Posts Tagged ‘inflation’

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how are GDP numbers calculated?

Wednesday 24 September, 2008

As a recovering economist, I read with interest this article by Ellen Simon in the Chicago Tribune Economists not buying revised GDP. The main premise is that the means to acquire this data is underfunded, which leads to inaccuracies & wild swings in the data as revisions come out.

How national economies are valued has changed over time, from when Gross National Product (GNP) was revised to become Gross Domestic Product (GDP) to reflect changes in services & imports/exports.  Economics is riddled with assumptions, so I don’t think that’s really the issue.  I don’t know how “foreign inflation” is different from domestic inflation.  Using deflators to adjust inflation from nominal into real GDP is a time-tested practice.  Who calculates them & how could be an issue.  Otherwise, I don’t buy these arguments.

What’s important is the integrity of these numbers.  I wouldn’t be surprised if economic numbers are being manipulated for political gain, i.e. revised upward so that the current party retains its hold on the presidency. I’m not sure how separate the powers that be are here.  My assumption is that although the Secretary of Commerce sits on the cabinet, the Commerce Department reports to Congress.  These statistics have to be calculated at arms length, far from the influence of politicians.  Given the current administration’s penchant for trying to change anything/everything it can for its own political gain, whatever they might have done to skew numbers in their favor wouldn’t surprise me.

The United States is known to have the most open & transparent reporting practices in the world.  In many of the other developed economies of the world, financial statements are offered in terms of active vs. passive income, etc.  (I can’t even comprehend how accurate or inaccurate numbers for developing economies may be.)  This is a big part of the reason the US has the biggest & most dynamic financial markets.  The more that’s reported, the less perceived risk there is, the safer people feel in investing in companies that report more.  I understand the US Financial Accounting Standards Board (FASB) is considering changing financial reporting requirements to adhere more to international standards than US standards, in other words, to report less rather than more.  My main point is:  If we can’t trust numbers provided by the US government, whose can we trust?

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sinking global funds

Tuesday 29 July, 2008

I read this article by Gail MarksJarvis of the Tribune Global funds no longer make world go round

Apparently the local economies of the world are linked after all. It has been speculated recently that the rest of the world had been decoupled from the American economy so that the rest of the world would continue to grow while Americans suffer from the aftereffects of the real estate financing fiasco. This article indicates that we are dragging the rest of the world down with us. In a sense the escalation in world oil prices affect US consumers more than anyplace else because gasoline is taxed less than anywhere else in the world, & thus our retail price reflects the fluctuations in the market more than elsewhere, i.e. we notice more of a difference when the price goes from $3 to $4/gallon (33% increase) than when a more highly taxed European sees petroleum go from $8 to $9/gallon (12 1/2% increase).

The role of foreign investors participating in the global stock markets has increased as well. My impression is newcomers saw these markets as ever increasing, without recognizing that they’re roller coasters. It looks like investors are retreating to supposed safe havens in this time of uncertainty & those markets which are benefiting from demand for raw materials.

I think in many ways, inflation is a greater risk in countries where it’s been commonly accepted, such as Latin America. It will be a real test to keep inflation under control in countries like those. Inflation in staples like food can be political hot potatoes. Talk of a commodity bubble is worrisome. It’s safe to say a lot of the internet bubble money went into real estate. Now that that bubble has burst, I’m wondering where it will go. Has it gone into commodities to fuel emerging economies growth? I question whether most investors have been that sophisticated.

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should we worry about the US$ exchange rate?

Thursday 26 April, 2007

Bill Barnhart

Inflation pushing U.S. dollar into foreign territory

Published April 18, 2007

The dollar reached a dubious milestone Tuesday, as a British pound bought more than $2 for the first time in nearly 15 years.

That means you’ll probably hear more British accents in downtown Chicago this summer. Combined with dollar weakness against the euro, it’s too bad for Chicago’s tourism industry that the Olympics won’t be staged here this year.

U.S. investors who hold international mutual funds can count themselves among the winners. Stronger foreign currencies buy more dollar-based investment returns. The iShares United Kingdom exchange-traded fund, for example, is up 7.4 percent this year, compared with a 4.2 percent gain for the iShares S&P 500 index.

 

mm comment: personally I think buying mutual funds based on currency plays is risky business. My preference would be to find a fund that fits what you’re seeking & if you can benefit from currency appreciation, all the better as a bonus.

 

Amid uniformly benign financial conditions around the world, traders seeking an edge accentuate every difference between investment factors. On Tuesday, the spotlight fell on inflation; in particular, on the inflation comparison between the United States and Great Britain.

Here, the Labor Department reported that so-called core inflation, not counting food and energy prices, eased last month from strong showings in January and February. On an annual basis, the U.S. consumer price index, including food and energy, is climbing at about a 2.8 percent rate, well below the 3.4 percent rate of a year ago.

Across the pond, the latest British inflation report shows a 3.1 percent rate, the steepest inflation there in 10 years. Inflation comparisons such as these help convince analysts that the Bank of England is more likely to raise interest rates than the U.S. Federal Reserve. Higher rates attract traders into a currency.

 

mm comment: Again, basing currency buys based on inflation, even core inflation, seems flawed. High inflation leads to higher interest rates, leads to higher borrowing costs, leads to less investment, which results in lower economic returns. Currencies are ultimately based on the performance of a whole economy, not just 1 of its components.

 

But it is easy to overstate comparisons of routine economic data, which can fluctuate day by day. International Monetary Fund statistics indicate that inflation is under control in all major countries.

Here are a few examples. Inflation in Australia declined to an estimated 2.8 percent this year from 4.5 percent in 2000. Inflation in Ireland eased to an estimated 2.4 percent this year from 5.2 percent in 2000. IMF forecasts for 2008 show inflation edging higher in several countries, including the United States, but there is no sign of serious inflation anywhere among the world’s major trading partners.

The persistent weakness of the dollar must reflect something else. John Brady, senior vice president at Man Financial, said the principal difference is economic growth.

“We are in a global deflationary environment, and because the U.S. imports so much, especially in terms of labor costs, the trend is being maintained,” he said.

Wage inflation is absent in most of the world, he said. On the other hand, “the tone and structure of European growth is impressive,” he said.

Brady said petrodollars from the Middle East are being recycled to Europe and Britain, not to the U.S.

“Some of that may be a political statement; some of it may not be,” he said. But “that explains the strength of their currencies and helps explain the differentials in interest rates.”

The money supply is booming in Europe, Brady said.

“You’re seeing a lot more investment going into Europe,” he said. “The European money supply figures have shown tremendous velocity.”