Monday, January 09, 2012

Welcome to the U.S. Manufacturing Renaissance


Business Insider -- "Investment Bank Jeffries' Chief Equity Strategist Sean Darby predicts a U.S. industrial renaissance "through a combination of higher wage inflation overseas, a weaker U.S. dollar and better productivity gains."

The most important factor in U.S. competitiveness may be a decline in Chinese competitiveness:
The labor comparative gap that China has had has disappeared because the total costs of production for certain products have moved towards US costs. This is particular where labor costs are a smaller proportion of the total costs. Although readers may be feel that it is an exaggeration to claim that ‘off-shoring’ will immediately be reversed back to ‘on-shoring’, perhaps it is better to suggest that the ‘hollowing out’ of US manufacturing has reached its nadir. The worst of the transition is behind the US all other factors of production being equal. The important driver will be speed of productivity gains between the two countries that encourages CEOs to open and close plants in one or the other, not just the labour cost.
Industries like agriculture, coal and mining, oil, aerospace and autos have already shown better growth than people realize (see chart above).

Jefferies is bullish on the U.S. economy too, expecting 2.5% GDP growth next year, strong enough to save the world from a Europe-led Armageddon. Last year Jefferies had the most accurate equity team on Wall Street."

MP: The chart above shows that over the most recent four-quarter period from 2010 Q3 to 2011 Q3, the U.S. manufacturing sector grew at 4.37%, or three times the 1.46% growth rate of the overall economy (real GDP), demonstrating that American manufacturing is at the forefront of the economic recovery. 

HT: Robert Kuehl

45 Comments:

At 1/09/2012 11:35 PM, Blogger Unknown said...

The two items in the graphic aren't really comparable. The GDP figure is a dollar figure. The manufacturing figure is the Fed's Index of Manufacturing Production, which is a composite index, not a dollar figure.

It might be better to compare, say, an annualized growth rate of factory shipments (from the Census Burea), because at least it's a dollar figure. Unfortunately, that one is tricky too because the Census Bureau does not adjust it for inflation.

So, probably the best thing to do would be to compare nominal GDP growth to the Census' factory shipments data.

 
At 1/10/2012 5:04 AM, Blogger marmico said...

compare nominal GDP growth to the Census' factory shipments data.

Let's do one better. Industrial production, manufacturing (BEA), industrial production, manufacturing (Federal Reserve), nominal GDP and manufacturing shipments all indexed to 2007=100.

The chart.

What renaissance? Manufacturing production got the crap beat out of it in the Great Recession and now is trending at the same growth rate as GDP, although there seems to be a pickup in shipments recently which I surmise is the pickup in exports.

 
At 1/10/2012 6:14 AM, Blogger rjs said...

growth from a depressed figure is almost meaningless...compare it to 2006...

 
At 1/10/2012 8:24 AM, Blogger Paul said...

Well, Matto's comments certainly indicate a renaissance in innovation for spambots.

 
At 1/10/2012 8:46 AM, Blogger sykes.1 said...

There are lots of complaints about job loss due to off-shoring, but increasing productivity (automation mainly) also kills jobs. Almost all the complaints about job loss ignore this, and the discussions that result are tendentious in the extreme.

Do you have any estimate of the relative impacts of off-shoring and automation on job loss?

 
At 1/10/2012 11:54 AM, Blogger PeakTrader said...

The U.S. had unprecedented job losses in manufacturing beginning around 2000, and yet the U.S. unemployment rate fell below 5% in the mid-2000s, while living standards rose at a steeper rate.

Over the past 10 years, the U.S. lost over 5 million manufacturing jobs (or about 30%):

http://metricmash.com/jobs.aspx?code=30000000

 
At 1/10/2012 11:59 AM, Blogger PeakTrader said...

And the real value of U.S. manufacturing output increased between 2000 and 2011.

 
At 1/10/2012 12:12 PM, Blogger morganovich said...

marmico-

that's a very interesting graph.

i think it refutes mark's premise pretty much completely.

manufacturing dropped far more than gdp and, unlike gdp, has not recovered to pre recession levels.

that would seem to make it a laggard, not a leader.

mark is trying to focus on % increases from the bottom without referring to the drop that led to them or the actual magnitude of the move.

if we each buy a stock at 100, and yours drops to 90 then goes to 110 and mine drops to 10 then rallies to 50, sure, i got more appreciation from the bottom than you did, but it's pretty clear mine was not the one to own.

i think mark is falling into that trap here.

 
At 1/10/2012 12:17 PM, Blogger PeakTrader said...

Also, China had an export boom over this period, because the U.S. offshored low-end manufacturing and shifted resources into high-end manufacturing.

So, the U.S. imported goods at higher profits and lower prices, while exporting goods with more market power.

The 2001-07 U.S. economic expansion raised U.S. living standards at one of the fastest rates in history, and yet it was largely unreported by the media.

 
At 1/10/2012 12:17 PM, Blogger morganovich said...

"Do you have any estimate of the relative impacts of off-shoring and automation on job loss?"

manufacturing jobs as a % of all jobs have been in decline worldwide.

it is, as you say, a function of productivity, not offshoring.

http://mjperry.blogspot.com/2012/01/decline-of-manufacturing-is-global.html

the slope of the decline between the us and the ROW is indistinguishable. this is a sign of wealth and productivity, just as it was in agriculture.

further the equation of job loss/creation flows both ways.

let's say you lose you job making blu ray players due to cheaper imports. sure, that hurts you. but, the cheaper imports benefit every buyer blu ray. they wind up with extra money. that money gets spent on other things like dinner out and creates jobs.

thus, cheap imports create jobs as well as cost them. that tends to be forgotten because the loss of a job is concentrated in a few folks and the benefits are dispersed widely.

 
At 1/10/2012 12:23 PM, Blogger morganovich said...

peak-

"The 2001-07 U.S. economic expansion raised U.S. living standards at one of the fastest rates in history, and yet it was largely unreported by the media."

you keep making this claim, but cannot substantiate it in any way.

gdp growth slowed dramatically from the prior 2 decades and more so than at any time in US history, household debt exploded. somehting like 30% of the meager growth in that period was funded by debt. growth was 35-55% below the previous decade (in real terms). that's a huge drop.

then, it all blew up. counting the inflation of a bubble and ignoring the effects of it popping seems awfully disingenuous.

the period from 2001-7 was inferior in terms of wealth creation to that of the 90's and of the 80's.

you have yet to produce a single piece of evidence to prove otherwise.

why continue to make this unsupportable claim?

 
At 1/10/2012 12:33 PM, Blogger morganovich said...

peak-

since 1992 is as far as we can go back and get a consistent comparison, let's start there.

1992-2000 averaged 3.86% gdp growth for 9 years.

now lets look at the next decade.

2001-7 = 2.45% (36% lower) and 1.73% (55% lower) for 2001-10.

so growth dropped from 36-55%. that's a BIG drop.

the best year from 2001-10 did not reach the average from 1992-2000.

reported real gdp for the 80's looked like the 90's.

regardless of what the correct way to measure cpi (and deflate gdp) is, the post 1992 method gets you less inflation from any given set of facts that pre. no one argues that. it was the point to the whole thing.

thus, 3.8% in the 80's is actually higher than 3.8% in the 90's as, deflated the same way, it would read more like 5%. for any given set of facts, the new method reads higher real growth.

thus 80's > 90's > 00's.

further, the period from 2001-7 saw household debt explode. it doubled during that period and accounted for roughly 1/3 of all the growth in that period.

calling living on borrowed money an "increase in living standards" may make you beloved of your credit card company, but it's not sustainable and leads to lower growth later when you delever.

 
At 1/10/2012 12:34 PM, Blogger Marko said...

As we see a decreasing share of manufacturing jobs controlled by unions, we can expect this to continue to improve. Once heavy industry moved into right to work states, it is not surprising that manufacturing in the U.S. is once again becoming affordable.

What we really need is a federal right to work law! (as a start)

 
At 1/10/2012 12:37 PM, Blogger PeakTrader said...

Morganovich, you need to look at the other half of the data too.

U.S. assets increased faster than U.S. liabilities.

U.S. real GDP growth was about 3% per year with annual trade deficits up to 6% of GDP, which subtract from GDP.

The recession initally began when the Bernanke Fed maintained a restrictive stance too long.

U.S. real consumption and real assets increased at faster rates in 2002-07 than in 1995-00.

 
At 1/10/2012 12:40 PM, Blogger PeakTrader said...

Morganovich, and you keep supporting the fact inflation was increasingly overstated at the height of the Information Revolution, from 1982-07, using the old method.

It makes no sense U.S. real GDP growth would be zero or negative in periods of full employment.

 
At 1/10/2012 12:45 PM, Blogger Buddy R Pacifico said...

From the Federal Reserve; Capacity Utilization for Manufacturing:

1972-2010 average 79.0%

2009 low 64.4%

November 2011 75.3%


We are now getting close to the almost forty year average, for manufacturing capacity utilization.

 
At 1/10/2012 12:55 PM, Blogger PeakTrader said...

Moreover, it should be noted, the 80 million U.S. Baby Boomers (born between 1946-64) began entering their peak productive years (35-54) around 1982, and the second most productive group (based on education, experience, and training) is the 55-64 age group.

A higher level of labor productivity reduces inflation, i.e. Y = t(l, k, r, e...x), or real output is a function of technology or productivity on labor, capital, raw materials, energy, etc.

 
At 1/10/2012 1:07 PM, Blogger PeakTrader said...

The U.S. had a quick and massive creative-destruction process mostly in 2000-02, and in a mild recession in 2001.

The expansion that followed reflected the most efficient economy the world ever saw, i.e. it took the U.S. less effort to achieve a higher standard of living.

 
At 1/10/2012 1:35 PM, Blogger morganovich said...

peak-

no, you keep misunderstanding my argument.

let's lay out some simple facts:

reported gdp growth was much lower in 2001-2010 vs the previous decade.

that's a very simple fact.

reported gdp growth from the 80's was about the same as the 90's. however, the way the number was calculated changed, so it would, for any given set of facts, read higher in the 90's (lower inflation, higher real growth).

this is also simple and incontestable.

you are trying to argue that the information age made such a dramatic difference that that adjustment is warranted.

what evidence do you have to back up that claim?

the information age was just one in a long string of productivity increases, and not a particularly powerful one in terms of upping manufacturing efficiency.

could you seriously argue that it beat electricifcation or the spread of assembly line manufacturing in terms of dropping production costs?

it was just one in a long line of innovations. you act as though it was some unique economic experience. it wasn't. compared to the telegraph, railroad, etc it was nothing too special, just a refinement of earlier technology.

the telegraph actually created somehting new, the ability to share info over long distances nearly instantly. the information age was just a refinement of that.

i think you are vastly overestimating what a big deal it was in comparison to other innovations.

such innovations occur all the time. they have an effect on prices. that shows up in CPI. you don't need to change it to account for it. that's double counting. if it really makes things cheaper, then why do you need to start geometrically weighting them? your argument (and that of boskin) makes zero sense on this count.

besides, we can ignore that whole issue and just look st the 00's vs the 90's. debt soared, growth plummeted.

you have yet to produce any data at all (even using your version of cpi) that supports your statement that 2001-7 was a great period of time for standard of living.

"It makes no sense U.S. real GDP growth would be zero or negative in periods of full employment."

and this is meaningless.

it depends on what people are doing and how it's being paid for.

you could draft 8 million people and get full employment. it wouldn't create growth.

it matters what they do.

are you seriously arguing that the balance sheet of US households is better now that in 2000?

 
At 1/10/2012 1:38 PM, Blogger morganovich said...

"The U.S. had a quick and massive creative-destruction process mostly in 2000-02, and in a mild recession in 2001."

mild compared to what? had the same thing happened in 1985 with the figures calculated as they were then, it would not have been anything like mild. you keep trying to compare apples and oranges.

further, part of the reason it was "mild" was incredibly loose money and an attempt to reflate a bubble, which went a long way toward creating the current mess.

sure, you can get a "mild" hangover from a long night of drinking if you snort a bunch of meth, but that's going to have consequences down the road, and you are ultimately going to wind up worse off.

 
At 1/10/2012 3:18 PM, Blogger Benjamin said...

I hope the dollar sinks even more. Helps exports, helps tourists come here and spend their money.

 
At 1/10/2012 4:58 PM, Blogger PeakTrader said...

Morganovich, it makes no sense real GDP growth would slow at full employment with a massive increase in labor productivity and a massive increase in technological improvements.

Even if you assume the data are correct, the U.S. consumed up to $800 billion a year more than produced in the 2000s, which in itself boosted U.S. living standards.

However, it's likely any adjustments to the data, to better reflect the real U.S. economy at the height of the Information Revolution, from 1982-07, were late and incomplete.

 
At 1/10/2012 5:21 PM, Blogger morganovich said...

"Morganovich, it makes no sense real GDP growth would slow at full employment with a massive increase in labor productivity and a massive increase in technological improvements."

you keep saying that over and over, but it happened.

look at the numbers. they are clear as could be. growth dropped 35-55% decade to decade, and that's using the bls cp and gdp/delfator that you champion.

there are absolutely no numbers that back up your claim.

repeating it over and over in the face of clear evidence demonstrates nothing but dogmatism.

and this:

"Even if you assume the data are correct, the U.S. consumed up to $800 billion a year more than produced in the 2000s, which in itself boosted U.S. living standards."

is a totally bogus argument.

you could boost your living standards in 2012 by running up $250k in credit card debt. would you be better off at year end as a result?

spending more than you earn is not a sustainable way to achieve an increase in living standards. it comes back to bite you, with interest.

even so, all that debt was already in the GDP figure, which was still, even with it, down big from the previous decade.

so it's already in the numbers, and the numbers were bad.

surely you cannot claim to think that growing at 1/2 the rate DESPITE running up huge debts is preferable to growing sustainably and saving/investing.

and this: "However, it's likely any adjustments to the data, to better reflect the real U.S. economy at the height of the Information Revolution, from 1982-07, were late and incomplete."

is just a huge, unsubstantiated whopper. what did the information age do to your house? your food? your shirt? that was not already captured in the price of that item?

what is this massive adjustment you claim is needed?

the effects of such things are ALREADY IN THE PRICE. you are trying to double counting them.

note that even when you do (as the bls did and does) you still get a huge slowing in growth despite huge debt accumulation.

thus far, you have not been able to provide a single credible piece of evidence to back up your claims. you just keep resorting to magical thinking, that somehow, everyhting changed and now you try to cover for even such modified data failing to bear out your thesis by claiming it must be changed more.

go back and look at the debates around changing cpi. they had zero to do with the arguments you put forth and everyhting to do with reining in COLA on social security.

the boskin report makes the IPCC AR4 on global warming (which is a massive collection of fraud, assumption, and post hock justification) look rigorous by comparison.

try reading it (as i have). you'll be stunned by the lack of data. the entire thing lacks any empirical foundation at all. it's just assumptions piled on top of subjective models and assumptions. there is no actual factual foundation to it anywhere.

feel free to try and prove me wrong on that. read it. point out to me any actual empirical validation.

you will not be able to. it's not there.

you are just so wedded to your premise, that you are calling the facts (even the slanted ones) wrong and demanding more slant.

that is the opposite of the scientific method and empiricism.

when the data invalidates you hypothesis, you alter the hypothesis, you don't try and change the data.

that's how a religion operates, not a hard discipline.

 
At 1/10/2012 5:27 PM, Blogger PeakTrader said...

Morganovich, I find it amazing you continue to cling to the same old static method to measure a large, diversified, and dynamic economy:

Part I

Why the Economy Is a Lot Stronger Than You Think
FEBRUARY 13, 2006

In a knowledge-based world, the traditional measures don't tell the story. Intangibles like R&D are tracked poorly, if at all. Factor them in and everything changes.

What if we told you that businesses are investing about $1 trillion a year more than the official numbers show? Or that the savings rate, far from being negative, is actually positive? Or, for that matter, that our deficit with the rest of the world is much smaller than advertised, and that gross domestic product may be growing faster than the latest gloomy numbers show? You'd be pretty surprised, wouldn't you?

Everyone knows the U.S. is well down the road to becoming a knowledge economy, one driven by ideas and innovation.

What you may not realize is that the government's decades-old system of number collection and crunching captures investments in equipment, buildings, and software, but for the most part misses the growing portion of GDP that is generating the cool, game-changing ideas.

"As we've become a more knowledge-based economy," says University of Maryland economist Charles R. Hulten, "our statistics have not shifted to capture the effects."

The statistical wizards at the Bureau of Economic Analysis in Washington can whip up a spreadsheet showing how much the railroads spend on furniture ($39 million in 2004, to be exact). But they have no way of tracking the billions of dollars companies spend each year on innovation and product design, brand-building, employee training, or any of the other intangible investments required to compete in today's global economy.

That means that the resources put into creating such world-beating innovations as the anticancer drug Avastin, inhaled insulin, Starbuck's, exchange-traded funds, and yes, even the iPod, don't show up in the official numbers.

As Greenspan would be the first to tell you, it's a lot easier counting how many widgets the nation produces in a year than quantifying the creation and marketing of knowledge. After all, we're talking about intangibles: brand equity, the development of talent, the export of best practices.

By the early '90s, Greenspan was becoming increasingly frustrated by the official numbers' inability to explain a rapidly evolving economy.

In 1996 and 1997 he refused to accept conventional data telling him that productivity growth was falling in much of the service sector, noting -- correctly, as it turns out -- that "this pattern is highly unlikely." He also pointed out that the official numbers for consumer inflation were too high.

 
At 1/10/2012 5:27 PM, Blogger PeakTrader said...

Part II

At the Washington offices of the BEA, J. Steven Landefeld, who became director in 1995, felt pressure to include numbers that better reflected the knowledge economy. Landefeld isn't a rash fellow, and the pace of change at the BEA, while quick for a statistical agency, would be called deliberate by most.

But in 1999 -- six decades after Kuznets laid the groundwork for calculating GDP -- Landefeld and the BEA decided to break with the past.

The BEA started treating business spending on software as a long-lived investment. The decision was overdue. Companies were spending more than $150 billion annually on software, far more than the $100 billion for computer hardware. And the software often stayed in use longer than the hardware.

Silly as it may seem now, it was a revolutionary change at the time. But over the past seven years the economy has continued to evolve while the numbers we use to capture it have remained the same.

Globalization, outsourcing, and the emphasis on innovation and creativity are forcing businesses to shift at a dramatic rate from tangible to intangible investments.

Want to see how this works? Grab your iPod, flip it over, and read the script at the bottom. It says: "Designed by Apple in California. Assembled in China."

Where the gizmo is made is immaterial to its popularity. It is great design, technical innovation, and savvy marketing that have helped Apple Computer sell more than 40 million iPods.

Yet the folks at the BEA don't count what Apple spends on R&D and brand development, which totaled at least $800 million in 2005.

Rather, they count each iPod twice: when it arrives from China, and when it sells. That, in effect, reduces Apple -- one of the world's greatest innovators -- to a reseller of imported goods.

But look at how our perception of the economy changes once you add in things like R&D and brand-building.

The published data show that total investment -- business, residential, and government -- has been falling over the past three decades as a share of national spending, while consumption has been rising. Add in the intangible investments provided by our three economists, and the picture changes completely.

Total investment rises, going from 23.8% of national spending in the 1970s to 25.1% in the early 2000s -- much higher than the 18.3% the conventional numbers show.

That helps explain why the economy has sustained strong productivity growth, and why foreign investors continue to pour money into the U.S.

Ricardo Hausmann, director of Harvard's Center for International Development, believes it should be. He describes these cross-border flows of knowhow as "dark matter."

Hausmann notes that U.S. multinationals consistently earn higher rates of return than their foreign counterparts -- an average of 6% on foreign operations since 2000, vs. the 1.2% foreign multinationals earn in the U.S., according to the latest BEA figures.

From that, he infers that the multinationals are benefiting, in part, from knowledge exported from the U.S., a country with faster productivity growth than the rest of the industrialized world.

 
At 1/11/2012 10:58 AM, Blogger morganovich said...

peak-

and i am amazed that you keep trotting out this subjective nonsense.

you are just trying to make up numbers.

R+D is already covered. the investment is there. it's salaries, capital equipment, etc.

sure, it may be more efficient, but that's ALREADY COUNTED in product sales. knowledge is just another kind of product.

the first version of windows 7 is incredibly expensive to make. so is the first viagra pill. but after that, they are really cheap and profitable. that's efficiency and knowledge based products. but they work just like every other product, they just have a different CoGS structure. you are actig like they need to be quantified differently, but there is no case at all that this is so.

R+D is only useful if it produces something. at that point, you can count it. all my sophisticated mud pie computer modeling is worthless. but when i produce a product that people want, hey, GDP, increased welfare.

you are trying to add this absurd magical thinking to economic measurement. the sort of innovation you describe has been going on for centuries. it's not the R+D for the horse collar plow that matters, it's the food production that comes from it. that has value and can be measured, then and now.

you don't like the trend, so you are trying to move the goalposts, but there is no fairytale castle full of knowledge making us all better off. it needs to become goods and services to do that.

the invention of the horse collar plow becomes valuable when tilled acreage and productivity goes up and food become more plentiful and cheaper. until then, it has no effect. every other technology is the same way.

the creation and marketing of knowledge is a meaningless phrase. what does the knowledge do? knowledge is only valuable when applied.

let's take a very simple example.

i create the recipe for the ultimate fried chicken. this is great stuff.

ok. so what? i have knowledge. i can sell the knowledge to you, and that becomes GDP and an improvement in welfare. or, i can make the chicken and sell it to you, and likewise created GDP and in increase in welfare.

but just creating the recipe does none of that.

if i never share/sell/use it, it's valueless.

there is a really easy way to value knowledge: who will pay for it. this lets some companies, like say, microsoft, sell more with less investment yielding higher profit, roic, etc, but that's already in the numbers.

it's also subject to very rapid change. netscape had a valuable browswer. people would buy it. the IP was used, useful, and valued. in a year, it was worthless. how could we measure such a decline: revenue. there is no need to go careening off into subjective assumptions about "knowledge value". that's the talk of investor newsletter gurus and academics that tend to ride every new trend right over a cliff.

you are trying to create some nonsense measure out of thin air and misunderstanding basic accounting issues like depreciation.

so software becomes capital, not an immediate expense. so? what is it you think that shows? it's just accounting treatment. it's just a reflection of how long it lasts and how much it costs.

these approximations about higher returns from knowledge work are similarly meaningless. of course you get a better return for more sophisticated products. apples design for an iphone is far more valuable than the ability to put one together on an assembly line.

but again, that's already in the numbers.

what you are doing is like trying to double count productivity.

it does not make any sense at all.

 
At 1/11/2012 11:06 AM, Blogger morganovich said...

"But they have no way of tracking the billions of dollars companies spend each year on innovation and product design, brand-building, employee training, or any of the other intangible investments required to compete in today's global economy."

nonsense.

read a 10k.

there will be an R+D line.

there will be salaries.

that's a preposterous statement.

not as preposterous though, as claiming to be able to somehow measure what is achieved.

lots of R+D goes nowhere. some creates valuable products.

there is no way to tell, in aggregate which is going to be which nor to measure it that way.

fortunately, there is a really easy way to measure success and value:

revenue.

if a chip sells $1 billion, hey, that was valuable R+D. we can tell because people wanted the result.

if it never gets past the mask stage, well, that was a zero.

you are trying to play god with this peak and claim that you can know what it's worth. you can't. no one can until they try to sell it. that's why we use revenues, not R+D to measure businesses.

you, like the boskin folks, are taking the view that you are so smart that you can quantify what companies themselves cannot and use it to argue for your own prejudices.

that is not how science is done.

you don't invent subjective data and use it to fill in holes.

brand is a massive value too. nike, coke, mcdonalds, those names have huge value. but it's already in the numbers. that value generates sales. that's how we know how valuable it is. it's just like knowledge that way.

 
At 1/11/2012 11:26 AM, Blogger morganovich said...

ps-

peak, did you notice the date on the thought piece you copied?

2006.

yup, they sure called the next couple of years well. oops. i'm sure they guys who bought big on that theory did really well...

that's the kind of "this time is different" "financial new agey nonsense" that comes out at the top of every cycle.

happened in 1999-2000, 2006-7, and it will happen again. it's one of the ways you know a cycle is getting into final innings: academics and newsletter writers start making up new metrics.

"it's not revenue and profit, it's 'eyeballs'!" "they need to lose more money or they can't grow enough!" "it's not about sales, it's about 'knowledge'!"

these failed mantras come and go every cycle. they have since some clown traded his castle for a tulip bulb.

it's part of what drives the business cycle.

every cycle carries the seeds of it's own demise. it works, it gets popular, it gets over popular, people overstretch assuming the next 5 years will look like the last 5, and then you get a blow up, a retrenchment, and you start again. lather, rinse, repeat.

the trick is to keep the blow offs small and manageable. trying to avoid them, especially by trying to reflate a bubble is the worst possible plan. it prevents the asset reallocation that needs to happen and stops the healing.

this pushes the imbalances together and forward and you get a huge crash (like this one) instead of a manageable one (like 2000).

 
At 1/11/2012 12:09 PM, Blogger PeakTrader said...

Morganovich, U.S. intangible assets are understated.

For example, the U.S. can offshore low-end manufacturing to produce more high-end manufacturing (from intangible assets).

So, although U.S. real GDP can expand 3% a year (or more, since quality improvements are understated), the U.S. can also consume more than produce (up to 6% of GDP) in the global economy (from intangible assets).

That additional consumption doesn't show up in U.S. GDP.

 
At 1/11/2012 12:43 PM, Blogger morganovich said...

peak-

you are not holding up a conversation here, just repeatedly making the same unsupportable claims.

"Morganovich, U.S. intangible assets are understated."

how? prove it. what's their value? you think that the IP at microsoft is undervalued? well buy the stock and get rich. you think equity prices don't account for IP? you must be joking.

and again, an intangible asset is useless until you DO SOMETHING WITH IT. go back and read the horse collar example until you understand this.

and this:

"So, although U.S. real GDP can expand 3% a year (or more, since quality improvements are understated), the U.S. can also consume more than produce (up to 6% of GDP) in the global economy (from intangible assets)."

is the worst nonsense you have posted yet. it's just more newsletter drivel of the kind that those guys blew you up with in 2006.

that statement does not even parse, much less make economic sense.

what, we eat and live in our dreamy intangible assets? no.

we need to create and trade goods and services (of which knowledge is one) for others. that is the only way to be better off.

earning $50k, spending $100k, and claiming it's ok because you had some great ideas is such an indefensible idea it's difficult to even know where to start trying to explain how wrong you are.

you can only cover that gap by monetizing somehting. no one is going to say, "hey, he has some great ideas, let's just let him not pay us 50 grand". you are living in a unicorn economy peak.

the things you are saying are shockingly wrong i'm literally almost speechless.

so by what dynamic would this fanciful process work?

how can i create $50k and consume $100k and make up the difference in intangible assets? how do these intangibles become tangible in my consumption and not show up in gdp?

does you grocery store let you walk in and say "i have a vast untapped pool of intellectual property, so give me a free ribeye"? (if so, you must let me know where you shop)

 
At 1/11/2012 12:54 PM, Blogger PeakTrader said...

Morganovich, rather than understanding interrelationships in economics, you remain in denial.

Perhaps, you can explain why U.S. trade deficits became increasingly larger when the U.S. Information Revolution began to accelerate after 1982, and why large U.S. trade deficits will persist in the future.

 
At 1/11/2012 12:55 PM, Blogger morganovich said...

let's try and pull this apart for a minute:

"For example, the U.S. can offshore low-end manufacturing to produce more high-end manufacturing (from intangible assets)."

that's not how it works at all.

the US has IP. that IP allows for the creation of more valuable, higher value add products. on this i think we agree.

but then you go on and want to count the value before we make anything. even assuming it were possible (and it's not), it's also totally unneeded. the value of the IP will become obvious as we MAKE THINGS WITH IT. that's why it's valuable. that's how we know it's valuable. the value of the IP is the difference between the value of of the high end products using it and the low end ones that don't. you see it in revenue and profit differentials.

we get better prices and profits from our goods, but that is all already in the numbers.

IP is a factor in stock price, business value, salaries, you name it, but again, it's all already been counted. sure, you want to look at asset values as well as gdp growth but that metric tells a terrible story of the last decade. in real terms, equity values are down 25% from 2007 and probably 40% from 2000 (using the S+P and cpi) which, admittedly, is a very rough gauge.

so if all this IP is so valuable, how have all the investors missed it? why aren't you wildly rich because you understand what they do not?

look at it this way:

i have specialized knowledge. this shows up in my income. that shows up in GDP.

to claim that we need to inflate it again to take account for my knowledge is double counting. it's already factored into my pay scale. the same is true of an iphone or a doorstop. it's in the price of the item. it's in the price of the company.

this is so basic as to be a near tautology.

you seem convinced in these magical pockets of value sitting around, but you need to learn what every successful businessman knows: ideas are a dime a dozen. it's turning them into something that's valuable.

 
At 1/11/2012 1:06 PM, Blogger morganovich said...

"Perhaps, you can explain why U.S. trade deficits became increasingly larger when the U.S. Information Revolution began to accelerate after 1982, and why large U.S. trade deficits will persist in the future."

now you are just drifting into fantasy and bizarre orthogonal argument.

first off, the concept of trade deficit is meaningless. mark has covered that in detail in the past.

second, most of the jumps in our imports have been in energy, so that's totally irrelevant to what you are arguing.

third, much of the gap has been in inflation variance.

fourth, it has been offset by a capital account balance where others buy our bonds, stocks etc.

you are confusing several concepts here and making it obvious by your question that you understand none of them.

there is nothing unsustainable about a "trade deficit" which is why the term is meaningless.

you will have a trade deficit with the supermarket for your whole life. does it impoverish you?

it's a few % of GDP.

in a year, we make $15tn in goods and services.

if we spend 3% on extra foreign goods, so what? that's like you making $100k and spending $3k on wine from france. so what?

france then buys bonds, stocks, whatever. they invest here because it has been attractive in relative terms.

this has nothing at all to do with IP, apart from perhaps their thinking that our companies are more valuable and better run.

the question you asked makes no sense at all.

it's a complete non sequitor.

might as well ask why there are fewer hurricanes now than in the 70's and claim it's due to the inforamtion age. it's a correlation with no causality.

 
At 1/11/2012 2:22 PM, Blogger morganovich said...

here's another way to look at it:

you claim all this valuable knowledge is sitting around undervalued.

how could that possibly be?

first off, investors and shareholders would have to not see it.

management teams would have to not see it too, or they would do MBO's to get it.

the companies and individuals that created it would have to not see it, or, if it were so valuable, they would be selling it or doing somehting with it.

so too would all their competitors and other would be entries into the space, or they would buy it from them.

that's an awful lot of smart, informed people to miss something so valuable.

i think you may need to consider the fact that it's you that are way off base, not the whole world of investors, inventors, corporate managers, and employees.

seriously, stop and think about it. i know that the uber bull newsletter writers will say anything to get you to believe it's not so, but those are the facts.

the likelihood that all those market participants have all failed to recognize so much latent value (which they themselves created) is zero peak.

it simply could never happen.

 
At 1/11/2012 5:59 PM, Blogger PeakTrader said...

Morganovich, you seem to be in denial how the U.S. can consume more than produce in the global economy and in the long-run, which understates U.S. GDP.

So, let's look at outsourcing.

When a firm can perform a service in-house at $100, and then outsources that service at $90, the firm receives the same value, but GDP falls $10.

 
At 1/11/2012 6:44 PM, Blogger PeakTrader said...

Of course, that $10 saving could go to bonuses for top management, overseas investment, buying Treasury bonds, etc..

Nonetheless, the real value is more than what's reflected in GDP.

 
At 1/11/2012 7:21 PM, Blogger PeakTrader said...

Normally, productivity and income both rise. However, outsourcing is a "game-changer," because you get the same service with a drop in income.

 
At 1/12/2012 3:19 AM, Blogger PeakTrader said...

Moreover, do you really believe the full value of personal computers, for example, which replaced typewriters, was captured in U.S. GDP?:

Typewriter Museum

"Brother Cassette Correction L10 Plus 3 Correction Typewriter (circa 1981) a portable electric traditional typebar typewriter with cassette correction tape and ribbons for easy correcting. Date is from an August 20, 1981 ad by The Crescent Store in the Spokane Spokesman-Review newspaper. "Features cassette correction ribbon, 13" carriage, variable line spacing, full tabulation and smooth quiet operation." Regular price was $275. The sale price was $249.99 which has the same buying power as $590.01 in 2009. In 2010 you can get a nice laptop and printer for $590."

 
At 1/12/2012 11:12 AM, Blogger morganovich said...

"Morganovich, you seem to be in denial how the U.S. can consume more than produce in the global economy and in the long-run, which understates U.S. GDP."

no peak, you seem to be mired in economic illiteracy.

there are 2 ways to consume more than you produce:

run up debt or sell assets.

we have been doing both.

note that selling assets is not really consuming more than you produce as you are just selling things you produced before.

seriously, where did you learn econ? this is really basic stuff and you seem to have no idea how it works.

you never respond to any of the questions i pose you, (like how could all this value get missed) then you spout nonsense like this:

"When a firm can perform a service in-house at $100, and then outsources that service at $90, the firm receives the same value, but GDP falls $10."

which is a ridiculous way to look at it.

you could say the same of any drop in price for any good or service, domestic or imported.

by your logic, buying beer on sale harms GDP.

you are confusing real and nominal here.

GDP is reported in real terms.

thus, if the price of a service drops to $90, that gets accounted for in the gdp deflator and thus real GDP does not change at all.

again, this is such an elementary issue, i'm stunned you do not understand it.

your logic is absurd. it would mean that decreasing prices lead to economic harm and price increases in gdp expansion, a clearly inaccurate idea.

"Moreover, do you really believe the full value of personal computers, for example, which replaced typewriters, was captured in U.S. GDP?:"

yes. this is just newsletter tripe. computers increased productivity. this was reflected in corporate values, output, wages, etc.

you could make this same argument about ANY technology. how was the invention of the electric motor accounted for? surely it was a huge deal. it was accounted for in output, in increased productivity and wages for machine operators, and in the value of the companies that used them.

computers are NO DIFFERENT.

they are just another productivity enhancing tool like a shovel or a tractor.

their effects show up in output, profit, wages, etc.
if they do not, then they are not valuable tools.

it's really as simple as that.

if it has value, it shows up in output, profit, productivity, and wages. this is a tautology. it is the very meaning of value.

i have no idea what nonsense stock newsletter you are reading (as this sounds foolish even for a gilder or a gav kal) but you need to get a new one.

these ideas are so flawed it's astounding and reveal a total ignorance of even basic economics and business principles.

 
At 1/12/2012 11:22 AM, Blogger morganovich said...

let me put this computer thing to bed as simply as i can:

you argue that computers are a productivity tool.

what is the key aspect of a productivity tool? productivity. productivity leads to PRODUCTION.

the amount production and profit go up as a result of the tool is the measure (and the very definition) of such a tool.

this, any productivity tool can be measured by the additional production it creates. to the extent it does, we call it a good tool.

that production is already in GDP.

for your case that computers have not been counted in gdp to be true, they must have production value that does not flow through to production.

stop and think about that. such a claim is clearly impossible. it's like believing in unicorns.

you are arguing that the value of a productivity tool is greater then the productivity it creates.

that's a totally unsupportable definition.

thus, your whole argument is self refuting.

if computers are important productivity tools, then they increase production. that's GDP. if they do not increase production, they are not useful tools.

it's really that simple.

i have no idea how you could possibly argue otherwise.

 
At 1/12/2012 6:20 PM, Blogger PeakTrader said...

Morganovich, It's amazing your comments about me fit you perfectly.

I explained in detail before how the U.S. consumes more than produces in the long-run through changes in currency exchange rates, interest rates, and inflation.

Obviously, you completely ignored those mechanisms, and went back to your "really basic stuff."

I can spend the time to explain them again, except I'll most likely get your same ridiculous comments.

 
At 1/12/2012 10:12 PM, Blogger sethstorm said...


Normally, productivity and income both rise. However, outsourcing is a "game-changer," because you get the same service with a drop in income.

The reality is that the service is worse with the drop in income of First World citizens.

 
At 1/13/2012 3:15 AM, Blogger PeakTrader said...

Seth, normally, with offshoring, the consumer gets a lower price and the firm gets a higher profit.

Normally, with outsourcing, the firm gets the same service with a drop in expense.

I agree, there are instances when offshored and outsourced goods & services don't meet standards (set in contracts), e.g. are lower quality.

Also, I may add, when goods are sold too cheaply and money is lent too cheaply, then people will spend and borrow.

And when the debt falls in real and relative terms, over time, then people can consume more than produce forever.

 
At 1/13/2012 10:05 AM, Blogger morganovich said...

"I explained in detail before how the U.S. consumes more than produces in the long-run through changes in currency exchange rates, interest rates, and inflation."

no peak, you made a bunch of statements that make no sense at all.

how does forex, interest rates, or inflation let you consume more than you produce?

explain the mechanism.

there isn't one. it's not possible.

you can only consume more than you produce by running up debt or selling assets (unless you plan to steal).

we already covered this, and you had no response nor any ability to explain your views, you just repeated the same unsupported claims over and over.

i note you are silent on PC's being accounted for.

yet another of your outlandish claims that you cannot back up at all.

you keep making clearly false claims over and over to which i respond in great detail and to which you never have any kind of factual counter response. you just make a couple more unsupported statements, bizarre and clearly untrue claims that demonstrate a total lack of basic grounding in economics (like claiming that low prices drop reported GDP), and then this childish attempt to claim that it is i who am ducking the issues.

go back and read peak. i have written you a treatise here that is thoroughly laid out and organized, you are cut and pasting non sequitor. i have answered your questions, you have not answered any of mine.

you claim that i am the one avoiding questions is so absurd that it can only be a rhetorical device used by someone who knows he cannot comment on the substance.

 
At 1/13/2012 6:32 PM, Blogger PeakTrader said...

Morganovich, obviously, you never had any international trade classes at the undergraduate level, the graduate level, nor passed the comp exams in that field (like I did).

To say mechanisms in economics aren't possible is a ridiculous statement.

Export-led economies sold their goods too cheaply and lent their dollars too cheaply, which generated a virtuous U.S. cycle of consumption-investment to maintain their employment levels.

Those economies lost investing in the U.S., because a weaker dollar means they had to exchange more dollars for their currencies, and from relatively low interest rates (U.S. T-bonds are the safest investment in the world).

They exchanged their goods for dollars instead of exchanging their goods for U.S. goods, which means if they bought U.S. goods in the future, prices would be higher from inflation, i.e. they'd receive fewer U.S. goods.

Also, about your comment on personal computers (PCs).

How much better is a PC in 2010 compared to a typewriter in 1980 after inflation?

Do you really believe the increase in real value between a 1980 typewriter and a 2010 PC was captured in real GDP?

You said U.S. real GDP growth slowed in the '80s, slowed even more in the '90s, and slowed even more in the '00s, although there was a major structural break (rather than the minor technology shocks you cited before 1980) when the Information Revolution began to accelerate after 1982.

Obviously, U.S. real GDP growth was increasingly understated after 1982, along with the other variables you cited.

 

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