Courtesy of The Automatic Earth.
Andreas Feininger Production of B-17 Flying Fortress bomber, Seattle March 1936
Economists are stupid because they have studied economics. Which doesn’t mean they weren’t born stupid, but that’s hardly relevant. Economists are useless because, well, they have studied economics. And economists are dangerous because they have studied economics, and people still listen to them; entire government policies are built around what they say. Now, you may think: isn’t that a bit harsh?, but don’t worry, I have proof.
In economics, growth is regarded as a physical law, similar to gravity. Never mind that in physics, eternal growth is prohibited. If there occurs an absence of growth in an economic system, it must be, by default, because the wrong policies have been applied. Economists will then prescribe the right policies. After which growth is certain to return. Unless the right policies turn out to be wrong, in which case the right policies will be applied. It’s foolproof. This set of ideas can lead to hilarious statements. Which would be quite alright if they were exclusively meant for entertainment purposes, but we have no such luck.
The Associated Press apparently conducts a monthly survey of a group of 30 economists – carefully selected, no doubt -, something Bloomberg can’t get enough of either for some reason, even if the predictions provided are far too often plain embarrassing. But this is the AP survey:
Whether to allow more exports of U.S. oil and natural gas has become a matter of political debate in Washington. But to economists, the answer is clear: The nation would benefit. The vast majority of economists surveyed this month by The Associated Press say lifting restrictions on exports of oil and natural gas would help the economy even if it meant higher fuel prices for consumers. More exports would encourage investment in oil and gas production and transport, create jobs, make oil and gas supplies more stable and reduce the U.S. trade deficit, they say.
As domestic energy production has boomed, drilling companies have pushed to be allowed to sell crude oil and natural gas overseas, where they can command higher prices. Such exports are restricted by decades-old energy security regulations. Those opposed to opening trade say exports could make it more expensive for Americans to heat their homes and fill up their cars. But even economists who think exports might increase fuel prices for U.S. consumers — an open question — say the overall benefit to the economy would outweigh any possible harm.
It would be better to allow the exports and use tax breaks or other methods to help those struggling with higher prices, they say. “The economy in general is better off if we can sell something to someone and bring money into the economy,” said Jerry Webman, chief economist at Oppenheimer Funds. “I’d rather deal with any side effects directly than limit our ability to do business with the world.” The AP survey collected the views of private, corporate and academic economists on a range of issues. Of the 30 economists who participated, nearly 90% responded that more exports of oil and gas would help the U.S. economy. [..]
For economists, there is no such thing as a possible scarcity. And even if there were, that would just be something to maximize profits on. You could perhaps choose to keep it for yourself, but only if and when higher profits were ensured. One may need to presume that this panel of “experts” get their supply numbers from the industry and possibly the EIA (but now I’m repeating myself). And as for the 3 or 4 “dissidents”, they have AP Energy Writer Jonathan Fahey to deal with:
Robert Johnson, director of economic analysis at Morningstar, doesn’t embrace the idea of unfettered natural gas exports. “We’ve already got a few industries building on the concept that we’re going to have a long-term energy advantage here, and I’d hate to interrupt those plans,” Johnson said. He also argues that higher energy prices would disproportionally hurt those with lower incomes, who spend a relatively large portion of their paychecks on energy. That leaves them with less cash for other things, which, in turn, hampers consumer spending — by far the biggest portion of the U.S. economy.
Fahey is having no part of that. As long as it isn’t sure that exports raise prices, those dissidents should shut up. There’s money to be made, and growth to be targeted. And come on, when you need to make a choice between consumers and the economy, isn’t it obvious?
But it is far from clear that exports would raise fuel prices or eliminate the country’s competitive advantage. Exports are even less likely to affect prices of fuels made from oil, such as gasoline and diesel. U.S. crude oil prices have been about 10% cheaper than global oil prices in recent years. But consumers don’t enjoy most of that benefit because exports of gasoline and diesel are not restricted.
I find it strange to see discussions like this one. If it’s fine to let Americans pay more as long as the economy benefits, why not simply raise prices? Presumably that would grow the economy as well. And not addressing possible future scarcity issues is just as strange. I guess economists may have heard of peak oil, but discarded it because it doesn’t fit their models. And it probably won’t until a replacement for oil and gas is found. Have mercy on the lot of them if that fails to materialize.
It looks as if in that same survey, AP asked about China as well. Interestingly, the following article is not from Jonathan Fahey, whose list of specialties seems limited to not understanding energy issues, but from Chris Rugaber, presumably AP’s Asia expert.
Just as the global economy has all but recovered from debt-fueled crises in the United States and Europe, economists have a new worry: China. They see a lending bubble there that threatens global growth unless Beijing defuses it. That’s the view that emerges from an Associated Press survey this month of 30 economists. Still, the economists remain optimistic that Beijing’s high-stakes drive to reform its economy — the world’s second-largest — will bolster Chinese banks, ease the lending bubble and benefit U.S. exporters in the long run.
I find that confusing right off the bat. But then I’m not trained to see growth beneath every rock. And it gets weirder:
“They’ve really got to change the way they do business,” said William Cheney, chief economist at John Hancock Asset Management. “But they have a good track record of doing just that. I’m an optimist about their ability to make this transition.” The source of concern is a surge in lending by Chinese banks. The lending was initially encouraged by the government during the 2008 global financial crisis to fuel growth. Big state-owned banks financed construction of homes, railroads and office towers. But much of the lending was directed by local officials for pet projects rather than to meet business needs.
Wait, China has “a good track record of changing the way they do business”? And we know that because they went from Communist to dollar store in record time, the last 6 years of which pumped by a $14 trillion government stimulus arrangement amplified by an $X trillion push from an absurdly highly leveraged underground finance system? And what do you mean “The source of concern is a surge in lending by Chinese banks.” Isn’t it a lot more than that? Isn’t the shadow banking system at least as mush of a concern, given that Beijing has a very hard time getting a grip on it? Oh, wait:
On Monday, the International Monetary Fund issued a warning about China’s private debt. It released a report citing “rising vulnerabilities” in China’s financial system, including lending outside traditional banks. Lending by that “shadow” banking system now equals one-quarter of China’s economy, the report said. The IMF also pointed to recent defaults in credit card and other debt sold to investors by banks and heavy debts owed by local governments. If it continues, “this could spark adverse financial market reaction both in China and globally,” the IMF said. The bubble has caused land prices in China to double in five years, according to an estimate by Nomura, a Japanese bank. Outstanding credit surged from 130% of the economy in 2008 to 200% in 2013, according to a forecasting firm.
I read things like these two articles, and I find them terribly hard to understand, because all these questions pop into my head that I think need to be addressed, but then find they’re not. Here’s that IMF (all economists all the time) report as RT wrote it up:
Asian growth will remain steady at 5.4% in 2014, however a steeper than expected slowdown in China and a failure in Japan’s “Abenomics” program could derail the region’s economic progress, says the IMF. Asia also faces risks from outside the region, including improving growth in the US, which could raise global interest rates the new IMF study said. “Bouts of capital flow and asset price volatility are likely along the way, with exchange rates, equity prices, and government bond yields affected by changes in global risk aversion and capital flows,” the IMF concludes.
The IMF raised its growth forecast for Asia this year due to a pickup in external demand alongside a recovery in advanced economies. Growth is also expected to improve slightly to 5.5% in 2015. Last year, the region grew 5.2%. However, the IMF predicts China will slowly decelerate to growth of 7.5% this year and 7.3% in 2015, to a “more sustainable path”.
A more sustainable path? Like what, Christine et al, 2%? Not what you had in mind, is it? That would break China. How about 4%? Would still break ‘em, but is also ridicules to label “sustainable”. Not that 2% is not, but I need to remember you’re economists and therefore confused about growth issues. I don’t understand that bit about “a pickup in external demand”. From where? You can’t mean Japan, or continental Europe. Russia? Ha!, got you there for a moment. So that leaves the US?! The overall growth forecast for Asia as a whole is raised because US consumers will start buying more trinkets again? The same US that saw its new home sales and mortgage originations fall by 14% in March, while its biggest landlord, Blackrock, cut its purchases by 90%? Interestingly, a WSJ article today quotes Markus Rodlauer, deputy director for Asia and the Pacific at the IMF, as saying: “That model that Asia had of relying on the trade channel, that’s gone”. Take your pick.
2014 has been a bumpy start for China, due to financial sector vulnerabilities, and the temporary cost of reforms, along with the transition toward a more sustainable growth path would have significant adverse regional spillover. Domestic and global political tensions could also create trade disruptions and weaken investment and growth across the region. In some frontier economies, high credit growth has led to rising external and domestic vulnerabilities.
The IMF expects Japan’s growth to decrease to 1% in 2015 from 1.4% this year, due to a reduction in the stimulus effects from monetary and fiscal easing. Another barrier towards growth will be a need to reduce debt, the outlook said. “The advanced economies are turning a corner and many Asian economies which depend on exports as a main growth engine are in a good position to capitalize on the recovery. That’s the main reason why we are positive on the Asian region,” CNBC quotes Changyong Rhee, the director of Asia and Pacific Department at the IMF.
I’d say the IMF is cherry picking here, wanting to come up with positive messages and growth predictions no matter what. I guess maybe that’s in their job description. Free Kool Aid for everyone. reality doesn’t seem to be willing to cooperate, though (not that the IMF economists have a strong bond with reality, of course). Bloomberg:
Almost all Chinese provinces failed to meet their growth targets in the first quarter even after scaling back their ambitions as the government instructs officials to focus on reining in debt and curbing pollution. 30 of 31 provinces and municipalities reported missing their goals, with the biggest shortfall in northeastern Heilongjiang, where an expansion of 4.1% compared with an 8.5% target for the year. Most localities’ targets are lower than in 2013. The latest data were released by government websites and newspapers. Premier Li Keqiang risks the nation sliding into a deeper slowdown as the government cracks down on overcapacity in the steel industry, wrestles with shadow banking risks and rolls out economic restructuring measures.
While the government has supported expansion with measures such as reserve-ratio cuts for rural banks, it has so far avoided broader stimulus as Li chases a national growth target of about 7.5%. “The central government will continue to refrain from all-out stimulus and the slowdown pressure may continue to rise,” said Zhu Haibin, the chief China economist with JPMorgan Chase & Co. in Hong Kong. After a 7.4% expansion in the first quarter, growth may sink closer to 7% during the second half of this year, Zhu said.
Well, Zhu, I think maybe it’s time to acknowledge that China’s growth may sink well below 7%. Obviously, being an economist, you have no reason to say that out loud until it actually happens, being a JPMorgan guy and all, but it sure doesn’t make you look any smarter. Heilongjiang’s growth is more than 50% below target, and I know for instance that so is Heibe, which is being whacked upside the head by the iron ore mess that’s only now coming to light in the west. FT:
China plans to get tougher on loans for iron ore imports as concerns grow that steel mills are using import loans to stay afloat in defiance of policies to reduce overcapacity in heavily polluting and lossmaking industries. The China Banking Regulatory Commission warned banks to tighten controls over letters of credit for iron ore imports in a document that caused iron ore futures in China to drop 5% on Monday. Rumours of the stricter measures, which are expected after the May 1 holiday, have been circulating in China for at least two months, after a hasty stock sale caused ore prices to tumble in late February.
Steel mills and traders have used iron ore imports to raise money as other sources of credit dry up, in yet another channel for off-book or “shadow” financing. Part of the attraction of the practice is that mills benefit from lower international interest rates compared to those in China. Chinese firms have developed a number of creative channels for raising money thanks to years of capital controls meant to starve the real estate sector of speculative funds.
Iron ore stocks at Chinese ports are at 109.55m tonnes, data from Steelhome showed on Friday, historically high in absolute terms but still relatively low in terms of the size of the industry’s import demand. Data from the first quarter of the year show that China is on track to produce 822m tonnes of steel this year, a rise of 5.5% from last year’s output, despite the rising debt levels, increased financing costs and the prospect of more environmental regulation. More capacity is still being built, lamented CISA vice-chairman Zhang Changfu, further squeezing margins in the industry. “With the industry in such a state, how can new capacity still be built?”
Saw that? “Chinese firms have developed a number of creative channels for raising money thanks to years of capital controls meant to starve the real estate sector of speculative funds.” One of those creative channels has been the use of iron ore to be used as collateral for leveraged loans to buy more iron ore and finance other endeavors. Which has been so lucrative that despite overcapacity and new regulations and rising debt, inventories are still rising.
And, predictable even for an economist, iron ore prices are falling. The combination of falling prices for an asset and leveraged loans that use the asset as collateral is a lethal one. Beijing is taking huge risks tackling the issue, it must therefore be pretty desperate to take a bite of the shadow banking’s power structure. What was it that John Hancock economist said? ‘China has “a good track record of changing the way they do business”‘ Well, I have no idea what that is based on, but I guess we can find out if it’s true pretty soon. As Chinese industries take advantage of the rise in external demand the IMF predicts but which seems to be the effect of the direct injection of Kool Aid into one’s veins.
The real job of an economist seems to be not to depict reality, but a version of it that looks reliable enough to induce people into spending their money (and trust) on whatever it is the economist’s employers – be they governments or corporations – are selling at any given point in time. The best way to achieve that is to make them believe their own nonsense, and by the look of things I would say there’s a much higher success rate there than in actual predictions. Regardless, whether they’re plain stupid or good liars, economists don’t have to tell the truth, they just have to be believed. Which is true for any con job.
PS Apologies to my friend Steve Keen: you know I’m not talking about you here.