Here’s a letter to my friend Richard McKenzie:
In your latest, excellent post at EconLog you quote Milton Friedman’s insistence that “the true tax” is “how much government is spending.” You quote Friedman further: “If you’re not paying for it in the form of explicit taxes, you’re paying for it indirectly in the form of inflation or in the form of borrowing.”
Friedman’s point is both correct and important, and you’re right to remind readers of it. It’s a reality that too many people – including too many economists – ignore.
But I disagree with you on one small matter – specifically, with your claim that:
How the added government outlays are financed—through taxes, newly printed dollars and inflation, or debt—is of secondary importance, perhaps only marginally affecting people’s incentives.
If the amount that government spends were independent of the means of financing, then I’d agree with you. But the amount that government spends surely is not independent of the means of financing.
Spending financed with newly created money gives, at least for a time, citizens-taxpayers the false impression that government-supplied goods and services are less costly than they really are. Therefore, resort to spending financed with newly created money, by lowering the perceived prices of government programs, increases quantity of such programs that the public demands beyond what it would be were these prices more accurately perceived.
Resort to deficit spending works similarly. By allowing today’s government spending to be paid for by tomorrow’s citizens-taxpayers, deficit financing allows today’s citizens-taxpayers to free ride on future generations. The inevitable result is that today’s citizens-taxpayers will demand more government spending today than they would demand were deficit financing unavailable. Indeed, because, unlike money creation, deficit financing doesn’t itself fuel inflation, deficit financing plausibly fuels an even greater and longer-lasting excess of government spending than does money creation.
In short, while Friedman correctly insisted that the real cost of government is the amount that it spends, it’s a mistake to suppose that this reality implies that the means of financing government are of little importance. Because financing with money creation or debt causes government spending to be higher than it would otherwise be, the means of financing are of paramount importance.
US Economy Remains On Track For Strong Rebound in Q4
With the end of the year in sight, the US economy continues to show signs of a sharp pickup in growth in the fourth quarter, based on several nowcasts….
With the end of the year in sight, the US economy continues to show signs of a sharp pickup in growth in the fourth quarter, based on several nowcasts.
The US Bureau of Economic Analysis is expected to report in late-January that output rose 5.4% (annualized real rate) in Q4, via the median of several nowcasts compiled by CapitalSpectator.com. The estimate marks a dramatic upside reversal from the slowdown in Q3 that cut growth to a modest 2.1%.
Although roughly a third of the fourth quarter’s economic data has not yet been published, the available numbers to date suggest that the final quarter of 2021 will deliver upbeat news for the US. The fact that recent nowcast revisions have been relatively steady at the 5%-plus level strengthens the outlook that output has accelerated. Today’s revised median 5.6% nowcast is up from 5.0% in the Nov. 16 update.
Recent survey data aligns with the firmer expectations for Q4 economic activity. “The US economy continues to run hot,” observed Chris Williamson, chief business economist at IHS Markit, on Nov. 23, citing the consultancy’s US Composite Output Index, a GDP proxy. “Despite a slower rate of expansion of business activity in November, growth remains above the survey’s long-run pre-pandemic average as companies continue to focus on boosting capacity to meet rising demand.”
Supply-chain and worker-shortage issues continue to create headwinds, but a rebound in economic activity overall appears increasingly likely when the government publishes its initial Q4 GDP estimate next month.
The main question is whether the rebound proves fleeting? Looking ahead to 2022 suggests that economic activity could slow in the new year due to potential blowback from the omicron variant of the coronavirus, higher inflation and other factors.
Goldman Sachs, an investment bank, recently cut its forecast for US growth in the new year. “While many questions remain unanswered, we now think a moderate downside scenario where the virus spreads more quickly but immunity against severe disease is only slightly weakened is most likely,” says Joseph Briggs, an economist at the firm.
This week’s update of the UCLA Anderson Forecast has also trimmed the outlook for early next year, revising its Q1 2022 growth estimate down substantially to a 2.6% gain from the 4.2% predicted in September. The key assumption: the omicron variant “might be disruptive, while acknowledging that its effects cannot be predicted.”
Perhaps, but the good news is that economic momentum looks set to deliver a strong tailwind going into 2022.
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Markets stay booster’ed
Equities rally continues US markets managed to maintain omicron is weak, buy everything rally overnight, albeit at a much less frenzied pace than the day…
Equities rally continues
US markets managed to maintain omicron is weak, buy everything rally overnight, albeit at a much less frenzied pace than the day before. That sits nicely with my V for Volatility outlook for December and readers should not be fooled into thinking the risks of whipsaw price have now disappeared. I’ll say it again, volatility will be the winner in December, not directional plays.
Having said that, I am not calling for the end of days for the 21-month stock market rally, merely that we can now expect a lot more two-way volatility going forward. A case in point is the Nasdaq, which has once again bounced off its mighty March 2020 trendline support and will probably be a classical technical analysis case study for years to come. Here’s what CFD from OANDA looks like, the actual physical chart is even sexier, and I’ll leave readers to draw the lines on that one themselves.
Another sign that we may need to wait for next week’s FOMC meeting to climb aboard the taper trade again comes from currency and bond markets. The Australian dollar, the risk sentiment indicator to rule them all, rallied powerfully overnight. Even the euro managed to recover, and the US dollar generally had a tough day at the office. That came as US 10-year yields rose back above 1.50% to 1.53%.
The divergence in price action is a warning sign for tomorrow night’s US CPI. It suggests that the street is positioned for a “risk-off” taper move. With the US 10-year rising around 20 basis points over the last few sessions, reversing recent losses, there may not be much juice in the tank at a 7.0% CPI print. Quid pro quo, US dollar selling and equity buying hint that a 7.0% CPI is increasingly priced in. We likely need to see a print much higher than 7.0% to revive the taper trade in the near term and it wouldn’t surprise me if an on-expectation CPI release sees US yields fall, the US dollar fall, and equities jump once again. Remember what I said about V for Volatility and whipsaw price action?
Helping things along, although with a gentler market impact, were comments from Pfizer and Moderna suggesting a third shoot would do the job against omicron. Given that the US and Europe can’t even get 65% of their populations to have even two shots, let alone a third, we can assume two things. Omicron will yet have a role to play in surging cases over the winter, and vaccine hoarding by rich countries will continue until 35% of their populations stop taking advice from social media and saying me, me, me, instead of we, we, we. That means that the poor in the rest of the world will be waiting longer, thus allowing a higher chance of more nasty variants to arise. And thus, the cycle continues, sigh…
Today’s data calendar in Asia is thin. New Zealand Manufacturing Sales in Q3 fell a dismal 6.20%, suffering from the Auckland Covid lockdown hangover. You can’t buy anything in New Zealand these days anyway; it’s either too expensive thanks to the RBNZ, or there’s none of it left thanks to Covid-19. The New Zealand dollar continues to underperform its Australian cousin, thanks to being another 2,250 kilometers (1,400 statute miles for non-decimal dinosaurs) east of Australia, and the RBNZ hitting the W for Wimp button at its last policy meeting.
On a brighter note, Japan’s Large Manufacturing Index QoQ for Q4 outperformed, rising by 7.90%. Some Q3 baseline effects are in there, but overall, it bodes well for next week’s Tankan survey and suggests that Japan is recovering after it Q3 delta wave. Services may have a more difficult time as the country shut its borders to Johnny Foreigner again this month.
China’s Inflation data has proved benign as well, giving regional markets a small sigh of relief. YoY Inflation for November rose to 2.30% (2.50% exp), while MoM Inflation rose by 0.40% (0.70% exp), giving markets a nil-all draw. That should provide more relief to local equity markets which despite the bad news pouring in from the property developer space this week, is taking their pleas for debt restructuring as meaning the government will facilitate “something.” At least Kaisa suspended trading of their stock in Hong Kong, I’m surprised Evergrande still is. A debt restructuring is not usually good for stock prices, even if they have already fallen by 90%.
The rest of the day’s calendar globally is second-tier. Some regional inflation measures from Europe and Germany’s Balance of Trade. The focus will be on US Initial Jobless Claim with markets hoping for sub-200k prints to resume. Overnight, US Jolts Job Openings for October jumped to 11 million unfilled jobs. That doesn’t really compute with US Non-Farms falling to 210,000, or even a Household Survey suggesting 1.1 million jobs, or unemployment falling to 4.20% with a 61.80% participation rate.
The Federal Reserve may have shot itself in the foot with its unlimited free money we’ll backstop the dumbest investment decisions monetary stimulus which should have been a short term “shock and awe,” and not a monetary Vietnam. Macroeconomics is a beautiful thing when the orchestra all plays in tune, but too often, sticking your finger in one leak sees another pop up nearby. By enriching substantially, any American who owns a home, crypto, a meme or any other stock, they have created a situation where people don’t have to go back to work or have retired. The inflation trade may waver this week, but don’t put it to bed just yet. If James Bond can return from his most diverse and politically correct movie ever (the end credits said he would), inflation sure can as well.
FT-IGM US Macroeconomists Survey for December
The FT-IGM US Macroeconomists survey is out (it was conducted over the weekend). The results are summarized here, and an FT article here (gated). Here’s…
For GDP, assuming Q4 is as predicted in the November Survey of Professional Forecasters, we have the following picture.
Figure 1: GDP (black), potential GDP (gray), November Survey of Professional Forecasters (red), November SPF subtracting 1.5ppts in Q1, 05ppts in Q2 (blue), FT-IGM December survey (sky blue squares), all on log scale. FT-IGM GDP level assumes 2021Q4 growth rate equals SPF November forecast. NBER defined recession dates peak-to-trough shaded gray. Source: BEA 2021Q3 2nd release, Philadelphia Fed November SPF, FT-IGM December survey, and author’s calculations.
In the figure above, I’ve used the SPF forecast of 4.6% SAAR in 2021Q4; the Atlanta Fed’s nowcast as of yesterday (12/7) was 8.6% SAAR. A new nowcast comes out tomorrow.
Interestingly, q4/q4 median forecasted growth equals that implied by the Survey of Professional Forecasters November survey (which was taken nearly a month before news of the omicron variant came out).
The q4/q4 forecast distribution for 2022 is skewed, with the 90th percentile at 5% growth, the 10th percentile at 2.5%, and median at 3.5%. I show the corresponding implied levels of GDP (once again assuming 2021Q4 growth equals the SPF ).
Figure 2: GDP (black), November Survey of Professional Forecasters (red), FT-IGM December survey (sky blue squares), 90th percentile and 10th percentile implied levels (light blue +), my median forecast (green triangle), all on log scale. FT-IGM GDP level assumes 2021Q4 growth rate equals SPF November forecast. NBER defined recession dates peak-to-trough shaded gray. Source: BEA 2021Q3 2nd release, Philadelphia Fed November SPF, FT-IGM December survey, and author’s calculations.
On unemployment, the median forecast is for a deceleration in recovery,
Figure 3: Unemployment rate (black), November Survey of Professional Forecasters (red), FT-IGM December survey (sky blue square), 90th percentile and 10th percentile implied levels (light blue +), my median forecast (green triangle). NBER defined recession dates peak-to-trough shaded gray. Source: BEA 2021Q3 2nd release, Philadelphia Fed November SPF, FT-IGM December survey, and author’s calculations.
The survey respondents also think that the participation rate will take a long time to return to pre-pandemic levels.
Source: FT-IGM, December 2021 survey.
On inflation, the median is higher than the November SPF mean estimate for 2022 of 2.3% (and Goldman Sachs’ current estimate).
Source: FT-IGM, December 2021 survey.
The entire survey results are here.
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