The authors find that some releases, including the first GDP print, seem to be foreseen by the markets just before they’re released. Basically, it looks like the press or insiders are leaking information.
I might have an overly realistic opinion of human nature and government institutions, but I can’t see a place like the BEA or BLS not developing leaks. The BLS is famously overstaffed, and it would only take one rogue employee. Even if the BLS and BEA workers aren’t the one’s leaking, is it so hard to believe they’ve been hacked? The rule today seems to be that, if you’re a federal agency, you will be hacked. If someone were getting the Employment Situation numbers ahead of time (say a day or two), even an early version of them, they could spread their insider trading out over time and no one could tell.
Tonight I salute the Greeks for taking the brave step of saying “enough”. Of challenging the European Union and its grotesque vision of a homogenized, commodified, United States of Europe.
Greece has suffered through what must be among the worst non-war, non-communist economic disasters in the history of the money economy. A disaster which has crushed family formation, stunted careers and ruined retirements for millions in the historic heart of Christendom and the West.
The Greeks are a people who have done and endured much. They gave us the seed of our civilization, they inherited the Roman state, defended early Christianity from the Persians and held Asia Minor and the Balkans against the full might of Islam for 800 years. They also invited the Slavs into the Western fold, a move which I think will pay off for them in the coming century.
When the scimitar slew the last innocent in Hagia Sophia, when the Sultan’s horse slipped on the blood-splattered flood in Europe’s greatest church, the Greeks were lain low, slaves in their own land. Greeks were forbidden from riding horses, were compelled to pay the onerous Jizya, and had their sons stolen and converted to Islam to man the Sultans mighty Janissary corps. The Greeks came back though. Through hard work and the peculiarities of the Turkish nation-farming system, Hellenes built up a massive merchant network within the Turkish empire. They became high officials, and robbed the state blind. It is my suspicion that much of Greece’s dysfunction today stems from the poor lessons learned robbing the Ottomans.
Things looked up for the Greeks in the 19th century. They regained a small independent state in the Peloponnese. The state grew and in the early 1920s, with the Ottoman’s defeat at in the First World War, it looked like a full Greek state, encompassing Constantinople, Smyrna and the western quarter of Asia Minor would be a reality. However, an exhausted Britain and France turned their backs on Greece and the Hellenes were crush by the great Mustafa Kemal “Ataturk”. The Greeks were expelled from their ancient city, from Turkish Thrace and Asia Minor, a million may have died in the chaos. Later, Greeks were expelled from Northern Cyprus and Egypt. Oh, and like most everyone else, Greece was wrecked by the Germans in 1941.
My point is that, if any group in the modern world is a ‘victim group’, it’s the Greeks. They are less than 200 years out of slavery and have institutional scars that must be on the order of those borne by Red China or Russia. Russia was communist for 70 years, China had about 30 years of intense communism, followed by today’s national-marketism. Greece lived under Turkish tyranny for about 400 years. It’s unreasonable to expect them to act like Austria, or hell, even Italy.
The coming weeks and months will be interesting. Will Greece be kicked out of the Euro Zone? Will they acknowledge any of their debts? What will happen if Greece restores the drachma and recovers quickly? Will the EU sabotage them to encourage Italy and Spain? Exciting stuff.
I’ve moved recently, from Alabama to Texas. Never live in a Blue state if you can help it.
I’ll skip the details, but the point is that the Efficient Forecast engine was running on a computer that’s been in storage for a while. I know, I should move it to the cloud.
The forecast should be back up this week, God willing. I gathered prices for 6-30 and 7-01 and ran them through the system today. I get back an NGDP forecast from 2015Q3 to 2016Q2 of 2.6%. Wow that’s low!
I wonder what’s going on, how can it be so low?
I check the prices and the principal component scores of the prices which drive the forecast.
They look weakish, but not 2.6% weak. 2.6% expected NGDP would probably mean a near-recession back when we had a strong economy. The economy is reasonably well calibrated for weak nominal growth now, so I don’t think we can say a recession is likely, but we’re in a soft patch for sure.
I remember that it’s now Q3. The system always uses NGDP data lagged two quarters from the current quarter. This ensures that I always have both GDP and GDI (the independent measures of GDP from the income side). I define GDP to be the average of GDP and GDI. Don’t think too hard about that sentence.
The chart below (click it to get a bigger view) shows the trends in GDP and GDI recently
Interestingly, GDI has been kicking GDP’s ass for three years. In every quarter since 2011Q4, GDI has been higher than GDP. I wonder what this means. Maybe it’s evidence of more economic activity being done off the books? (hooray social decay!) Something is going on though, it’s not just randomness.
In any case, aggregate demand growth definitely slowed in 2015Q1, just like last year. This seems to be weighing on the forecast.
This raises the question: when forecasting NGDP, should we even use recent NGDP movements? Or should markets be the only input into the model?
The problem is that, while recent GDP movements have a lot of predictive power, there are cases where there’s a ‘one off’ event, like a horrible snowy winter that distorts NGDP growth. The conventional forecasting approach would be to “add factor” or “overlay” the problem away. Basically, just make something up that looks good and add it to the forecast. I however, refuse to do this. The proper way to tackle this problem is to keep working on the model, using reasonable methods. 2.6% is questionable, but not so questionable that I completely reject the number. This is what the system is saying.
A question for another post.
1. Going from years of 3.6% NGDP growth, to 2.6% is a lot easier than going from 5.5% to 2.6%. But as we’ve had one-off quarters were Q/Q NGDP growth fell to zero or below, something that NEVER happened in the period following the second word war, yet have stayed in expansion/recovery, I’m confident we could suffer 2.6% growth without losing jobs.
People sometimes say “Banks create money”. This is true, more or less, but it’s not a helpful way for the uninitiated to think of money creation.
When people hear “money creation” they think of the Jack Nicholson in clown makeup, rolling down the street spraying the poorly dressed 1980s masses with freshly printed cash. This isn’t what banks do when they ‘create money’.
Dios meo this movie doesn’t hold up well…
Instead, what banks do, is they ‘trick’ people into thinking they have money at the bank, when really 90% or more of their money has been lent out. Those lent funds in turn end up with a bank somewhere, only to be lent out again, and on and on. This money multiplier process creates a massive structure of perceived cash that isn’t really there.
Unlike certain internet cranks and dead Austrian exiles, I don’t think this is monetary fiction a bad thing. The economy is absurdly stable. Not as stable as it might be, but the Anglosphere demand-side is well-run, compared to the EMU or Japan or most anywhere else. Fractional reserve banking works fine, and in a pinch, in a banking panic, the central bank can presumably step in and give deposit holders the cash-money they thought they had in the bank.
Still, bank’s aren’t literally making money “out of thin air”, they’re making perceived money. They’re fooling people who don’t really understand deposit banking at all (97% of people) and convincing the remaining 2.999% that they’ll have access to their cash whenever they want.
That’s it. Just a small point.
The U.S. economy doesn’t have the ‘nominal head of steam’ to sustain higher interest rates. Maybe if the macro shocks go our way we can sustain 0.5% rates, but I’d be shocked if rates were, say 1.5% in 2017.
It goes back to the old Sumnerian point: A Fed Funds rate at 1.5% in 2017 is consistent with both a markedly weaker economy, and a markedly stronger economy. If you wanted the policy rate at 1.5% in 2017 (or even 2016) you’d come out and say “We want NGDP growhth to be 6% in 2016, and 5.5% in 2017 and 5% per year thereafter.” The Chuck Norris effect would take care of everything else, and you could proceed to raise rates in following meetings.
We don’t live in that world though, and we probably never will. The Fed never the less, is going a good job, as well as can be expected at least. I don’t know if the Fed will raise rates in 2015. I do know that if they do, they’ll back off in 2016.
I expect that if rates do go higher, they won’t go much higher. I also expect that if the markets tank in a sustained way, and if inflation expectations dip, and if data worsen, that the Fed will back off right away and use stimulative language. Yellen is a highly able macroeconomist and a good central banker. She is also somewhat insulated from media criticisms and pressure. I think she’ll make smart moves, not Market Monetarist Smart, mind you, but the best moves that the broadly New Keynesian playbook allow for.
I would feel safe going long the U.S. economy now, and be ready to go longer still, if the Fed raises rates and stocks dip.
The EU gives Germans a way to signal that they’re not nationalistic. This is an easy way to get status feelz for Germans (and Europeans in general, but most of all Krauts and Scandis).
The EU gives former Yugoslavia and Warsaw Pact Europeans a way to feel like they’re in the cool kids club. You don’t have to wear the Adidas suit (aka a Bosnian tuxedo) to show you’re cool now, because your country is in a quasi political union with Germany. You’ve arrived!
I have a poorer sense of why Iberians or Italians would want the EU, or the French for that matter. I suppose they get the cheap status whoring benefits of promoting antinationalism too. Maybe they’ve just swallowed the propaganda.
I was wrong, I thought Greece would be out of the Euro by 2013. I was only wrong about the Greek people’s willingness to go through economic deprivation though, the macro economic situation has gone as I expected it would, zero nominal growth.
The Hellenes need to end the madness. They also need to weigh who their true friends are.
Given the current demographics, who will shield Hellas from the Turk in 2030? In 2050? I propose that Russia is a better potential sponsor than the morally exhausted Western Europeans.
Russia’s interests are aligned with those of Greece, there is a deep cultural connection too. Indeed, there is a longstanding pattern of Russian geopolitical desires aligning with the Greeks, only to be thwarted by the West.