The Skeptical Optimist

FQ.07.13: Favorite Quote for This Week

The louder he talked of his honour, the faster we counted our spoons. 
—Emerson

Mar 2007: Inflation

In spite of all the doomsday rhetoric surrounding us (fiscal deficit, trade deficit, federal debt, interest on the debt, China’s debt holdings, the so-called raid on the trust funds, etc.), doomsday is still somewhere off in the future—just as it has been every year for the quarter-century I’ve been paying attention.  In other words, inflation is still tame. 

Will it continue that way?  Sorry, I’m not in the forecasting business; besides, if I could forecast inflation and interest rates, I’d be making billions in the forex market instead of blogging for free.

From the smorgasbord of inflation measures, I chose two for this chart, which I’ll update periodically so we can keep testing whether doomsday is on the radar yet. 

Click to enlarge.

If inflation stays between 2% and 3% [see End Note], that’s good; it means the dollar’s value is maintaining steady predictability—in spite of all the things that are supposed to be ruining it, such as (again) fiscal deficits, trade deficits, federal debt, interest on the debt, China’s debt holdings, and the so-called raid on the trust funds.  Either those things don't matter anywhere near as much as the doom peddlers want us to believe, or we're doing something very, very right that's not getting any airtime.  [I suspect both.] 

Clickable links:
• Dallas Fed PCE data;
• Treasury 10yr inflation-protected, weekly;
• Treasury 10yr note, weekly.

----------------------
End note: Why 2% inflation is good for us

I think a target minimum of 2% inflation is a good one, for two reasons: (1) we aren’t perfect at separating quality improvements from true inflation in prices, which means inflation is probably overstated by some amount—healthcare is a good example; and (2) the Fed needs a cushion for lowering interest rates, to counter occasional growth-unfriendly deflationary pressures.  You can’t lower interest rates below zero, a problem that has plagued Japan for a decade or more. 

Mar 2007: USA GDP growth, Q4 final

GDP growth was revised upwards yesterday.  Here’s the usual chart, followed by the underlying data that some have been requesting.   

An upward adjustment is good news, but this growth rate is still anemic in my book.  In a few days I’ll be able to recalibrate the debt clock (at upper right on this page), after the Treasury posts the month-end debt balances; that’s when I’ll be able to recalculate the growth rates.  If the anemic GDP growth rate still exceeds the debt growth rate, the clock will still be ticking backwards.  We’ll see in a few days. 

In the meantime, for more detail on the GDP situation, please see Brian Wesbury’s article at this page. 

Bernanke: China's debt holdings not a problem

China owns 4% of our federal debt.  It's nothing to worry about—according to the Chairman of the Federal Reserve.  Here's the article.

Would somebody please tell Hillary?  She could use some better economic advice than she's apparently been getting. 

----------
[Thanks to William F. Hummel for the Bernanke tip.  Go see his website on how money works; you can buy his book, too.]

A pleasant surprise: Rudy the growth advocate

Three weeks ago I was wondering out loud if any of the presidential candidates would have anything to say about the most important underlying issue facing us: economic growth.  (“Economic growth” essentially means “higher paychecks, and increasing societal wealth and quality of life.”)  Back then, Mitt Romney was the only candidate form either party who had come close. 

Looks like I was just being impatient.  Two nights ago, Larry Kudlow interviewed Rudy Giuliani (transcript here).  Kudlow asked him about economic policy, and Rudy delivered a pleasant surprise: he showed that he's at least one candidate besides Romney who understands the importance of economic growth—and is unafraid to articulate policy ideas to pull it off.  (I do hope the growth topic catches on with the other candidates, although my gut tells me a few of them will be sticking with redistribution.) 

You may remember an article I wrote last year about why I differ with Al Gore’s ideas on energy policy.  Well, for a while on Monday night I was wondering if Giuliani had read that, because here’s one portion of what he said in the interview [emphasis mine]:

Let's look at wind and solar from the point of view of can we spare that energy? Right now, it's inconsistent energy. When the wind is blowing, you get energy. When it isn't, you don't. Is there a way to develop a technology that you can store it? Can we clean coal? Carbon sequestration, it can be done. Can we expand it? The other benefit is looking at this way, which I consider a pro growth way, is, we move ourselves to that energy independence and then we also create an industry, a new industry in America. And with the growth of China and the growth of India, if we're at the head of that industry, we're going to make a lot of money in China and we're going to make a lot of money in India. We won't just be buying things from them, they'll be buying things from us. 

I’m certain he got none of that from me, but is it any wonder why I was pleasantly surprised?  Rudy understands the importance of growth, the importance of energy independence, and the importance of technology advances to solve the problems.  And, last but not least, Rudy is so far demonstrating a knack for communicating with us; I miss that, don’t you?   

Now that Giuliani has really opened up the subject of economic growth to the presidential campaign, it will be a lot more interesting for me.  If the other candidates decide to join in the discussion, I’ll be delighted.  If they don’t, that would also be okay with me.  The campaign will be more fun to watch in either case.

The Global Warming Mystery

Although there are still a few scientists who think the planet will be cooling soon, there's a huge and growing body of evidence that the temperature is headed in the opposite direction: up.  If it is, the next questions are, in this order:

• Why is the globe warming?
• What should we do about it?

My interest in science doesn’t mean I’m an expert in climate science, so I have to rely on the evidence and arguments of others before I can draw any informed conclusions.  I do believe that our technological capabilities will be a big factor in the solution, as I mentioned in this energy article—but before we can commit to a solution path, it would be a big help to know why the globe is warming, wouldn’t it? 

A large number of people already have their minds made up; not only are they convinced they know “why,” but they also know “what we should do about it”: we humans are causing it, and the solution is centrally planned and enforced controls on the human activity and technologies that cause it.  That message is getting such wide coverage, I wouldn’t be surprised if a majority of the general public agreed with it. 

But if there is a majority, it doesn’t include me yet.  Reason: I’m not so sure the “Why” question is settled.  In fact, in the mainstream media, I think I’m detecting something Thomas Jefferson warned about:

The moment a person forms a theory, his imagination sees in every object only the traits which favor that theory.

The famous physicist and Nobel laureate Richard P. Feynman gave us a similar admonishment:

For a successful technology, reality must take precedence over public relations, for nature cannot be fooled.

Scientific truths are not determined by popular vote or opinion polls.  They are determined by testing theories against observations.  The book depicted at the top of this article has an interesting title, and an even more interesting subtitle: Unstoppable Global Warming: Every 1,500 Years , by S. Fred Singer and Dennis T. Avery.  I’m only partway through it, but wanted to get this posted in case you wanted to see a plausible alternative to the “greenhouse” theory for explaining why the planet is warming: the 1,500-year climate cycle, discovered recently by three European scientists (Willi Dansgaard, Hans Oeschger, and Claude Lorius).  Here’s the opening paragraph:

The earth is warming, but physical evidence from around the world tells us that human-emitted CO2 (carbon dioxide) has played only a minor role in it.  Instead, the mild warming seems to be part of a natural 1,500-year climate cycle (plus or minus 500 years) that goes back at least one million years.

I’m going to withhold judgment on the “Why” question; I need to see the rest of the evidence and arguments in this book.  Until we know why the globe is warming, we won’t know what to do about it.  (Example of an unanswered question: Is increased CO2 causing the globe to warm, or is the naturally warming globe causing CO2 levels to rise?)  When I see new evidence and theories like the one this book lays out, I become a bit more skeptical about the “greenhouse” theory to which so many others have already committed.  As the authors say, if it’s really the 1,500-year cycle that’s causing the warming . . .

. . . then public policy must focus instead on adaptations—such as efficient air conditioning and building dikes around low-lying areas like Bangladesh. 

Seems to me the 1500-year cycle theory should be getting more exposure and debate time from those truly interested in “settling the science.”  Maybe this new book will help liven up the discussion. 

FQ.07.12: Favorite Quote for This Week

Contemporary economic theory and policy are based on outdated models that emphasize energy costs, commodity prices, and capital investment in plant and equipment as key driving factors, while largely overlooking computational capacity, memory, bandwidth, the size of technology, intellectual property, knowledge, and other increasingly vital (and increasingly increasing) constituents that are driving the economy.
—Ray Kurzweil

Updated pie chart: Who Owns the National Debt, Jan. 2007

[ THIS PAGE IS OBSOLETE; click here to see latest pie chart. ]


This pie chart brings in more traffic than lengthier articles I write—and who am I to argue with success?  The chart below is an update, using the latest estimates from the Treasury.  (To make it easier to dispel the popular-but-false rumors about China’s share of our federal debt, I added some percentages in the bigger slices.  To end the suspense, the Chinese own 4% of it.) 

I assume this chart is mostly self-explanatory.  Seems to me that we have a diverse and inclusive array of Treasury-security owners spanning the globe, but concentrated in the USA.   Click to enlarge.

Here are clickable links to the data sources:
• Estimated foreign debt holdings
• Page to lookup total debt and intragov. debt
• Fed (“US Monetary Authority”) share of debt

-----------------------
End note:
I corrected this chart on 4/10/07 to properly include the Fed's debt portfolio in the US publicly-held debt; it was in the wrong place on the original chart.  The debt owned by the Fed is the ever-increasing inventory of bonds resulting from the Fed’s open market operations (purchasing bonds from the public, to maintain its targeted Fed Funds rate).  [For what it’s worth, I picture the Fed’s continually-growing inventory as a T-bond “boneyard.”  The military parks its old, unneeded aircraft in the Mojave Desert, and the Fed parks the government’s old, unneeded T-bonds in the Fed’s boneyard: $780 billion and growing.]
------------------------
Nitpick
I usually ignore nitpicking, but I'll make an exception in this case.  Excel expert John Walkenbach has judged this to be a "bad" chart, because, as he explained to me, "a bar chart would convey the information much better." 

Well, John and I will just have to agree to disagree on this.  Here's one of many links to explanations of which chart types to choose when.  Not sure if John has seen it, or one like it, but it's a concise summary. 

The shares of the federal debt owned by various entities as of Jan. 2007 call for a pie chart.  It's a snapshot in time, and it's a compact representation of all the portions (unlike a bar or column chart that's spread out vertically or horizontally). 

In my judgment, this chart makes it much faster and easier to check the facts against the political rhetoric.  John disagrees.  So be it.

Planet-friendliness in China and the USA

China's Premier Wen Jiabao, in the same article I mentioned in my previous post, also mentioned how diligently his government is going to act in order to cut energy consumption from 2006-2010; specifically:

We have set a target for cutting energy consumption per unit of GDP by 20 percent from 2006 to 2010. Although the Kyoto Protocol has not set obligatory targets for developing countries, the Chinese government is acting with a sense of responsibility to the world and is earnestly fulfilling its due international obligations.

If China pulls that off, or even a substantial portion of it, I have little doubt that world opinion will smile on that country for being so green-conscious.  After reading that, I thought to myself, Just think how much cleaner and fresher the atmosphere will be, relatively anyway.  If China can act with that kind of responsibility to the world, why can’t the good ol’ USA? 

But before I allowed my emotional self to turn green with envy that China, not the USA, would get the world’s approving smile, I told my analytical self to check the numbers before jumping to negative conclusions about my country’s performance regarding energy efficiency. 

When Premier Jiabao said “energy consumption per unit of GDP” I took it for granted he was talking about real GDP, which is adjusted for inflation.  (Otherwise, all a country would have to do is inflate its currency to get more “energy efficient,” and I’m sure the Kyoto crowd would call a foul on that; I would, in any event.)  So I grabbed some of the data I used for article 3 of my energy series last year, and focused my attention on the USA’s energy usage per dollar of real GDP, year by year for a half century. 

The chart below tells the story.  What a surprise: since 1971, the USA has reduced its energy consumption (using China's definition) by 49.1 percent!  That’s a steady, long-run average improvement of 2.01% per year.  I’m glad I checked the numbers before jumping to the false conclusion that China deserves energy accolades and we don’t. 

Here’s the chart; click to enlarge. 

Conclusion
China is targeting a 20% improvement over four years.  The USA has already achieved a 49% improvement over thirty-four years—and we’re still improving steadily.  And we did it without any “obligatory targets.”  By Premier Jiabao’s logic, that’s “acting with a sense of responsibility to the world.” 

When one considers the size of our economy, a decades-long track record of steady improvement should be enough to get us some kind of planet-friendliness award, don’t you think? 

China's premier on China's dollar holdings

China's premier, Wen Jiabao, answered several reporters' questions last Friday.  Because China's holdings of US dollar assets seems to be on everybody's radar, I thought this exchange with the Wall Street Journal would be of interest.

Wall Street Journal [excerpt]:

...the government has announced plans for a new agency to manage the diversification of China's foreign exchange reserves. Can you tell us what kind of assets this agency will invest in?

China's Premier Wen Jiabao [excerpt]:

In the 1990s, China did not have enough foreign exchange, so we borrowed foreign exchange from the IMF. The IMF only lent us $800 million. Now our foreign exchange reserves have exceeded $1 trillion, and how to make good use of them has become a new issue for us. 

China practices diversification of its foreign exchange reserves to ensure their security. Yes, we do plan to set up a foreign exchange investment company, and it will not be under any government department... It will be under government oversight and regulation and should preserve and increase the value of the assets... 

I know by raising this question, you may wonder whether the overseas investment to be made by this newly established agency will affect US dollar-denominated assets. China's foreign exchange reserves mainly consist of US dollar denominated assets. This is the fact. China's holding of US dollar denominated assets is mutually beneficial in nature. The setting up of a Chinese foreign exchange investment agency will not affect the US dollar-denominated assets. [emphasis mine]

It wouldn't be logical for China to invest their dollars in a way that diminishes their value.  As some have been trying to point out, even if that were feasible, it would be the financial equivalent of shooting oneself in the foot, or worse.  It just wouldn't be logical. 

I do understand that logical economics isn't always what drives politicians; however, the massive worldwide market in dollar-denominated assets will make it difficult if not impossible for any single country, including China, to dent the dollar by much—even if its politicians were willing to risk shooting their country's foot off.  [In fact, I think the only country in the world whose politicians might be able to pull that off is the USA.]   

------------

For reference, if you haven't seen it already, here's a recent chart showing how much of our federal debt is held by China and other entities.