ohio, Arkansas and Iowa. On a $1,000 refrigerator, a 20% tariff raises the retail price $200 in a fiercely competitive market with appliances also supplied by local firms and imports from Korea and elsewhere.

MP: That seems like a real no-brainer. The U.S. has everything to gain (eliminating tariffs on U.S. exports to Colombia), and nothing to lose.

Yet, it's politically convenient to oppose the free trade agreement with Colombia because the popular imagery is that trade destroys U.S. jobs. The loss of almost 4 million U.S. manufacturing jobs since 1998 seems easy to explain by cheap imports or the flight of plants to Mexico, China and other poorer countries. The truth is murkier: Although this has occurred, job losses also stem from greater efficiency (fewer workers producing more goods, see chart above using these data) and slumping domestic demand (for communications equipment and computers after the dot-com bust and for housing materials and vehicles now). Nor has falling factory employment crippled overall U.S. job creation.

Robert Samuelson in today's Washington Post article "Marching Backward on Trade"

Wednesday, April 16, 2008

India's New Billionaires: Builders or Robber Barons?

Investor's Business Daily.

Unfortunately, the last two sentences were chopped: "India is a much more prosperous country today, and has a much larger middle class, with its abundance of billionaires, than it was ten year ago, when billionaires were scarce. When the Forbes list of world billionaires comes out next year, India should aspire for many more billionaires, since it will be a sure sign that more wealth is being created for everybody."

AGI: Oil Would Be $65 If USD Had Remained Strong

From the American Geological Institute(AGI):

The chart above shows the spot market price of crude oil per barrel (BBL) in US dollars and in euros from 2001 to today. The price of oil has grown faster relative to the dollar than to the
euro. Yet, a portion of the rise in oil prices is due to the fall of the value of the dollar. The graph also shows the number of barrels of crude oil per cost of an ounce of gold, demonstrating the parallel growth in commodity pricing.

If the US dollar had remained strong in the global economy, oil might, in theory, be around $65 per barrel. However, oil is priced in dollars, and oil prices continue to rise. The impact of increased oil prices can not be ignored in the US economy, and, in turn, can further weaken the dollar. Resource economics is a complex feedback loop where today’s resource boom is driven by many external factors. This complex system bears watching by all geoscientists.

Average Work Week

THE ECONOMIST--South Korean workers toil for over 45 hours every week on average, nearly seven hours longer than workers in any other OECD country. Americans put in 15% more hours on average than workers in the western (richer) bit of the European Union. Poorer Eastern Europeans work considerably longer. Flexible arrangements for part-time workers, generous welfare systems and a limit on the working week all contribute to western Europe's seeming indolence. But where more people work part-time the average working week is likely to be shorter. The Netherlands, where 45% of workers are part-timers, the highest proportion in any OECD country, has the shortest working week.

Industrial Production Growth Suggests No Recession

According to today's Federal Reserve release, industrial production grew in March at annual rate of 1.6% compared to the same month last year. Industrial production growth in March was higher than expected, and suggests that the U.S. economy is not in recession (see chart above showing industrial production growth in the last two recessions).

From First Trust Advisors: :"Industrial production surprised to the upside in March, undermining the theory the US is in recession. In the past six recessions – periods accumulating to about 5½ years – industrial output has only increased in six of those months. In the 2001 recession, industrial output did not climb even once."

Bloomberg story here.

Passing the Peak of Mortgage Resets

Thanks to Dennis Gartman of the Gartman Letter for the chart above, showing that we are currently passing the peak of adjustable mortgage resets, and "from this point onward the monthly figures actually become reasonable instead of burdensome."

Market Magic: Everyday Miracles

That's the biggest lesson I've learned in 35 years of consumer reporting: The market performs miracles so routinely that we take it for granted. Supermarkets provide 30,000 choices at rock-bottom prices. We take it for granted that when we stick a piece of plastic in a wall, cash will come out; that when we give the same plastic to a stranger, he will rent us a car, and the next month, VISA will have the accounting correct to the penny. By contrast, "experts" in government can't even count the vote accurately.

That's why I talk about market magic.

~John Stossel

Tuesday, April 15, 2008

2007 Current Account Balances

From the CIA, ranked by country, from #1 China with a $363.3 billion surplus, to #164 U.S. with a -$747.1 billion deficit.

Guest Blogger Peter Schweizer Coming Soon to CD

Watch this week for the debut of guest blogger Peter Schweizer, who will help out over the next few weeks with posts on CD during my travels to Russia, where my access to the Internet might be somewhat infrequent. Peter is a research fellow at the Hoover Institution, and author of many books including my favorite, "Do As I Say, Not As I Do: Essays in Liberal Hypocrisy."

Peter's articles have appeared in The New York Times, Wall Street Journal, Los Angeles Times, USA Today, National Review, and Foreign Affairs, and he has appeared on ABC News, NBC News, CBS News, Fox News, CNN, MSNBC, CNBC and the BBC.

62 Million "Taxpayers" Will Pay NO Tax in 2008

The chart above is from the Joint Economic Committee's (JEC) report Overview of the Federal Tax System As In Effect for 2008, showing the distribution of taxpayers (including nonfilers and dependent filers) by marginal Federal income tax rate (MTR). The JCT staff estimates that approximately 62 million "taxpayers," or 37% of the 170 million taxpayers, will have no tax liability in 2008 and generally have a marginal tax rate of zero.

Q: Are you still a "taxpayer" if you don't pay taxes?

See related CD post here

(HT: Ben Cunningham)

Highest Foreclosure Rates: CA, NV and FL

RealtyTrac, the leading online marketplace for foreclosure properties, today released its March 2008 U.S. Foreclosure Market Report, which shows foreclosure filings — default notices, auction sale notices and bank repossessions — were reported on 234,685 properties nationwide during the month, a 5% increase from the previous month and a 57% increase from March 2007.

The report also shows one in every 538 U.S. households received a foreclosure filing during the month. Nevada, California, Florida has the top state foreclosure rates (see map above), and California, Florida, Ohio reported the highest foreclosure totals.

On Tax Day: The Tax Debate We Need To Have

Here's a cold reality that none of the presidential candidates want to tell you: a shrinking number of Americans are bearing an ever bigger share of the nation's income tax burden. In 2005 (the most recent year for which data is available), the bottom 40% of Americans by income had, in the aggregate, an effective tax rate that's negative: their households received more money through the income tax system, largely from the earned income tax credit, than they paid.

That means that the number of people who actually pay America's income taxes - totaling almost $1 trillion in 2005 - is surprisingly small. Of those who filed returns (themselves a subset of the population), just half accounted for 97% of the Treasury's total income tax revenue (see chart above). The top half's share of total payments has been growing steadily for the past 20 years. The top 10% of taxpayers kicked in 70% of total income tax. And the famous top 1% paid almost 40% of all income tax, a proportion that has jumped dramatically since 1986.

Did Bush cut taxes for the rich? Yes. But he cut taxes for the poor even more. If we look at the measure that really matters - the change in effective tax rates - the bottom 50% got a much bigger tax cut than the top 1%. Did the dollar value of Bush's tax cuts go mostly to the wealthy? Absolutely. It could hardly be otherwise. Since the well-off pay the overwhelming majority of taxes, any tax cut with a prayer of influencing the economy would have to go mostly to them. You could completely eliminate income taxes for the bottom half of the population, and the Treasury would hardly notice.

The real issues here are clear. One is having a shrinking minority of citizens pay most of Washington's bills. Social cohesion falls apart. The majority who pay nothing resent those with higher incomes; the minority who pay heavily resent those who don't pay.

~Geoff Colvin, Fortune Senior Editor


Monday, April 14, 2008

The "NY Times Jobless Rate"

According to Paul Krugman in today's (Apr. 14) NY Times: The official unemployment rate may be relatively low — but the percentage of prime-working-age Americans without jobs, which isn’t the same thing, is historically high.

According to a comment on this earlier CD post about Krugman and Don Boudreaux's response, Krugman was referring to the top chart above in the April 12 NY Times article by Floyd Norris "Many More Are Jobless Than Are Unemployed," which claims that "Men in the prime of their working lives are now less likely to have jobs than they were during all but one recession of the last 60 years. Most of them do not qualify as unemployed, but they are nonetheless without jobs."

Norris uses a "jobless rate," or "proportion of people without jobs," which can be calculated as: 1 - Male Employment Ages 25-54/Population. Using employment/population data for men, women and all workers aged 25-54 from the BLS (via Economagic), the "jobless rates" are calculated and displayed in the bottom chart above. The middle chart above shows this calculation for males aged 25-54, which matches the Norris graph at the top.

If Krugman did refer to that article as his source, there are a few problems:

1. Krugman says "the percentage of prime-working-age Americans without jobs is historically high," which is clearly not accurate. It would be more accurate to say that it is close to being historically low (see middle brown line above for "All Workers"). Krugman may have used Norris' data, but then mistakenly discussed the jobless rate for all workers aged 25-54 being high, when he should have been discussing men only aged 25-54.

2. When the data are displayed over a range from 0% to 70% (bottom graph) instead of a more narrow range from 2-16%, it's much clearer that the jobless rate for men aged 25-54 has been relatively stable at about 12% for the last 25 years. Further, the jobless rate for all workers aged 25-54 has been relatively stable at about 20% for the last 25 years, and jobless rate for women has been stable at about 28% for the last 20 years, and is close to an historical low.

Update: After exchanging emails with Norris, he calculated his "jobless rate" by first finding the number of men with jobs aged 25-54 in the household employment survey, and he then compared it to the civilian noninstitutional population for the same age group. Then he subtracted the employment/population ratio from 1 to calculate the "jobless rate." That calculation can be replicated by using the Employment/Population ratio from the BLS, and then subtracting that ratio from 1, see the middle chart above - it replicates Norris' top chart exactly.

What is Paul Krugman Talking About?

Paul Krugman in today's NY Times: The official unemployment rate of 5.1%, though rising, is still fairly low by historical standards. Yet economic attitudes are worse now than they were in 1992, when the average unemployment rate was 7.5%. Why are we feeling so down?

Our bleakness partly reflects the fact that most Americans are doing considerably worse than the usual economic measures let on.
The official unemployment rate may be relatively low — but the percentage of prime-working-age Americans without jobs, which isn’t the same thing, is historically high.

Don Boudreaux responds: Krugman is simply wrong to assert that the percentage of Americans of prime-working-age without jobs is "historically high" -- and misleading to suggest that, whatever this percentage might be today, that it is evidence of some major economy malady.

Comment: The labor-force participation rate for prime-working-age Americans has been relatively flat at about 83% for the last 20 years (see chart above, data available here), and is actually slightly higher so far this year at 83.10% (average from Jan-March 2008) than in any full year since 2002 (83.3%).

Don is correct - what is Krugman talking about? The percentage of prime-working-age Americans without jobs is close to an historical low, not an historical high!

50 Greatest Comedy Sketches of All Time

According to (with video links), including one of my favorites: "Buh-Weet Sings" from SNL, with classic songs like "Wookin' Pa Nub."

Inheritance is NOT The Main Driver: Rich Aren't Getting Richer, They're Getting More Numerous

WSJ--Study after study shows that most of today’s multi-millionaires made their wealth themselves, as opposed to inheriting it from their parents. PNC Wealth Management recently polled 1,500 Americans with $500,000 or more in investible assets and found that 69% of respondents made most of their fortune through work, business ownership or investments. Only 6% made their wealth by inheriting it, while 25% made it through a combination of inheritence and earnings (see chart above).

Other examples (also from WSJ):

1. According to a study of Federal Reserve data conducted by NYU professor Edward Wolff, for the nation’s richest 1%, inherited wealth accounted for only 9% of their net worth in 2001, down from 23% in 1989. (The 2001 number was the latest available.)

2. According to a study by Prince & Associates, less than 10% of today’s multi-millionaires cited “inheritance” as their source of wealth.

3. A study by Spectrem Group found that among today’s millionaires, inherited wealth accounted for just 2% of their total sources of wealth.

Each of these stats measures slightly different things, yet they all come to the same basic conclusion: Inheritance is not the main driver of today’s wealth. The reason we’ve had a doubling in the number of millionaires and billionaires over the past decade (even adjusted for inflation) is that more of the non-wealthy have become wealthy.

So it’s not just that the same old rich folks are getting richer. The more-important shift is that the rich are getting more numerous.

Sunday, April 13, 2008

Bulgaria: New Location for Outsourcing Film Scores

As the American film industry cuts costs, orchestras in Prague, Budapest and Sofia are picking up recording contracts for Hollywood scores, or those of French and Italian blockbusters.
A Balkan country known for its skilled musicians and low labour costs,
Bulgaria has become an attractive spot for outsourcing film scores.

"Compared to the United States or even Western Europe, our prices are five times lower."

What About High-Skill Immigration Zones?

PITTSBURGH--Last year was bad. This year, even worse -- a crush of applications, but a dearth of H-1B visas awarded to employers who say they need to import educated foreign workers to occupy high-tech positions that can't be filled by American workers.

This month, companies across the U.S. began filing petitions for 85,000 available work visas, which will be awarded through a random lottery. Last year, 133,000 petitions were received over two days in April before closing the application window. This year, immigration services accepted petitions for a full business week starting April 1, meaning the number of petitions could exceed 200,000.

The limitations are especially crippling to cities such as Pittsburgh, many businesses here argue, because drawing an educated immigrant class is the city's best short-term hope for population and economic growth, since the native-born population keeps dropping.

What if the cap remained in place across most of the country but was lifted for places that are lagging economically -- Detroit, Buffalo, Cleveland and Pittsburgh? It's a strategy being bounced around by think tanks and immigration advocates. Immigration lawyer Richard T. Herman says we should call them "High-Skill Immigration Zones," patterning the relief from H-1B caps after a similar visa program that allows foreign investors to plant their money more easily in economically "distressed" regions.

See related CD post: Help NOT Wanted in US: National Self-Sabotage

Price Discrimination for Eyeglasses

A firm engaged in price discrimination faces two practical problems. The first is the problem of distinguishing customers who will buy the good at a high price from those who will not. One solution is said to be used by optometrists. When the customer asks how much a new pair of glasses will cost, the optometrist replies, "Forty dollars." If the customer does not flinch, the doctor adds "for the lenses." If the customer still does not flinch, he adds, "each."

~David Friedman's Price Theory textbook (copyright 1990)

Copper: The New Underground Currency

MINNEAPOLIS--As copper prices surge above $4 per pound (see chart above), thieves in Minneapolis are ransacking house after house in search of copper they can sell to scrap dealers for as much as $20,000 a month.

Thieves most often hit foreclosed homes, but not always. They broke into Keili Mac's Minneapolis home while she was out of the country and took copper gas pipes. They left the gas on, the house exploded and the city demolished it. The victim returned to find her house gone.

Election Year: Economic Hypochondriacs Unite

During presidential elections, when candidates postulate this or that "crisis" for which each is the indispensable and sufficient cure, economic hypochondria is encouraged, so a sense of suffering is rampant.

Deranged by the entitlement mentality fostered by a metastasizing welfare state, Americans now have such low pain thresholds that suffering is defined as a slight delay in beginning a subsidized retirement often lasting one-third of the retiree's adult lifetime.

Subprime mortgages are a small minority of mortgages, and only a minority of subprime borrowers are not making their payments. Casting this minority of a minority as victims of "predatory" lending fits the liberal narrative that most Americans are victims of this or that sinister elite or impersonal force, and are not competent to cope with life's complexities without government supervision.

The politics of this may, however, be more complex than the compassion chorus supposes. The 96 percent of mortgage borrowers who are fulfilling their commitments, often by scrimping, may be grumpy bystanders if many of the other 4 percent -- those who found the phrase "variable rate" impenetrably mysterious -- are eligible for ameliorations of their obligations.

What next? Adults still burdened with student loans have not yet announced their entitlement to relief, but as they watch this subprime drama, might.

~From George Will's column "Fooling Ourselves into Entitlements"

Cartoon of the Day

Click to enlarge.