More Old News

Blogging has been slow lately. Just haven't been feeling it. I've been busy, too, but not that busy. There has been a lot of good reading over at Eternity Road. But then, there always is. Today's post by Fran, which is excellent as usual, has me slightly regretting the wording of my post from a few days back. *Sigh*. Whenever one begins to talk or write about other nations, whether politics or economics or what-have-you, one runs into this sort of sticky thought-goo, which usually turns out to be verbal-goo more than anything, at least in my experience. Honest listeners generally know what you are talking about and what you mean, apart from whatever word choice one happens to end up using, however poor. I certainly would not subscribe to the belief that all members of a group are the same. At the same time, one would be completely dishonest to say that there weren't any such thing as trends within groups. And certainly, each person deserves an individual "hearing," and ought not be tried and sentenced purely as a member of a group. But likewise, we must deal with statistical aggregates as a practical matter, especially when it comes to things like national policy, whether economic or political. Every state, let alone every American, cannot have his own individual foreign policy, and most economic forces, like supply and demand, are the net result of mass-action. They are perfectly valid characterizations, outliers or not. Keeping our heads about ourselves as we make the leap from characterizations of individuals to characterizations of statistical aggregates can be demanding. On the other hand, I find it a little absurd that one must begin any piece which addresses another group with a legal disclaimer recognizing individual variability. The idea of individualism is supposed to be axiomatic to us as Americans. Most people get this, except for a whiny few who are always looking for something that will give them an excuse to take offense. (Incidentally, having married a Chinese wife and living day to day amongst a great number of various Latin Americans, I find that it is Americans who are the hypersensitive ones on this topic. Most other folks seem perfectly comfortable with generalizing statements, and understand perfectly clearly that there are exceptions. Maybe we should take a lesson from them and lighten up.) So, I think I will continue to be verbally lazy as a matter of principal. Clearly, when referring to "Japan" or "the Chinese" or other such with respect to economic policy or mass-action, I am referring either directly to the folks in charge of said policy or responsible for said action, or to the statistical aggregate, not making sweeping generalizations about every single individual of said nationality. And since I've heard that it is considered a blogging faux pas to alter or remove a post once it has been posted for such reasons, I shall leave the previous post as it stands, and leave this topic once and for all. Hopefully. Probably not. And speaking of statistical aggregates, we have a story today about our own Timothy Geithner preparing for a trip to China:

Beneath the usual diplomatic niceties, there is likely to be some real friction as U.S. Treasury Secretary Timothy Geithner meets top Chinese officials in Beijing early next week. Premier Wen Jiabao and vice premier Wang Qishan are worried that Washington’s profligate spending policies will lead to inflation and dilute the value of China’s more than $1 trillion in U.S. assets—a concern they will certainly bring up. Beijing too is increasingly pushing for a larger international role for its currency the renminbi, which would by necessity weaken the leading global role the U.S. dollar now plays. In March central bank governor Zhou Xiaochuan called for a new “super-sovereign reserve currency” to replace the dollar. That was followed by a series of currency swap agreements signed between China and some of its trading partners including Malaysia, South Korea and Argentina.

All of this is old hat. It is funny to read the same story over and over, as if it is new every time. Why do these guys have these meetings? Everyone knows his own and everybody else's position and agenda. This isn't poker. On top of that, nothing has changed in 20 years. It is equally obvious what everyone is going to do: exactly what is in his own interest, everything else be damned. The "non-aggregate Chinese individuals responsible for Chinese economic policy," e.g., the Chinese knew this just as well as the "non-aggregate American politicians and FED chairmen," e.g. the Americans back when they decided to consumate this sick economic relationship. This is the perfectly predictable outcome of mercantilism coupled with debt fueled consumption. They knew the day of reckoning would come, and what their own actions and the actions of their counterparts would be when the time came. All of this has been set in stone for quite some time. There really is nothing to discuss. This is one of those stories that simply tells us what we already know and is not worth reading. Assuming we are economically literate. Why did I post on it? I don't know...

Wifey to Me: "I Wanna Wii"

My wife just asked for a Wii for our 5 year anniversary. Yes, a Wii. You can't make this stuff up. Read that again: my wife ASKED for a video game system for her anniversary present. This is incontrovertible evidence that I somehow managed to pick the best woman in the world to marry.

Lots of Topics for Today

First, in the first quarter, Japan's GDP contracted at a 15% annualized pace:

TOKYO (AP) — Japan's economy shrank at a record 15.2 percent annual pace in the first quarter, dragged down by plunging exports, thinner factory output and wary shoppers.

But within the details emerged new hope. Economists said the worst is over for the world's second-largest economy. Many predicted it would grow in the April-June period amid aggressive stimulus steps by the government and signs that companies are boosting production.

"I think the economy has passed the bottom, and the recovery has begun in the current quarter," said Richard Jerram, chief economist at Macquarie Capital Securities in Tokyo.

Government data released Wednesday confirmed what many had been dreading yet expecting. The drop in gross domestic product was the steepest since Japan began compiling such statistics in 1955. Compared to the previous three months, GDP fell 4 percent, in the fourth straight quarter that the economy withered.

This is tremendous, though not unexpected. Japan is a major exporter of goods and an inveterate mercantilist. This is what happens to mercantilists during downturns. I imagine China is in nearly as bad shape, but they are also inveterate liars to boot and I wouldn't trust any numbers coming out of that place. Next, pensions look to be in a wee bit of trouble:

The agency (the Pension Benefit Guarantee Corp. SA), which insures traditional corporate pensions, said Wednesday it had a $33.5 billion deficit for the first half of fiscal 2009, worsening from a $10.7 billion deficit at the end of fiscal 2008. It sees substantial underfunding in plans by automakers, auto parts and other industries.

You are not going to retire. Oh, you'll get your monthly check in the mail, along with your Social Security check, just as you were promised. It might even buy you a Big Mac for the first few years. But if you'd like to do things like eat regularly and sleep indoors, you're going to have to work for it. The government hamster-wheel you're in is just going to speed up, until the day you croak and the government has no more use for your broken, lifeless body. Unless there's a war first. Then you'll probably be exterminated. And, just in case you thought you were prepared, the FED says it is going to get worse:

NEW YORK (CNNMoney.com) -- The Federal Reserve's latest forecasts for the U.S. economy are gloomier than the ones released three months earlier, with an expectation for higher unemployment and a steeper drop in economic activity.

The Fed's forecasts, released as part of the minutes from its April meeting, show that its staff now expects the unemployment rate to rise to between 9.2% and 9.6% this year. The central bank had forecast in January that the jobless rate would be in a range of 8.5% to 8.8%, but the unemployment rate topped that in April, hitting 8.9%.

The Fed also now expects the gross domestic product, the broadest measure of the nation's economic activity, to post a drop of between 1.3% and 2% this year. It had previously expected only a 0.5% to 1.3% decline.

It'll be worse than that, mind you. And of course it is the FED's fault. The solution?

The Fed disclosed plans to begin buying $300 billion's worth of such Treasurys in March in order to try and keep long-term rates down and boost economic activity.

Why, print more money of course! It worked so well to get us into this jam, surely it'll get us out of it. And I assure you, it will be far more than a measly $300 billion. Trillions. Quadrillions, maybe. This one is courtesy of Mackay:

BEIJING (Reuters) - China has engineered a subtle yet significant shift in the investment of its foreign exchange reserves, a sign of how it is willing to act on concerns about financing an explosion of U.S. debt.

Beijing has been far and away the single biggest foreign buyer of Treasuries over the past year, but this apparent vote of confidence belies how it has turned its back on long-term U.S. debt in favor of shorter maturities.

China's move to the shorter end of the U.S. debt spectrum is a defensive tactic adopted by the wider market as well on the view that the United States will have to raise interest rates down the road to control inflationary pressures when the economy recovers from the financial crisis.

I've have blogged on this topic over and over again. I grow weary. China is beginning to take steps to transition out of Treasuries and dollars and into commodities. An excellent summary of their likely strategy can be had here, though I disagree that the Chinese are the sharpest knives in the drawer. After all, they did get themselves into this jam; and if they were that smart, they'd have taken over the world already. I suppose one could argue, though, that the rest of the drawer has gotten duller, and that they have become sharpest by default. At any rate, they will still lose money, but not nearly as much. They appear to be planning on foisting most of their losses onto the idiots who are either accepting Treasuries as collateral or are outright trading for them. As the author suggests, these are probably bankers, who we will no doubt be bailing out with printed money once again. I would note with some irony the inverse relationship between the Chinese and the bullion banks, who have borrowed most of the West's gold and sold it into the market, a lot of it for "interest bearing" instruments like Treasuries. After all, these really smart guys know that gold doesn't pay interest like a bond does, so they stand to make a lot of money, right? So they cleverly borrowed the gold decades ago and sold it at $50-$200/oz, bought Treasuries, and now owe all that gold at ~$900/oz and rising. You didn't really think all that gold was still in Fort Knox gathering dust, did you? And I wonder who's going to be eating that loss? Surely, it isn't the Chinese... (Incidentally, I forgot to include this in my analysis some time ago of the ability of the FED to contract the monetary base. Actually, if they demanded all the gold back to sell, the bullion banks would be forced into bankruptcy. The FED could never collect, so effectively, that gold is no longer backing the currency at all! I suppose even Austrians like me screw up now and again. OK, a lot actually...) Finally, since it has proven such a disaster for Europe, the Middle East has been looking to create a unified currency, but it appears that the UAE pulled out at the last minute:

The United Arab Emirates said Wednesday it won't join a plan to unite the Gulf's currencies, dealing a serious blow to what was seen as a step toward greater economic integration in the oil-rich region.

The official Emirates news agency quoted an unidentified foreign ministry official saying his country has informed the six-nation Gulf Cooperation Council of its decision Wednesday. The government often announces official policy changes through the news agency, WAM.

Like the rest of the world, the Arabs grow suspicious of US cheating on its payments through inflation. Oil is priced in dollars, and this puts them, as sellers of oil, at the monetary whims of US policy. With their own currency, they could demand dollars be converted to whatever units they issue, allowing more open bidding for their "wares." This, of course, hurts American interests. Fortunately for the lying, cheating Americans, Arab governments are even less trustworthy. I can't imagine what central banking policy would be like governed by a committee of these, well, characters. One might become suspicious of this act as a sign of growing Arab unity. However, I have a feeling that with the collapse of the dollar out of the way, and the decline of their collective "rival," the Great Satan, it is more likely to lead to rivalry and bickering over proper monetary policy. This is certainly what has happened in Europe. I doubt that the Arab/Muslim world will ever be able to unite. They just hate one another too much. It won't help that the economies of their customers have collapsed, and they have no domestic economies to speak of. I have a feeling there will be a lot of gnashing of teeth in the region. Populations there have expanded dramatically, but they are dependent on the economies of the outside world. Global shutdown could really put the hurt on. On the other hand, commodity prices as a whole, and oil prices in particular, are likely to stay very, very high, as this is where the inflated money supplies of the nations of the world will flock towards once things really get going. So they may be the richest kids on the block, though it will still be a poorer block. But what do I know... Crazy times, they are a-comin'.

What's That Popping Sound I Hear?

Could it be the end of the education bubble?

Stanford University’s president said the school will have to cut costs and delay building projects amid a “financial shock wave.”

John Hennessy told alumni via email that Stanford plans to cut its $800 million general funds budget — which pays for most faculty and staff salaries, administrative costs and non-research expenses — by 10 to 12 percent over the next few years.

So far, most of this is the result of a major hit to the endowment, which has gone down the tubes much like most any other investment would have these days. But I'd bet schools begin to feel the pinch with tuition soon, too, as fewer people will be willing to go into debt and fork over big bucks to get into a contracting job market. As much is hinted:

Tuition cannot be raised significantly, Hennessy said, “out of fairness to our students and their families.”

Or, more likely, because it will hurt enrollment. The education bubble has been fed by major government subsidies just like the housing market was through GSE's like Sally Mae. Like the housing market, this has been going on for a long time. Expect something similar to what we have seen in housing in higher education.

A Wee Bit of Inflation... or Harbinger of Doom?

CPI numbers came out on Friday:

Tame CPI Eases Deflation Fears Consumer prices were flat in April, "welcome" news to analysts, but core prices posted a larger-than-expected increase

Deflation worries may have receded a bit with the release of the Consumer Price Index numbers for April. The seasonally adjusted CPI for all urban consumers was flat in April, after falling 0.1% in March, the Labor Dept. reported on May 15. The unadjusted CPI was down 0.7% over the last 12 months, primarily due to a large drop in energy prices.

The year-over-year declines in the CPI are the first since 1955, the Labor Dept. said. However, the core CPI—which excludes volatile fuel and energy prices—rose 0.3% after a 0.2% rise in March, slighter higher than the 0.1% analysts expected.

Why in the world am I posting about such a tiny increase in CPI? Obviously, because I think it is important. The FED has a two-part mission statement: to maintain a "stable price level" and "full employment," which is, to be blunt, a fanciful economic turd wrapped in a nice, pretty-sounding package, delivered to the American public courtesy of the intellectual black-hole of Keynesian economics. Call it "mission impossible." The massive expansion of the AMB which has come about as a result of the FED's asset purchasing frenzy and the "lowering of rates"/printing of money has been justified by the notion that, thanks to the economic slowdown, the FED can safely "inject liquidity" (e.g. do all the nasty, dishonest things just mentioned) without fear of inflation. Thus, it can safely cover the posteriors of the banking community without fear of its money-printing spilling over into price inflation because of the pullback in consumption and increased rate of savings by the public. Not to mention increasing unemployment cutting down on the amount of money in the average wage-earner's wallet and the risk of job-loss putting a hurt on the average American's willingness to go out and blow his entire paycheck at the mall. In fact, fear of "deflation" (i.e., falling prices, not a contraction of the money supply) has prompted some to call for expansion solely for the purpose of "keeping prices stable." Not to mention the whole full-employment angle. This is all wrongheaded, of course, but so far the FED has gotten away with this policy and the theory looks sound, at least to the public and brain-dead media's level of scrutiny. The crisis is blamed on the financial community, not policies like these, and the fact that prices have not so far risen seems to validate the FED's position. But of course, like the public, the FED and its Keynesian bureaucrats are utterly myopic, and the disasters awaiting us as a result of these policies a few months or years down the road have not yet occured to them. Or at least, they are not a priority as yet, as a few months or a few years are still a few months or a few years away, and politics is all about today. However, the laws of the universe will not be denied. Their theories are unsound, and this bit of inflation could be the first hint that they are wrong. To a central banker, price inflation says "raise rates! sell assets! tighten the money supply!" High unemployment/recession says "lower rates! buy assets! loosen monetary policy!" In late 2007/early 2008, back when housing and oil prices were skyrocketing and equity prices were still relatively stable, the FED was receiving the first set of signals. Since then, the FED has been receiving the second set of signals. And it has obliged wholeheartedly. According to the Keynesians, it should not receive the first set of signals again until recovery has taken hold. But if this uptick in inflation is any indication, and if Austrian theory, not Keynesian theory, is correct, the FED will soon be receiving red hot signals from both directions, precisely because Keynesian theory is wrong and the FED has taken on the impossible! What is a central banker to do? It will face a stark and uncompromising choice: massive inflation, or severe recession. Period. The market is whispering to the FED "Your policies are wrong. Raise rates and sell assets, or face the imminent destruction of your currency." Right now, it is only a whisper, and the message is readily muffled and ignored by those who would rather hear otherwise. Soon, however, it will be screaming this message loud and clear. But the body politic is already screaming "I'm in pain! Don't do it to me! I just can't take it right now!" If unemployment rates are any indication, it will be for some time. To whom will the FED listen? Who has its ear? The economy could well go down two very different paths, and the outcome all depends on the actions of a select few bureaucrats. How are we to plan our lives and investments? Unfortunately, we can't know. That's the beauty of a central bank to a despotic government; the future hinges on the whims of a powerful, unaccountable few. The choices they make will create enormous winners and losers depending on the financial positions we have taken. They make or break us all. It is not us against the world, it is us against them. We are betting on the minds of men, not an impartial economy. They are "the deciders." My guess: the body politic will have its way. There will be zigs and zags, but history tells us that this is the pattern: eventual inflationary destruction of a fiat currency. This is what the public always chooses in the long run. And in the long run, it prevails. Expect inflation, and lots of it.

Just In Case Anybody Is Interested...

Here is a labeled graph of predicted per-capita GDP vs. actual data: (click on the picture to enlarge) It is also added to the original post.

Yet Another I-Told-You-So

The headline says it all:

OIL FUTURES: Crude Ends Higher Despite Weak Demand Forecast

NEW YORK (Dow Jones)--Crude oil futures ended higher after a last-minute rally fueled by rising equities.

Futures had spent most of the day in negative territory, after the International Energy Agency cut its 2009 oil demand forecast and said there is little chance of a quick recovery.

Well of course oil prices are rising oblivious to demand forecasts. What the heck is supposed to happen when the FED is printing money hand over fist? You didn't actually think prices would fall, did you? Beware oil, that one. It'll be the end of us...

Yet Another Abysmally Stupid Idea From GM

Importing cars from China? That's the rumor:

As thousands of General Motors workers await word on more U.S. plant closures, reports that the company plans to import Chinese-made vehicles to the U.S. have created a political problem for the automaker and the White House.

The reports, which GM will neither confirm nor deny, could mean trouble because GM is supported by $15.4 billion in U.S. government loans, largely due to the Obama administration's desire to preserve the company's 90,000 U.S. jobs.

The United Auto Workers charged last week that the Detroit automaker intends to almost double over the next five years the number of vehicles it imports to the U.S. from Mexico, South Korea, China and Japan.

"GM should not be taking taxpayers' money simply to finance the outsourcing of jobs to other countries," Alan Reuther, the union's Washington lobbyist, wrote in a letter to U.S. lawmakers.

These auto companies are utterly clueless. I happened to pick this example, but the others are doing the same thing. Who in their right mind thinks that the US will be importing cars from overseas in the future, let alone China? Years ago, Japanese car manufacturers found that it was cheaper to produce their cars here in the US than to continue shipping them from Japan. Now Honda's and Nissan's and such are produced here in the USA. Why? Japan became a wealthy nation, and it didn't make sense to employ its citizens to make cars to ship overseas. The profit wasn't there. America is about to become a poorer nation. The wage differential will greatly diminish. On top of that, shipping costs will no doubt rise as energy prices increase over time. Its going to become an expensive proposition to ship things all over the globe, especially heavy, unwieldy objects like cars. Every other industry outsourced throughout the last two decades to take advantage of lower wages abroad, cheap oil, and Asian mercantilism, let's not forget. Now they are finding their cost advantages evaporating. This trend is likely to continue as the US dollar loses its advantages over foreign currencies, particularly the Asian currencies, which even now are enormously undervalued thanks to years of mercantilist policies and increased productivity. As outsourcing is finally beginning to unwind, the big three auto companies now think its a good idea to go overseas. If they want to open a plant in China to sell to the Chinese, this is probably a reasonable thing to do. China is a growing market, and the Chinese probably won't be buying cars imported from the US. But to think that GM can sustainably produce cars in China and sell them for profit in the US is utterly foolish.

Social Insecurity

It was bound to happen:

WASHINGTON (AP) — Social Security and Medicare are fading even faster under the weight of the recession, heading for insolvency years sooner than previously expected, the government warned Tuesday.

Medicare already is paying out more money than it receives, something that happened for the first time last year. And Social Security will be by 2016, a year sooner than had been projected, the trustees' annual report said.

Unless changes in Social Security are enacted, the retirement fund will be depleted in 2037, four years sooner than projected last year. The Medicare trust fund is in even worse shape. It is projected to become insolvent in 2017, two years earlier than expected.

Don't worry, the checks will be in the mail. Your account will be filled with freshly printed money. It's a piece of cake. You don't need to worry about Social Security. You'd just better hope somebody invents printed food, printed housing and printed clothing soon...

Gerard Jackson Concurs

Gerard Jackson opines on the developing debt crisis:

If there is one institution that is in desperate need of a stress test it's the US government. On 7 May the government auctioned $14 billion of 30-year bonds. The yield was 4.28 per cent, much higher than predicted by analysts. When the result became known Treasuries immediately dropped. For those readers who are unaware of the link between bond prices and yields, when the latter rises bond prices fall. This event followed closely behind the UK's failed bond issue. It sure as hell seems that the markets are worried by these governments' financial incompetence. And so they should be.

Just as I have said. Several times actually. You're probably getting tired of hearing it... But believe me, you'll be hearing more of it, more than you ever wanted to hear. We are all about to become intimately familiar with the relationship between bond prices, interest rates, and inflation. We'll be a nation of experts! But I doubt we'll learn our lesson.

Even the Banks Think They're Going Down

You have to be a bit of a cynic to be a good investor. OK, you pretty much have to be a calculating, conniving jerk. I try to be a good investor (cue the snide remarks), and when I see a story like this, it tends to set off the hair-trigger cynic reflex I'm trying to hone:

KeyCorp, which is among 10 major U.S. banks ordered by the government to raise more capital as a buffer against future losses, joined several other banks Monday in announcing public stock offerings. The offerings put pressure on financial shares, but underscore the improving conditions in the capital markets and the increasing demand for bank stocks, which have skyrocketed in the wake of the market's massive two-month rally.

"Improving conditions in the capital markets?" Yeah, maybe... Or maybe the banks know they need to raise money, lots and lots of money, and they are trying to time their new share offerings at the highest prices they think they can get for the foreseeable future. You tell me. The analysts will tell you that this will dilute the claims of present shareholders, which will hurt the stock price in the short term, but that raising money will help the banks recover in the long term, blah, blah, blah. The banking executives have plans for restoring the banks to health, and they are just raising money to do their job for the shareholders whom they loyally serve. Or maybe they are wiley sons-a-bi**es and shareholders and sharebuyers are suckers, and the execs plan to do the same thing that Blackstone did to the Chinese sovereign wealth funds, selling them a huge chunk of the company right at the peak so they can make out like bandits while their investors take it in the teeth. Call me a cynic; I'm going with the latter. Time will tell.

Debt, Debt, Debt...

Just as I'd said, it was bound to happen:

Weak demand at a Treasury bond auction touched off worries in the stock market Thursday about the government's ability to raise funds to fight the recession.

The government had to pay greater interest than expected in a sale of 30-year Treasurys. That is worrisome to traders because it could signal that it will become harder for Washington to finance its ambitious economic recovery plans. The higher interest rates also could push up costs for borrowing in areas like mortgages.

Itoldyaso....

Interest on the debt will rise. The government won't be able to pay. Inflation is imminent.

Societal Wealth and the "Freedom Fraction:" A Brief Statistical Study of the Relationship Between per-Capita GDP and Libertarian Economic Attitudes

Introduction Every year, The Heritage Foundation publishes the Index of Economic Freedom, a ranking of all the nations of the world on the basis of economic freedom. The ranking system is fairly complex, looking at everything from monetary policy and inflation, to government expenditure as a fraction of GDP, to ease of opening a business, and everything in between. There are ten main scoring categories, each with its own subdivisions and complex evaluation systems and rules. Though some of the evaluation systems become perhaps overly sophisticated, dredging up controversies of interpretation a bit unnecessarily, nevertheless, it provides a comprehensive look at virtually every national economy across the globe, and its authors probably deserve some leeway in their methodology as they have chosen quite a formidable task. Invariably, attempts are made at statistical correlations between the freedom ratings and societal wealth, which most agree is best measured by per-capita GDP. Undoubtedly, the trend is there: the top ten most-free nations are always some of the wealthier nations of the world, and the usual suspects are always lurking at the bottom of the curve: North Korea, Burma, Cuba, and an assortment of African economic basketcases. But from a quantitative point of view, the data provide a less-than-straightforward interpretation, as a graph of the 2009 data clearly shows: Speaking as a natural scientist, this scatterplot leaves much to be desired if the notion that societal wealth is a function of economic libertarianism is to be taken more seriously than some airy, idealistic notion. A true “natural law” ought to leave a mathematically visible fingerprint, and the haphazard spray of data points generated by this survey leaves enough wiggle room for considerable doubt, especially when there is not much suggestion of a specific, theoretically reasonable, mathematical model that might be tested for fit against the data. After all, a lot of scenarios could lead to such a graph which might have little to nothing to do with economic freedom per se. On the whole, it leaves the reader not already predisposed to the libertarian point of view asking the question: is there really something to the notion that freedom makes societies wealthy, or is it more an exercise in relatively stable, well managed democratic societies that only tend to be more free wagging their fingers at geopolitical bad-boys, who have managed to land themselves in poverty simply as a result of their generally bad behavior? Am I seeing a real effect, or am I being fed some ideologically driven line? Is there really an important natural law lurking somewhere in that data, or are some overly enthusiastic libertarians straining just a little too hard to find a pattern that is just not there? The question is an important one, and without a concrete theory capable of withstanding quantitative scrutiny, the case is less than watertight and graphs like this one tend to leave a lingering shadow of doubt hanging over the libertarian's case. In this brief study, I present a statistical manipulation that may help shed some light on the matter and suggests that a somewhat different interpretation may be more appropriate, with some surprising implications. Data Normalization and the Threshold Model The writer at La Griffe du Lion has come up with a powerful method for comparison of normal distributions and teasing out mathematical relationships based on variances in these distributions, which he applies in an effort to explain a variety of social phenomena, some of them quite politically controversial. Because the normal distribution is so ubiquitous in nature, the method finds useful application across a wide range of questions. In particular, La Griffe himself addresses the relationship between IQ and per-capita GDP, finding that there is a very strong statistical case to be made that the IQ distribution of a population is the main determinant of per-capita GDP. Even more impressive, he generates a mathematical equation to describe the relationship that closely fits the observed data, which he terms the “Smart Fraction Theory.” In summary, he postulates that per-capita GDP is directly proportional to the fraction of the population which is above a certain IQ threshold. He then develops the equations necessary to describe such a phenomenon and shows that the data closely fit the predicted pattern. A more detailed description of the method and its derivation can be found here. Could something similar be going on with the data compiled by the Index of Economic Freedom? It may be that the correlation the economists are looking for isn’t necessarily proportional to the freedom score itself, but is convoluted by a similar effect of population heterogeneity. Could a similar “liberty thresholding” of societies explain the bizarre data pattern seen here? Treatment of Data Unfortunately, the data presented by the Index of Economic Freedom lack standardized, normalized descriptions of the societies they describe, or a scale similar to the IQ scale for measuring human intelligence which has a statistically well characterized distribution. Fortunately, the second hurdle can be overcome by constructing an ad-hoc scale based on the distributions of the various nations. The first must be dealt with by making a few approximations and assumptions, which is clearly suboptimal, but the assumptions are not without substantial grounding in reality. Construction of the normalized scoring scale. Looking at a histogram of national scores, we can see that the dataset produces a roughly normal distribution, skewed slightly to the right, with an average score of 60.1 and a standard deviation of 10.4. Data for a few nations were thrown out, due to either a lack of data or to manipulations in getting the per-capita GDP data to line up with scoring data. This is not expected to substantially affect results, as the deletions were not systematic and the remaining data are more than sufficient to accept or reject a pattern. Subtracting the average score from each data point and dividing by the standard deviation, we arrive at a normalized distribution: which is obviously the same graph plotted on a different scale of axes. The x-axis is plotted in units of standard deviation (SD). This transformation makes later manipulations simpler. Likewise, plotting our per-capita GDP data on the new scale gives us the same graph using units of standard deviation: Approximating Individual Populations. Using the global distribution of freedom scores, we now have a normalized scale for quantifying proclivity towards economic freedom. Unfortunately, we have no direct measurements of individual populations. However, we do have the individual nation scores, which provide some insight. If we accept that government policies are a reflection of the beliefs and attitudes of their respective populations, as various and sundry worldly political machinations do their work bringing about at least the minimal necessary harmony such that the masses are quiescent enough that the powerful get to remain so, we can make the approximation that the individual national scores provide a rough measure of the likely median score of the respective nations’ populations. On the other hand, we have virtually no knowledge of the distribution of individual attitudes within nations and their respective scoring distributions. Here, we must make a larger statistical leap. I will use the approximation that the individual distributions have the same standard deviation as the global standard deviation. This is not entirely unreasonable. The global distribution is the aggregate of these same attitudes, so it stands to reason that subpopulations should not have distributions radically different from the aggregate, otherwise they would perterb the graph. The greater is the aggregate of the lesser, and thus should reflect its properties, so the two distributions should be within the same order of magnitude. Furthermore, excessively broad divergence in attitudes within nations would be expected to lead to civil strife, dividing said nation into smaller subunits with distributions more amenable to social cohesion. On the other hand, it cannot be handily rejected that population distributions might be somewhat narrower than the global distribution. But in the absence of such information, I will stick with the original approximation, keeping in mind that both the median and standard deviation approximations are rough and adjust our expectations of the precision of this study to reflect this. Determining the Threshold and Calculating the Approximation Curve The equation we will be fitting to the data takes the form

Per-Capita GDP = cf + d

where c is a proportionality constant (measured in dollars), f is the “freedom fraction,” the fraction of the population with freedom scores that exceed a specified threshold, and d is another constant representing baseline GDP in the absence of any “freedom fraction” at all, expected to be close to zero. Unfortunately, we do not know that threshold a priori, so we will try a number of thresholds to find best fit to the data. Using the Excel worksheetfunction NORMDIST calculates the integral of a normal distribution below a threshold expressed in standard deviations. The “freedom fraction” would therefore be the remainder of the curve, the region above the threshold, or the quantity returned by the NORMDIST calculation subtracted from one. The equation looks like this:

freedom fraction = 1-NORMDIST(threshold, median population score, SD of population, TRUE)

since we have normalized the national scores already, threshold and median scores are expressed in units of standard deviation (SD), and the standard deviation is by definition one, since the scores are normalized. The TRUE argument ensures that the function returns the integral, not the center of mass, and is just an artifact of Excel. Plotting “freedom fractions” vs. per-capita GDP with a range of thresholds generates the following series of graphs: Plotting per-capita GDP versus freedom fraction appears to linearize the scatterplot quite nicely, particularly for threshold values in the range of 1.0, giving an R2 vale of .54. While the data is still clearly scattered, the fact that it has been linearized suggests that our proposed equation, GDP = cf + d is a reasonably good mathematical approximation of a curve that would describe the pattern of the points in the original scatterplot. Using the linear equation of the trendline generated by Excel, we can extract our two constants c and d for the original equation, which now reads:

Per-Capita GDP = $42751*f + $2201.3

Finally, if we plot our newly created model equation against the normalized scatterplot, or the original scatterplot if the SD units are converted back to the original scoring system, we obtain the following graph: which, given a few outliers and some spread in the data due to the fact that we are dealing with relatively complex systems, appears to describe the data rather nicely. Results and Discussion The fit of the data to the model tends to support the contention that societal wealth is a function of the degree of embrace of a libertarian economic ethic by a society, at least to a rough first approximation. It is entirely possible that a more sophisticated model which attributes differential contributions of various slices of the “freedom curve” within a population might give a better fit, for example, by steepening the slope of the middle part of the curve and creating a sharper transition between the flat upper and lower regions with the sloping central region, but in any case, in the absence of better, more direct measurements, such an attempt would be even more speculative than this exercise. There are several important implications if this model is correct. The first, and arguably most important, is that societal wealth is not a function of governing economic policy per se. Rather, it appears that both economic policy and societal wealth are functions of the beliefs and attitudes of the population which makes up the body of the society, as these were the explicit assumptions made in the generation of the model. The distinction is important. It implies that top-down policymaking by governing bodies is far less important to improving the economic lot of a society than the actual embrace of libertarian principles by said society at large. Just as “societal wealth” is a measurement of aggregated individual human action, it appears that individual human belief and action at the lowest levels, not the highest, are responsible both for setting the prevailing ethic of the marketplace, and the resulting potential for expanding the productive capabilities and motivations experienced by individual economic actors. In short, human action looks to be the relevant factor here, not government policy. Another surprising set of implications, at least to this author when he decided to take up the subject, is that increasing wealth through embrace of economic liberty is bounded, as the flat, upper region of the curve implies, and that a fair number of real human societies actually appear to have reached the cusp of this plateau, as clearly visible by the data points at the far right of the curve. The threshold which was found to best fit the available data corresponds to a freedom score of only 70.5, which is to say, that individuals whose attitudes reflect this degree of economic freedom or better are part of the “freedom fraction” and contribute to per-capita GDP improvement at the higher level, while those below this threshold correspond to the baseline. This score corresponds approximately to the scores received by Spain, Sweden, Germany, Cyprus, and Norway, not despotic regimes by any means, but certainly not freewheeling capitalist societies either. The rightward skew of the national score histogram, which we noted earlier, coupled with this low threshold results in a few top scoring societies nearly “saturating” the effect of liberty on per-capita GDP, implying, for example, that over 99% of members of the top-scoring society, Hong Kong, would be above this threshold, though their failure to achieve the per-capita GDP predicted by their score would tend to suggest that there is a disparity between government policy and real public attitudes, assuming the model is correct. Is this the case? It is certainly a testable hypothesis. If the model is correct, it implies that the standard for maximization of human productivity is actually not all that high, at least with regard to economic liberty, as a few nations have actually come very near to achieving it. Though it might be more satisfying to libertarians if the upper end of the curve were boundless, continuing on into infinity, this is probably not reasonable. If not bounded by restrictions on liberty, it stands to reason that a man’s productivity is bounded by something, whether present-day technology, or the near satisfaction of desires at the cost of an additional increment of his time and effort, or simple, overwhelming complexity as the division of labor lengthens indefinitely. It is certainly a hopeful finding that it is within human capacity to achieve the minimal libertarian ethic that allows maximization of human potential, at least in one regard. This model produces a variety of testable hypotheses, as well as suggests further studies. It would be very interesting to determine the actual individual “freedom score” distributions of national populations to test the several assumptions of this study and further validate or refute the model. Perhaps this could be done through polling with a well designed questionnaire. It would also be interesting to combine this model with others, particularly doing a multivariate analysis to determine if the deterministic effects seen in this study can account for the “deviations” seen in another, particularly La Griffe’s IQ study, or vice versa. It could be that only a few determinants can effectively predict the observed economic distributions, if the relatively good fit found here and in his study are any indication. Conclusion A theoretical, mathematical model relating per-capita GDP to economic liberty which appears to have predictive value and real world implications is generated by relating the fraction of a population sympathetic to economic liberty, described by a simple normal distribution, with a proportionality constant. The success of this model suggests that increases in GDP are bounded in the limit of near universal individual acceptance of a certain minimal threshold of economic liberty, that the attitudes of individual economic actors towards economic liberty are more important than governing policy, and that several real-world societies actually approach the maximization of productive potential with respect to this variable. This simple approach appears to be a useful model for further investigations. ----Update!---- In case you are interested.... (click on the graph to enlarge)

Big News Tomorrow...

...maybe. The bank "stress test" results are scheduled to be released tomorrow, but like the rest of the economy, expect the results to be thoroughly manipulated by the government. You can rest assured that they are working hard to make sure that everybody passes. In any event, its highly possible that we will see big moves in the markets, whatever the result. My guess is that they will be down sharply, but as things are quite unpredictable at the moment, I don't have any money on it (it sure was tempting, though...) Commodities are scaring the pants off me. Oil hit its highest price of the year, and base metals are on the rise. Is it the beginning of the great inflation? I wish I could say. Strange as it sounds, I really wish things would turn back down. If the economy "recovers," its all over for us Americans. While we stay in this funk, prices should stay down, and we'll be able to afford nice things like food and shelter. It may be stressful, but at least we get to eat. If the money ever starts flowing again, we're all going to be in big trouble. Oh, and by the way, I'm working on something big. An actual statistical study, with graphs and everything. Hopefully, it will be out by the end of the week.

All Eyes on Steel

An interesting link, courtesy of Vox Day. Steel production, like most other commodities, is currently in free-fall:

Unsurprisingly, steel output in the U.S. also fell in February. The U.S. produced 3.8 million tons of steel last month, a decrease of 54.2 percent from February 2008, the World Steel Association says. Comparable declines were seen globally as world steel output fell 22 percent in February.

In the European Union, there were production drops of 31.6 percent in Germany, 35.7 percent in France, 35.7 percent in Spain and 39.9 percent in Italy. Brazilian steel production decreased by 39 percent last month from February 2008 totals, and both Russia and Ukraine saw steel output fall by 32.1 percent and 33.6 percent respectively.

This is all unsurprising, as demand for commodities has collapsed, so have prices and therefore supply. Although the drops are quite large in magnitude, this is consistent with an economic event of similar scale as the Great Depression, which I hope that by now we are all pretty much in agreement is what is going on. Then we come to a bit of an anomaly:

Iran and China were the only two countries who reported positive gains. Iran steel production gained 15.9 percent from February 2008 to 900,000 tons. China produced 40.4 million tons of February's overall world production of 84 million tons. The country reported an increase of 4.9 percent from last year's same-month total.

Are China and Iran really doing that well? Not so much:

Not all the steel, however, is being used. In fact, steel and other industrial products exceed domestic and foreign demand. "As of this month, about 30 percent of the nation's aluminum production capacity is idle, as is 20 percent of cement and plate-glass capacity and 70 percent of semiconductor production," according to China's industry ministry (via the Wall Street Journal).

To combat the surplus, the Chinese government invested four trillion yuan (about $585 billion) to boost construction of public works, thereby increasing demand for steel and thus reducing idle capacity. Along with the stimulus package, Beijing announced another plan in January for reducing steel overcapacity.

The plan indicates that "new capacity would be approved only in exchange for the closure of outdated production facilities," a separate Financial Times article says. The Chinese government also added that "within three years, it wanted to see 45 percent of the market in the hands of the top five steelmakers, up from 28.5 percent now."

So the Chinese are producing lots and lots of steel to sit around and gather rust just to keep people busy. That's the ticket: when you're in deep trouble, the proper thing to do is spin your wheels and waste resources. This is not helpful. It is wasteful. Not that the US can say much about it, given what we've been doing. Pot calling the kettle black, and all of that. But it is just one more indicator, at least to me, that China is not the capitalist paradise set to take over the world that mainstream economic opinion makes it out to be. Like most other nations of the world, it has decided that once in a hole, the best solution is to keep digging. Better prospects for growth than ours? Yes. Able to achieve today's US living standards within a generation or so? I doubt it. Someday? Maybe. I hope so.