Dollars and Jens
Thursday, July 31, 2008
A couple MIT chemists have developed a simple efficient mechanism for hydrolysis. I'm curious about efficiency and how easy it is to store hydrogen at this point.

Incidentally, in the press for it here, they seem to keep harping on its use with solar power, but it appears to me that the solar power is being turned into electricity before it's being used for hydrolysis. I don't think household photovoltaic cells are as efficient (particularly from the standpoint of capital costs) as central station power generation. If it's easy to store large quantities of hydrogen and to quickly switch this system between forward and reverse, that makes things like wind power a lot more viable as well. I'm interested to see where this goes, but I certainly wouldn't expect it to lead in ten years to a large-scale use of solar power on a household scale, as is suggested here.

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Now that I'm back in civilization I can blog the GDP report that came out today. Note that this one comes with a lot of revisions to previous data.
4.8% -.2% .9%1.9%
Consumption 1.44  .67  .61 1.08
Inventories .69 -.96 -.02-1.92
Fixed investment-.15 -.97 -.86 -.36
Net Exports2.03.94.772.42
Government Spending.
Exports were up at a 9.2% annual rate, while imports were down at a 6.6% annual rate. This is the first time since Q2 of 2007 that residential fixed investment has taken less than a full percentage point off of the number; it dropped at more than a 15% rate (which is less than it has been) but only took 0.6 points off the GDP, in part because it's only 2/3 as big compared to GDP as it was two years ago.

Because the inventory figure is so significant, I'll quote a comment I made in January:

inventory adjustment's impact is, on a short term basis, negatively correlated with consumption, and negatively serially correlated with itself; in short, looking at trends, I like to throw about half of it away and put the rest with consumption.
On that basis consumption was basically flat and the headline number about a point higher than reported. The consumer, perhaps boosted by stimulus checks, drew down inventory, and producers let them.

You can compare this to February, the last time I made a table like this. Note that the Q4 estimate at that point was positive, and has been downgraded 0.8 percentage points.

update: Residential fixed investment is now 3.5% of GDP, not too far above its multi-decade low in the early eighties. There's still a lot of overhang, and I would expect that multi-decade low to be broken, if not by the time the Q4 data come out then by Q1. On the other hand, if you imagine it's not going to dip below, say, 2.75%, that means further deceleration in that area would only take an aggregate of 3 percentage points off of future quarterly growth reports. (I saw a recent calculation of probably not quite 2 million excess housing units, which was about the annual rate of construction when it constituted 6% of GDP. If demand, over the intermediate to long term, is going to keep doing what it has done over the past couple decades, long-term equilibrium would suggest that we run below average by, for example, 2% of GDP for 3 years, or some equivalent.)

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Monday, July 28, 2008
oil subsidies
The local fishwrap has an article on countries subsidizing petroleum-based fuels.
From Mexico to India to China, governments fearful of inflation and street protests are heavily subsidizing energy prices, particularly for diesel fuel. But the subsidies — estimated at $40 billion this year in China alone — are also removing much of the incentive to conserve fuel.

The oil company BP, known for thorough statistical analysis of energy markets, estimates that countries with subsidies accounted for 96 percent of the world’s increase in oil use last year — growth that has helped drive prices to record levels.

In most countries that do not subsidize fuel, high prices have caused oil demand to stagnate or fall, as economic theory says they should. But in countries with subsidies, demand is still rising steeply, threatening to outstrip the growth in global supplies.

President Bush warned about the effects of subsidies on July 15. “I am discouraged by the fact that some nations subsidize the purchases of product, like gasoline, which, therefore, means that demand may not be causing the market to adjust as rapidly as we’d like,” he said.

Saturday, July 26, 2008
oil prices
What's the right price for oil right now?
(1) According to the Energy Information Administration, China consumed 7.6 million barrels of petroleum each day of 2007, which is 860,000 barrels/day more than in 2005. (2) EIA also reports that the world as a whole produced 84.6 million barrels of oil per day in 2007, which is 30 thousand barrels per day less than 2005.

Now, how could it be that China is burning 860,000 b/d more than it used to, but no more is being produced? Well, it could be that there are errors in the consumption or production numbers, and both will likely be revised. Or it could be that we're drawing down global inventories. But the most natural inference is that somebody else in the world must have been persuaded to reduce their consumption of oil between 2005 and 2007 to free the barrels now being used in China. And indeed, according to preliminary EIA estimates, petroleum consumption in the U.S., Japan, and those countries in Europe for which data are now available fell by 760,000 b/d between 2005 and 2007.

For reference, the NSPR has about 700 billion barrels of oil (private stocks in the U.S. aren't quite that high, but are similar). If it were clear that oil prices would drop in the next year or two, putting some of that on the market could make a significant difference.

Of course, we don't know that, and if prices go even higher we'd wish we'd hung on to the oil. (Note that it's intended to be held for tail-risk situations, not ordinary price manipulation.) He ends with

What about the delayed response of quantity demanded to the price increases already in place? If that proves to be substantial (and I'm of the opinion that it will), U.S. petroleum consumption should continue to decline during 2008 even with no further price increases and no recession. There's also been some increase in global production this year, and more is expected. Won't that be enough to satisfy those new and thirsty Chinese vehicles? If so, $123/barrel may be way too high a price.

But don't forget, while you're doing these calculations, you'll need to meet Chinese demand for 2009, and 2010, and 2011.... Which, if you project the current trend and tried to satisfy entirely by cuts in U.S. consumption, would have us down to consuming zero barrels of oil in the United States in about 17 years.

Is the price of oil today too high given the fundamentals? Could be. Is it too low? Could be. But one thing I'm sure that's too high is the confidence on the part of those who insist they know the answer.

Oil for delivery next April is about $2 higher than now, then it starts decreasing as you go out, but hardly in a dramatic way.

Wednesday, July 23, 2008
John Templeton
Sir John Templeton died on July 8.

Friday, July 18, 2008
naked shortselling
The SEC a few days ago issued a new rule prohibiting naked short-selling of the stocks of certain financial companies — if you want to sell the shares, you have to actually have them available, whether owned or borrowed from a willing lender — and I kind of think the Wall Street Journal is right about this; it's probably relatively harmless as far as these sorts of things go.
This is also a question best left to private contracts, as the short seller who doesn't deliver the promised shares can be treated like anyone who reneges on a deal. Still, if the SEC is going to uphold the principle that someone selling an asset should definitely be able to deliver that asset to the buyer, well, we've heard crazier ideas.
I've been thinking for a couple years now that one of the responses government should make to apparent bubbles is a bit more vigilance in terms of enforcing regulations, preventing frauds and the like, which become more common as the bubble goes along. This enforcement may tend to be a bit one-sided — but, then, so (typically) is the increased opportunity for fraud and the like — and may slow down price adjustments, which would be a negative if the regulators incorrectly target a price-change that is more sustainable, but it shouldn't prevent the market from getting there eventually — it might just take a bit longer to get there, if that's really where it should be headed. The direct monitoring of potential fraudulent activity is the primary form I'd expect this response to take, but regulations limiting potential counterparty risks on securities exchanges, and even somewhat tighter margin limits (where the perpetrator's own broker, not every participant on the exchange, is subjected to the credit risk) seem like reasonable tools. As the Journal says, limiting naked short selling isn't nuts, and isn't likely to interfere with the market eventually reaching its equilibrium, but I would add that it might reduce the potential for some chaos (failures to deliver, etc.) as we get there, and as such might even be a good thing.

Thursday, July 17, 2008
William Poole
An interview with William Poole.
When William Poole warned in 2003 that Fannie Mae and Freddie Mac lacked the capital to weather a financial storm, his advice went unheeded. Five years later, the outspoken former president of the Federal Reserve Bank of St. Louis is far too polite to say “I told you so,” but he does have a message for the Fed: Wait too long to tackle inflation, and you’ll face an even worse recession in the years to come.
I felt they cut the funds rate too far in March, and that they should have bumped it up since then, not because I think the economy is strong, but because I feel the economy doesn't benefit from the last 50 to 100 bp of cut. Note that, insofar as some of the current pain is a function of high oil prices, that it's a function of the weak dollar:
Now, to me, the inflation problem is actually part of what is depressing economic activity, because the generalized inflation that I think we have underway — although it’s not showing up in core inflation and wages just yet — is showing up in the depreciating dollar, and the depreciating dollar directly feeds through to increased energy prices and food prices. So, the depreciation itself is leading to depressed economic activity.
In any case, the economy just has some shaking out to do, and creating inflation on top of our current problems isn't going to do anybody any favors.

Bernanke, with his background, is worried about financial disintermediation, and I can see where this would lead him to try perhaps a little too hard to keep the collapse of Bear Stearns and the GSEs "orderly" and monetary policy loose. Certainly as big financial companies collapse your traditional monetary aggregates become harder to use as indicators of how tight monetary policy actually is; as long as you're targeting the fed funds rate, though, I don't currently see a reason to target it this low at this time.

Wednesday, July 16, 2008
different ways of working out the same thing -- tariffs
I've been thinking lately about a comment by physicist Richard Feynman that a good physicist should be able to work out a physics problem in several different ways. The same is true of economics; if we have different tools for analyzing problems then, to the extent that they're all correct, they should get the same answer to the same question. An example is the effect on a nation that is a large importer of a good placing an import tariff on that good.

One way to view this is initially to view the nation as a single entity, and to look at it as a monopsonist, or at least a market-moving buyer on the world stage. To optimize its own interests, it should reduce its purchases below what it would buy if it were a price-taker, thereby lowering the price on the units it does purchase. Efficient allocation of the reduced purchase among residents of the country should, for the usual reasons, be achieved by allowing them to trade at a single price within the country; the artificial reduction of quantity imported will increase the domestic price while reducing the world price, and the optimal tariff, from this standpoint, is the difference between the domestic price and the world price at the optimal consumption level.

Insofar as the country consists not of a unitary actor, perhaps this is better thought of as a buyers' cartel, but, to the extent that it's able to enforce internal cooperation, the external economics look the same. It is in the interest of each member of the cartel to cheat -- to buy more of the good at the world price, rather than the domestic price. As each individual does so, though, they bid up the price faced by everyone else, reducing the welfare of their fellow citizens by more than they increase their own welfare.

This gets us to a second way of viewing the same problem, in terms of pecuniary externalities. More buyers or sellers in a market may move the price up or down, but they won't have an effect on overall Marshallian welfare; they simply transfer it back and forth between buyers and sellers. As I've constructed this situation, though, we don't ascribe any value to the welfare of foreigners, who are net sellers, only to those of our fellow citizens, who are net buyers; a purchase, then, by placing upward pressure on the price, represents a welfare transfer away from our fellow citizens. An optimal Pigovian tax would impose this externality on the purchaser in the amount that it would fall, on net, on his fellow citizens; where the world price differs from the domestic price by the amount an additional unit purchased is likely to cost the fellow citizens in increased costs, the buyers will find their equilibrium, and it should be at the same optimal level inferred from the monopsony argument.

Of course, if we valued foreigners' welfare equally to that of domestic citizens, there would be no externality to tax; that Pigovian tax, to first order, represents welfare that would otherwise be gained by foreigners from the additional unit purchased. The tax is economically incident, in part, on the foreigners, and this offers a third treatment of the problem: we wish to impose a tax such that the amount of revenue effectively derived from the foreign exporters from a marginally higher or lower tax would be offset by further welfare losses associated more directly with the lower domestic use of the good at higher prices. This is another standard paradigm into which the problem can be put and, yet again, it should yield the same result. This is the paradigm that makes it most easily apparent, though, that it is also in the interest of a large net exporter of a good to tax that good -- driving up world prices, with the tax falling partly on foreigners -- rather than to try to subsidize it, as is more often what mercantilist impulses seem to lead nations to implement.

Note that this is all without regard to any other Pigovian taxes one might impose on the product for other externalities; if consumers of the good, besides bidding up prices and effecting a transfer of wealth out of the country, also impose other negative externalities on their fellow citizens, even higher Pigovian taxes would be justified. The arguments above do not suppose such externalities, and are independent of them.

This is all under the ceteris paribus assumption, and the assumption that the welfare of the exporters is to be ignored. If a tariff is likely to lead to a trade war, that could well cost more than the net benefit of the tariff; if, conversely, a free trade regime can be negotiated and all parties are likely to adhere to it, that is likely to improve welfare for each country more than if each country separately starts taxing trade in attempts to optimize its own welfare by itself. On the other hand, if many of the exporters of a particular good are actually using proceeds from the sales to actively harm a country's interest, so that the importing country might view the exporters' economic welfare as negative, then the arguments apply all the more strongly.

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