Thursday, March 11, 2010

Z1

Today the quarterly Flow of Funds (aka Z1) report was released by the Federal Reserve. What is the Flow of Funds report? Imagine the USA was a company: it's income statement would be called GDP report, and it's balance sheet would be the Flow of Funds. In my opinion this is the most important economic statistics release there is.

Unfortunately for this blog and its readers, I am quite busy at the moment getting ready to commence employment at Keefe, Bruyette and Woods research department in London, and I'm likely to become more and more busy as days go by. I will thus ask my dear readers to confer to the fantastic blogs linked below in the right column of this page for analysis of  and commentary on the all-important Z1 report.

Monday, March 8, 2010

Hulbert: advisory sentiment back to dangerously high levels

Which of course is bearish (link here). Note that this type of contrarian indicator works best at a horizon of a few weeks.

Saturday, March 6, 2010

Guest post: Paul Kasriel on fiscal deficits and inflation

Today I had the pleasure of exchanging a few emails with Paul Kasriel, Chief Economist of Northern Trust. Paul is in my opinion one of the greatest economic forecasters around (you can read him here). I don't think he would disagree if I said he is a great student of Friedman and Hayek, and that he knows what is money and what is inflation. Here is what I asked him and his response:

RK - Some economists argue that money and government bonds are near-perfect substitutes in an investor portfolio. Thus, they conclude, large fiscal deficits will result in higher rates of inflation, whether or not the central bank lets the money supply grow very fast or not. What is your opinion of this theory?

PK - I do not understand the argument. If the government sells the public bonds and the banking system (including the central bank) does not create the credit for the purchase of these bonds, then the public is transferring purchasing power to the government. The public cuts back on its current spending and the government increases its current spending. In contrast, if the banking system creates the credit for the public to purchase government bonds, then the public does not have to cutback on its current spending and the government can increase its current spending. This would be inflationary. In the former case, the Austrian economists refer to this as "transfer" credit inasmuch as purchasing power is transferred from one entity to another. The Austrians refer to the latter case as "created" credit in that the banking system and central bank create credit, much like a counterfeiter, enabling one entity to increase its purchasing power while not necessitating any other entity to cut back on its purchasing power. Perhaps I am missing something in the argument of these economists who believe that government debt issuance is inflationary in and of itself.
Those economists I mention (they seem actually to be a majority of economics scholars), believe that a dollar is a dollar, is a dollar. But if you issue a bond, someone has to cut its spending in order to buy it. Also, why not extend the theory and include AAA rated private bonds to government bonds? And while you're at it, just throw in all investment grade bonds.

To conclude, Japan seems to provide a pretty convincing evidence for Paul's point of view. But as he says, maybe we're missing something?

Monday, March 1, 2010

Conspiracy theorists are not going to like this one

More precisely, by conspiracy theorists I mean people who have been arguing that the Bush and Sarkozy administrations had been using their connections with media barons to influence the public opinion and thus, voters (Let's leave Berlusconi and Putin out of this...).

James Hamilton over at Econbrowser Menzie Chinn reports on a recent study by University of Chicago professors Matthew Gentzkow and Jesse Shapiro, who use standard econometric methods (which is why this subject is not too far away from the usual posts on this blog) to explain what drives a newspaper's political orientation. Two main conclusions: a paper's political orientation is very correlated to "the political orientation of people living within the paper's market", and "the politics of the paper's owner seem to matter much less". Hamilton Chinn continues:
Gentzkow and Shapiro conclude that papers to some degree are just giving their readers what the readers want so as to maximize the newspapers' profits.
The full study is here.