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Posts Tagged ‘GDP’

Credit Card Swipe fee reductions to add significantly to U.S. economy

July 12, 2011 2 comments

If you haven’t heard the news, credit card swipe fees are about to be reduced by the government.  I think these fees are close to being criminal, so any reduction in these fees is good news.

The amounts that will be added back into the economy by this reduction in fees will be rather large.   It will end up being noticable in GDP over the next 20 years.  In fact, we’ll get close to an extra year of growth in the next 20 years just by reducing these fees.

It’s a bold, but provable claim.

The current rate is about $.44 per transaction or $16bn a year in revenue.  Just using simple math, we can figure out how much more money will be injected into the economy by the reduction in fees.

The proposed fees are $.20 from the fed, but they might go down too. The debate isn’t over.  $.12 has also been floated.

At the top is a quick table.  It’s remarkable just how large this boost will be.

My first thought is the impact will be even greater due to where the savings will accrue.  It’s going to go to lower income consumers, and small retail business owners.

Lower income consumers do much of their shopping at Walmart and small retail establishments.

Walmart won’t have as much savings as most business, but their fees will be reduced. Walmart agressivly negotiates all of its contracts, and swipe fees will be part of this.  They are rather cutthroat about passing savings onto consumers, so there will be very slight, but meaningful in aggregate, reductions in costs for Walmart customers.

I don’t expect prices to go down much in smaller retail establishments.  But the owners of these small business just got a decent boost to their profits.  The owners of small retail establishments are not rich – they will increase their spending.  I’d say it’s reasonable to expect mulitpliers on the order of a payroll tax cut for these fees.

If the multiplier is 1.3, we’re going to see close to a .1% increase in GDP due to lower swipe fees.

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Businesses hire more people when they are swamped with demand, not when they have high profits.

June 16, 2011 10 comments

We just lived through the fastest rebound in corporate profits since the 1940’s.  Did your company hire?

Here is Bloomberg making an astounding observation:

“Earnings will climb an average 10 percent a year through 2013, more than three times quicker than the economy, after what has already been the fastest rebound since the late 1940s, JPMorgan Chase & Co. projects. ”

The fastest since the late 1940’s!   Where is the hiring now?

There is a weak relationship between corporate profits and hiring.   We’ve had high corporate profits for nearly 2 full years – but last month we added employed only 54,000 more people.  High Corporate profits do not cause businesses to hire!

Businesses hire more people when they are swamped with demand, not when they have high profits.

I made this unsupported statement about how high demand causes hiring, and not corporate profits.   But unsupported does not mean untrue.

Over at the Big Picture, Invictus does the work I did not.  He shows a comparison of retail sales and employed people.   Raising retail sales means greater demand.  Retail sales and hiring are strongly correlated.  The chart is quite clear about the relationship, but Invictus goes into nice detail about how this works.   The reason for this is because retail sales is a direct measure of demand.

The Bloomberg article makes a claim that simply is not supported by any evidence.  They claim in this article that high corporate profits are about to cause a hiring spree.  I don’t see this in the data at all.

If you read the entire Bloomberg article, you’ll see that there are almost no lines about actual hiring in the entire article.   There is plenty of talk about increased corporate profits. There is talk about “Gunpowder” to hire, or “growing businesses” due to high profits.   But there is not much talk about how that means actual hiring.

I am far more concerned about where and how actual hiring will take place.

Hiring tends to take place when companies have to turn away business to their competitors because they do not have the manpower to take that business.

Red is employment, Blue is Corporate Profits

Look at the late 1990’s in this chart of corporate profits against changes in employment.   The late 1990s did not have rapidly growing corporate profits, but the hiring was just incredible.  That’s because businesses were swamped with demand.

Businesses hire when they are swamped with business, not when they have high profits. High profits can be related to demand, but high demand is not necessary for high profits.

Focusing on making businesses more profitable will not end our slump.  Focusing on increasing demand will end our slump.

Businesses hire more people when they are swamped with demand, not when they have high profits.

Does MMT hint will we see $2.00 gasoline by July 15th?

May 17, 2011 4 comments

It could happen

Oil is falling. Oil is falling rapidly. The drop is nothing short of astounding.  The conventional wisdom is:

“The Fed’s view, and our view in the UBS mining team is that QE2 operates through portfolio choices. When the Fed buys treasuries, it lowers yields relative to other risk assets – forcing portfolios to shift up the risk curve. That shift incorporates strong capital flows overseas – which can be seen in the dramatic rise in foreign exchange reserves in recent months.”

The MMT view is different.  It says:

“QE II is an asset swap.  Investors that wanted to swap their treasuries for higher yield assets could have done so at any time through the repo market or tiny margin haircuts at any bank.   The yield curve tends to float to indifference levels for future inflation – so if there is $3T or $13T of Treasuries out there, the yield curve will gravitate to levels that discount future inflation.  In general, QE won’t push the market to speculate more due to the mix of assets investors hold.”

These views do not seem that different to lay people, but to investors, they are hugely different.  If you believe the conventional view, QE of moderate size is the equivalent of  pouring gasoline on a fire.  People cannot do anything without cash, and forcing people out of T-bills and 2 year notes into cash makes them spend it on riskier assets.  Riskier assets should embark on huge rallies as QE takes effect.

So we get a commodity bubble, oil prices go through the roof.  Silver and Gold rationally respond by tacking on 50% or so in a year.  As QE takes hold, people will respond by shifting to slightly riskier assets.

Perhaps this conventional view is true.  However, I do know that professional traders and firms prefer to post t-Bills as collateral at the Chicago Mercantile exchange over cash.  T-Bills still pay the bearer money. And the CME treats T-Bills just like cash. So posting a t-Bill or treasury at the CME turns your required margin account into an interest bearing account.

Banks also accept T-Bills as collateral on very similar haircut schedules.

In other words, large speculators – or the firms that hold accounts for small speculators – prefer to post T-Bills instead of cash as collateral.

If you had:

  • held T-Bills or Treasuries,
  • got “pushed out” of U.S. debt due to QE,
  • and thought to yourself, “Now I want to speculate in Commodities”,

the first thing you would do is turn around and buy T-Bills with your cash or short term U.S. debt with your cash.  You’d do this so you could speculate in commodities but still get paid interest.

You can see why I’d think this chain of events doesn’t make much sense.  Why bother speculating?  It probably wasn’t QE that made you speculate in the first place.

The MMT view is that due to effects like this, it doesn’t matter if people hold cash or T-bills.  T-Bills are so close to cash.  T-Bills are “better than cash” for speculation, because they get treated like cash for margining, and still earn interest.

What does this have to do with Oil?  The speculation in oil does not have anything to do with Quantitative easing.  It’s just speculation.  It isn’t supported but a massive U.S. Government program.  It’s just speculation that oil will go up.

The data from the Chicago Mercantile Exchange tells us there is a ton of speculation. If you are going to speculate in oil, the Nymex division of the CME is the place you’d do it.  The conventional view is that QE II is driving this speculation.  But the odds are strong QE II has nothing to do with record speculation.

The fundamentals of oil are not strong.  Maybe the CEO of Exxon is trying to deflect criticism when he says that oil should be at $60-$70 based on fundamentals.  But everywhere you look, there is lots of oil, and moderate demand.

Last time oil was at $60 a barrel, gasoline was at $2.00 a gallon.  If oil prices fall as people realize QE II didn’t force speculation in oil, we could easily see gasoline prices fall dramatically – and in a short period of time.

MMT doesn’t guarantee lower oil prices.  All it says that the current crop of speculation in Commodities wasn’t forced by QE.  The speculation in the markets could be due to people wrongly thinking QE would push others to embrace riskier assets.  But not one person got pushed out of Treasuries and then decided to speculate in commodities.

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Risk Adjusted GDP growth and taxing the rich

May 13, 2011 6 comments

Matt Y tackles a tough problem. Many economists believe that lower taxes on the rich increase economic growth by a few tenths of a percent.  We do not have much solid empirical evidence for this, but they still believe it.  So of course, these people agitate for lower taxes on the rich – its a no brainer because it makes everyone better off.

But the most cursory investigation makes it obvious they care far more about low taxes than economic growth.

First, Nearly all the benefit from this .2% comes after the current generation is dead.  The extra benefit is barely visible after 40 years.

Economic Growth after 40 years

3.5%   296%

3.7%  328%

The overall economy is 30% better off after 40 years. Thats great, but not exactly earthshaking extra growth.

Next, This is the total economic growth. It doesn’t account for distributional effects.  If the entire economy is 328% better off, but the middle class is only 200% better off, the deal is much better for the middle class to go with taxing the rich.

Over the last 40 years, the middle class is closer to 0% better off than 200% better off. No wonder why the middle class wants to tax the rich more.  They don’t get any growth otherwise.

Then, This thinking doesn’t account for increased economic volatility that results from wealth concentration.  I pound the table about this – we need to think about risk adjusted returns when looking at economic growth.

Downside volatility is horrible for long term growth, because digging out of the hole takes a long time.  Some people are waking up to the idea, but we need more focus on the risk and not just the return when thinking about long term GDP growth.

TC Blast from the past: The most important event in the history of humanity since the domestication of animals and plants” happened in a country with Debt to GDP greater than 150%

April 22, 2011 1 comment

I have a soft spot for one of my old posts.  It’s about the industrial revolution and debt to GDP ratios.

“One of the most important developments in  human history – the industrial revolution in Britain – happened in a country where the Debt/GDP ratio was always greater than 100%. For much of the time, debt was higher than 150% of GDP.

Here is some Wikipedia goodness on the Industrial Revolution:

Economic historians are in agreement that the onset of the Industrial Revolution is the most important event in the history of humanity since the domestication of animals and plants.

From New Deal 2.0. via this excellent Mike Rorty post, it turns out  the Industrial Revolution happened while debt to GDP was over 150%:”

Read more here.

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Will our Recovery technically be a Recession?

November 26, 2010 Comments off

I am starting to wonder about our next recovery.  I suspect that while we will have something that feels really good to the consumer, we might technically have a double dip recession!

Our inventory build up has been so large and the change so dramatic, that we must slow down inventory growth – it is all but a certainty.  Additionally, inventories get drawn down during fast expansions – it is difficult to build inventories when facing a deluge of orders.

Combine a deluge of new orders, plus low future orders according to the ISM, and record inventory growth, and you have a recipe for negative inventory growth.

Read more…

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