<![CDATA[Hedgehogs.net: '' related content]]> http://www.hedgehogs.net/tag/economic+theories?view=rss http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11434262/indexology-a-keynesian-puzzle-for-fed-watchers Sat, 13 Dec 2014 23:39:25 +0000 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11434262/indexology-a-keynesian-puzzle-for-fed-watchers <![CDATA[Indexology®: A Keynesian Puzzle for Fed Watchers]]> ]]> 11434262 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11432187/free-exchange-poor-behaviour Sat, 13 Dec 2014 11:09:27 +0000 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11432187/free-exchange-poor-behaviour <![CDATA[Free exchange: Poor behaviour]]>
A BAT and a ball cost $1.10 between them. The bat costs $1 more than the ball. How much does each cost? By paying attention to how people actually think, behavioural economics has qualified some of the underlying assumptions of classical economics, notably that everyone is perfectly rational. In fact, the mind plays tricks, dividing up $1.10 (in this example) neatly into $1 and 10 cents, rather than correctly into $1.05 and 5 cents. People also tend to copy others and often prefer to co-operate rather than compete. For these reasons, some of the simplifying assumptions of economics are not always correct: people do not act in every instance in their long-term self-interest; they do not weigh up all the costs and benefits before taking a decision.Many of the insights of behavioural economics were based on studies of American university students and other privileged folk. But they apply with greater force to the poor—both the poor in rich countries and the more numerous inhabitants of developing ones. Behavioural economics therefore has profound implications for development. The new “...

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http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11432181/the-status-of-economists-the-power-of-selfbelief Sat, 13 Dec 2014 11:09:19 +0000 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11432181/the-status-of-economists-the-power-of-selfbelief <![CDATA[The status of economists: The power of self-belief]]>
“IF ECONOMISTS could manage to get themselves thought of as humble, competent people, on a level with dentists, that would be splendid!” said John Maynard Keynes, a British economist. Despite their collective failure to predict the financial crisis, let alone follow Keynes’s injunction, economists are still very influential. They write newspaper columns, advise politicians and offer expensive consulting services to business-folk far more than other academics. A new paper* tries to explain why.One reason, say the authors, is that economists have come to believe that they are superior. A survey in 1985 found that just 9% of graduate students in economics at Harvard strongly believed that economics was “the most scientific of the social sciences”. But as economics became ever more mathematical, its practitioners grew in self-confidence. By 2003 54% of the graduate economists studying at Harvard strongly agreed with the statement. A glance at a popular blog for doctoral students in economics, econjobrumors.com, gives a taste of the contempt in which its users hold other disciplines. Sociologists “play around with big important ideas without too much effort or...

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http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11427738/economists-vs-politicians Thu, 04 Dec 2014 07:48:45 +0000 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11427738/economists-vs-politicians <![CDATA[Economists vs politicians]]>

Yesterday, I questioned George Osborne's economic competence. In one sense, though, it is a little unfair to single him out. Back in the summer, Ed Miliband wibbled that "we won’t have the money" and pledged to "balancing the books in the next government" - a promise which means excessively tight policy, unless the economy grows surprisingly strongly.

read more...

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http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11426995/new-normal-or-old-normal Wed, 03 Dec 2014 19:25:49 +0000 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11426995/new-normal-or-old-normal <![CDATA[New Normal or Old Normal?]]> The yield curve has steepened somewhat as compared to last month. This is still in line with a pick up in inflationary expectations.


It feels as if we have finally left the "New Normal" behind. How is this possible when the fundamental issues that has been with us since the last crisis has not been resolved and in fact may have even gotten worse? The answer has to do with "Animal Spirits". "Animal spirits" is the term John Maynard Keynes used in his 1936 book The General Theory of Employment, Interest and Money to describe emotions which influence human behavior and can be measured in terms of consumer confidence.

I am no fan of the Keynesian school of thought but their description of "Animal Spirits" is spot on. It is however their pursuit to control or manufacture "Animal Spirits" that created more chaos in the financial world. However, as a money manager, you have to be cognizant of the fact that the world is currently being run by Keynesians and make the best of the situation.

So to me, it feels like the "Animal Spirits" are starting to be rekindled again despite all the global macro issues that is still hanging like a damocles sword. But that's just the way "Animal Spirits" operate. The period from 2004 to 2007 certainly feels very normal even though we now know on hindsight that things were far from normal. But that didn't stop the "Animal Spirits" from running loose.

I feel that we are entering a similar period where everything feels normal as we see economic numbers presenting a picture of robust recovery while the global macro issues continue to simmer below the surface. This is not unlike a dormant volcano where you never know when it is going to blow again. One thing is for sure, the global economy is still a dormant volcano and not an extinct one.

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http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11424040/irish-fiscal-watchdog-criticizes-budget Thu, 27 Nov 2014 16:21:09 +0000 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11424040/irish-fiscal-watchdog-criticizes-budget <![CDATA[Irish Fiscal Watchdog Criticizes Budget]]> 11424040 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11423953/house-prices-real-prices-and-pricetorent-ratio-in-september Thu, 27 Nov 2014 16:10:28 +0000 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11423953/house-prices-real-prices-and-pricetorent-ratio-in-september <![CDATA[House Prices: Real Prices and Price-to-Rent Ratio in September]]> The expected slowdown in year-over-year price increases is ongoing. In November 2013, the Comp 20 index was up 13.8% year-over-year (YoY). Now the index is only up 4.9% YoY. This is the smallest YoY increase since October 2012 (the National index was up 10.9% YoY in October 2013, is now up 4.8% - also the slowest YoY increase since October 2012.

Looking forward, I expect the indexes to slow further on a YoY basis, however: 1) I don't expect the indexes to turn negative YoY (in 2015) , and 2) I think most of the slowdown on a YoY basis is now behind us.

This slowdown was expected by several key analysts, and I think it is good news.  As Zillow chief economist Stan Humphries said today:
“The days of double-digit home value appreciation continue to rapidly fade away as more inventory comes on line, and the market is becoming more balanced between buyers and sellers,” said Zillow Chief Economist Dr. Stan Humphries. “Like a perfectly prepared Thanksgiving turkey, it’s important for things to cool off a bit in the housing market, because too-fast appreciation risks burning both buyers and sellers. In this more sedate environment, buyers can take more time to find the right deal for them, and sellers can rest assured they won’t be left without a seat at the table when they turn around and become buyers. This slowdown is a critical step on the road back to a normal housing market, and as we approach the end of 2014, the housing market has plenty to be thankful for.”
emphasis added
In the earlier post, I graphed nominal house prices, but it is also important to look at prices in real terms (inflation adjusted).  Case-Shiller, CoreLogic and others report nominal house prices.  As an example, if a house price was $200,000 in January 2000, the price would be close to $278,600 today adjusted for inflation (39%).  That is why the second graph below is important - this shows "real" prices (adjusted for inflation).

Another point on real prices: In the Case-Shiller release this morning, the National Index was reported as being 10.4% below the bubble peak.   However, in real terms, the National index is still about 25% below the bubble peak.

Nominal House Prices

Nominal House PricesThe first graph shows the monthly Case-Shiller National Index SA, the monthly Case-Shiller Composite 20 SA, and the CoreLogic House Price Indexes (through July) in nominal terms as reported.

In nominal terms, the Case-Shiller National index (SA) is back to March 2005 levels, and the Case-Shiller Composite 20 Index (SA) is back to October 2004 levels, and the CoreLogic index (NSA) is back to February 2005.

Real House Prices

Real House PricesThe second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices.

In real terms, the National index is back to September 2002 levels, the Composite 20 index is back to June 2002, and the CoreLogic index back to March 2003.

In real terms, house prices are back to early '00s levels.

Price-to-Rent

In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS.

Price-to-Rent RatioHere is a similar graph using the Case-Shiller National, Composite 20 and CoreLogic House Price Indexes.

This graph shows the price to rent ratio (January 1998 = 1.0).

On a price-to-rent basis, the Case-Shiller National index is back to February 2003 levels, the Composite 20 index is back to September 2002 levels, and the CoreLogic index is back to May 2003.

In real terms, and as a price-to-rent ratio, prices are mostly back to early 2000 levels - and maybe moving a little sideways now.

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http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11423896/house-prices-real-prices-and-pricetorent-ratio-in-september Thu, 27 Nov 2014 16:08:59 +0000 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11423896/house-prices-real-prices-and-pricetorent-ratio-in-september <![CDATA[House Prices: Real Prices and Price-to-Rent Ratio in September]]> The expected slowdown in year-over-year price increases is ongoing. In November 2013, the Comp 20 index was up 13.8% year-over-year (YoY). Now the index is only up 4.9% YoY. This is the smallest YoY increase since October 2012 (the National index was up 10.9% YoY in October 2013, is now up 4.8% - also the slowest YoY increase since October 2012.

Looking forward, I expect the indexes to slow further on a YoY basis, however: 1) I don't expect the indexes to turn negative YoY (in 2015) , and 2) I think most of the slowdown on a YoY basis is now behind us.

This slowdown was expected by several key analysts, and I think it is good news.  As Zillow chief economist Stan Humphries said today:
“The days of double-digit home value appreciation continue to rapidly fade away as more inventory comes on line, and the market is becoming more balanced between buyers and sellers,” said Zillow Chief Economist Dr. Stan Humphries. “Like a perfectly prepared Thanksgiving turkey, it’s important for things to cool off a bit in the housing market, because too-fast appreciation risks burning both buyers and sellers. In this more sedate environment, buyers can take more time to find the right deal for them, and sellers can rest assured they won’t be left without a seat at the table when they turn around and become buyers. This slowdown is a critical step on the road back to a normal housing market, and as we approach the end of 2014, the housing market has plenty to be thankful for.”
emphasis added
In the earlier post, I graphed nominal house prices, but it is also important to look at prices in real terms (inflation adjusted).  Case-Shiller, CoreLogic and others report nominal house prices.  As an example, if a house price was $200,000 in January 2000, the price would be close to $278,600 today adjusted for inflation (39%).  That is why the second graph below is important - this shows "real" prices (adjusted for inflation).

Another point on real prices: In the Case-Shiller release this morning, the National Index was reported as being 10.4% below the bubble peak.   However, in real terms, the National index is still about 25% below the bubble peak.

Nominal House Prices

Nominal House PricesThe first graph shows the monthly Case-Shiller National Index SA, the monthly Case-Shiller Composite 20 SA, and the CoreLogic House Price Indexes (through July) in nominal terms as reported.

In nominal terms, the Case-Shiller National index (SA) is back to March 2005 levels, and the Case-Shiller Composite 20 Index (SA) is back to October 2004 levels, and the CoreLogic index (NSA) is back to February 2005.

Real House Prices

Real House PricesThe second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices.

In real terms, the National index is back to September 2002 levels, the Composite 20 index is back to June 2002, and the CoreLogic index back to March 2003.

In real terms, house prices are back to early '00s levels.

Price-to-Rent

In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS.

Price-to-Rent RatioHere is a similar graph using the Case-Shiller National, Composite 20 and CoreLogic House Price Indexes.

This graph shows the price to rent ratio (January 1998 = 1.0).

On a price-to-rent basis, the Case-Shiller National index is back to February 2003 levels, the Composite 20 index is back to September 2002 levels, and the CoreLogic index is back to May 2003.

In real terms, and as a price-to-rent ratio, prices are mostly back to early 2000 levels - and maybe moving a little sideways now.

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http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11422998/conservatives-will-hate-this-proof-that-government-spending-cuts-hurt-economic-growth Thu, 27 Nov 2014 13:41:51 +0000 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11422998/conservatives-will-hate-this-proof-that-government-spending-cuts-hurt-economic-growth <![CDATA[Conservatives Will Hate This: Proof That Government Spending Cuts Hurt Economic Growth]]> nightfire

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http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11419622/mystery-of-the-unexpected-explained-japan-slides-into-recession-yet-again-blue-ribbon-panel-in-review Wed, 19 Nov 2014 12:42:10 +0000 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11419622/mystery-of-the-unexpected-explained-japan-slides-into-recession-yet-again-blue-ribbon-panel-in-review <![CDATA["Mystery of the Unexpected" Explained; Japan Slides Into Recession Yet Again; Blue Ribbon Panel in Review]]>
Unadjusted for price changes, the Japanese economy contracted an annualized 3 percent, the Cabinet Office said.

None of this was "expected". We will explore "why" in a moment. First consider some headlines.

Bloomberg: Japan Unexpectedly Enters Recession as Abe Weighs Tax.

Wall Street Journal: Japan Falls Into Recession. GDP Declines 1.6%, Setting Stage for Delay in [Another] Sales-Tax Increase.

Time: Japan Sinks Into Recession (Again).

Time Reports ...

An unexpected contraction in quarterly GDP shows that Prime Minister Shinzo Abe’s radical economic program is badly broken. GDP in the quarter ended September shrank by an annualized 1.6% — far, far worse than the consensus forecasts. That followed a disastrous 7.3% contraction in the previous quarter. Speculation in Japan is that the bad results will push Abe to call a snap election only two years after taking office.

Financial Times: Sales Tax Tips Japan Back Into Recession

Financial Times Reports ...
Japan is poised for a snap election after its economy tipped into a technical recession, increasing the odds that prime minister Shinzo Abe will delay plans to raise the country’s sales tax next year and appeal for a fresh mandate.

Monday’s preliminary data for the period between July and September was far worse than markets expected, showing the economy shrank 1.6 per cent quarter-on-quarter on an annualised basis. Analysts had expected growth of 2.2 per cent.

The dip is a blow for “Abenomics”, the most ambitious attempt to revive Japan’s economy since it fell into stagnation two decades ago.
Expectation vs. Reality

  1. Expectation: Last quarter's huge plunge was a one-time affair.
  2. Expectation: 2.2% growth this quarter.

Instead, Japan's economy shrank 1.6% and last quarter was revised lower from negative 7.1% to negative 7.3%.

Blue Ribbon Panel in Review

Flashback August 31, 2013: Japan Seeks to Hike Taxes then Waste Money on Stimulus to Make Up for Decline in Spending.

My comment: "When you cherry pick a panel, and the panel has a pre-determined outcome, the answer always comes out the way you expect. Thus Abe's blue ribbon panel concluded tax hikes won't hurt. And for good measure, if by some chance they do, the panel suggested wasting those tax dollars on stimulus. Good grief!"

Flashback April 30, 2014: Japan Output and New Orders Decline at Fastest Pace Since 2012; Abenomics in Review

My Comment: "Abenomics said Japanese stimulus efforts would offset tax hikes. I disagreed. Although one month is not proof, Markit reports Japanese Output and New Orders Decline For First Time in 14 Months Following Tax Hike."

Flashback September 8, 2014: Japanese Economy Contracts Bigger than Expected 7.1% in 2nd Quarter; Really Bad Theories

My Comment: "By now it should be pretty clear that Abenomics is a complete failure. Abenomics did not spur lending, investment, hiring, or wage growth. It's one touted 'success' is that prices have gone up. And for cash-strapped consumers facing higher taxes, that alleged "success" is actually a disaster."

In September, I also commented on "really bad theories".
Really Bad Theories

"Theoretically, there should be no impact from the consumption tax increase on corporate spending or long-term corporate planning, but a large number of Japanese corporations seemed to see a large impact from the hike on final demand," said Junko Nishioka, an economist at RBS Japan Securities in Tokyo.

Good grief. Nishioka has theories, but they are as sound as a home foundation in a swamp. Here's an easy to understand explanation.

Eight Point Explanation

  1. Japan's sales tax increased from 5% to 8%.
  2. Wages did not go up.
  3. Consumers have 3% less money to spend.
  4. Consumers with less money, spend less.
  5. Businesses faced with a slowdown in consumer spending reduce future plans.
  6. Abe plans to hike the sales tax again and businesses know that as well.
  7. Business sentiment sours.
  8. Japanese demographics are such that businesses already have substantial worries.

What is it about those eight points that economist Nishioka fails to understand?
Mystery Explained

Why all of this is so "unexpected" is an apparent mystery. Sales tax hikes do not spur the economy, no matter how much of it government wastes. And it should not take a genius or an 8-point synopsis to figure that out.

So why was this news so "unexpected" in nearly every quarter? I have two answers.

  1. Economists are the most optimistic lot on the planet. They believe what they want to believe.
  2. The average economist also believes in Monetarist and Keynesian fairy tales.

Japan is living proof of the absolute stupidity of Abenomics (a combination of Keynesian and Monetarist stupidity), yet academia, let by economist Paul Krugman concludes "Japan did not do enough".

Apparently, debt to the tune of 250% of GDP fighting deflation was not enough. 500% would not have been enough either, for obvious reasons.

But don't expect any Keynesian or Monetarist clowns to admit that. They will never stop believing in fairy tales.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com]]>
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