04 October 2015

US recessions and recoveries over 55 years

The following graph shows year on year changes of real Personal Consumption Expenditure from January 1960 to August 2015.

Among other things it is an indicator of the severity of the eight recessions flagged as such by the US National Bureau of Economic Research (NBER). The recession from March 2001 to November 2001 was scarcely a recession. In trying to recover from it, the Fed first created assets bubbles in the housing and equity markets and then blew them up. The recession from December 1969 to November 1970 too scarcely qualifies as a recession.

The current recovery is the slowest and least energetic on record.

Category: Economics

06 September 2015

A Fed rate hike won't have adverse results, for now

On September 16-17 the Federal Reserve Board's FOMC will meet to decide on an increase in the Fed Funds rate. It won't be an easy decision to make. Stock markets around the world are in turmoil. Commodity markets have fallen very low. And data on the jobs front are ambiguous. The temptation will be to push a rate hike further down the road or increase it from 0.13% at present to just 0.25%. But my guess is that a rate hike at this point will have little impact.

According to Wikipedia, the Federal funds rate is the interest rate at which depository institutions actively trade balances held at the Federal Reserve, called federal funds, with each other, usually overnight, on an uncollateralized basis. And since inter-bank loans are at a level last seen in 1979, it is unlikely that an increase in the fed funds rate will have much impact. Markets may throw a tantrum but they will probably settle down after a while. A small fed rate hike may even help to slowly deflate the asset bubble that the various bouts of QE helped to inflate.

Even more important, the YoY growth rate of Corrected Money Supply has nearly flattened out in the three months to July 2015, when it was 5.6%. A study of the graph since 1961 shows that at this level no catastrophe has ever occurred.

The trouble is that when the Fed sees a rate hike has little adverse impact it will be emboldened to repeat the process several times. And when that happens calamity usually strikes. The last three recessions have been directly engineered by the Fed. As in previous cycles, the Fed seems unaware that it is raising rates midway through a contraction.

Category: Economics

02 September 2015

India's exports and imports as a percentage of GDP 1960 to 2014

The graph below is self-explanatory. The data are from the World Bank web site.

Category: Economics

26 August 2015

Real interest rates paint a gloomy picture

The graph below shows real interest rates from January 2001 to July 2015. It is derived by subtracting the annual inflation rate (using the Consumer's Price Index for all Urban Consumers, all items) from Moody's Seasoned Aaa Corporate Bond Yield.

It shows the real interest rate in May, June and July 2015 was 4.02%, 4.07% and 3.98%.

By way of comparison, in October 2006 the real interest rate touched 4.2%. Just a few months later the financial crisis began unfolding. In February 2007, Freddie Mac announced that it would no longer buy the most risky subprime mortgages and mortgage-related securities.

It is useful to compare this with the graph of Corrected Money Supply below, reproduced from my May 2015 post.

Category: Economics

20 August 2015

Darwin and 'evolution'

Darwin is considered the father of evolution so it is more than a little surprising that the word 'evolution' does not occur at all in the 1st edition of The Origin of Species (1859). Nor in the 2nd, 3rd, 4th or 5th. It is only in the 6th edition (1872) that the word makes an appearance and even then it may have been only because Thomas Huxley and others regularly used the word to describe the process that Darwin had in mind.

So why was Darwin himself so reluctant to use the word? First of all there is a grammatical problem. When one talks of a person eating we mean of course that the person eats. When one talks of a person jumping we mean that the person jumps. By extension, when one talks of the evolution of a creature one means that the creature evolves. But of course creatures do not evolve. Darwin was very clear about that.

There is only one variant of the word 'evolution' in the 1st edition of Origin. It is the very last word of the book. "There is grandeur in this view of life, with its several powers, having been originally breathed into a few forms or into one; and that, whilst this planet has gone cycling on according to the fixed law of gravity, from so simple a beginning endless forms most beautiful and most wonderful have been, and are being, evolved."

Note how carefully Darwin uses the word. Creatures do not "evolve". They "have been, and are being, evolved".

Darwin is not the father of evolution. The idea of evolution, meaning the idea that the plants and animals we see around us did not always have the forms they do but were modifications of previous forms, is very old. It goes back more than two millennia. Closer to Darwin's time Jean-Baptiste Lamarck and his own grandfather, Erasmus Darwin, were evolutionists. In their view of evolution creatures "evolved". The ancestors of giraffes stretched their necks higher and higher trying to reach scarcer and scarcer tree leaves in times of drought, and their longer necks were passed on to their descendants. In Darwin's theory individuals did not change at all. It was the species that "was evolved" and this did not happen because of anything they did. By the time of the 6th edition of Origin Darwin may have felt confident that it was his idea of evolution that had triumphed and that he could safely use the word without being misconstrued. Species evolve, not individuals.

But how can species evolve without the members of the species themselves changing? Consider an example, totally imaginary of course. There is a certain deep-dwelling species of fish in the Amazon. Light penetrates with difficulty to the bottom of the muddy river, so the fish are bright red in colour, because it helps them to find their mates. One year it so happens that the Amazon shifts its course. The next year it returns to its original course, leaving a large but shallow lake in the path where it had shifted before.

The red colour of the fish which was a huge advantage earlier now becomes a big disadvantage, making them easy picking for a large population of water birds in the vicinity.

Assume that the population distribution of the fish in the lake is in the shape of the bell curve shown below.

A few fish at the extreme right are bright red. A few fish at the extreme left are nearly colourless. The rest fall in between. All are red, but of varying shades of red.

Now assume that the water birds eat up the reddest fish in the population, so that the population distribution is as below.

It is the same as the first graph but with a small chunk of fish at the extreme right end eaten up; you have to assume that they are eaten before they can reproduce. Now if you assume that the birds migrate for a few months allowing the fish population to recoup, the new population distribution will be as below. The peak of the curve and every point on it are just a little less red than before.

After this has gone on for a few tens of thousands of years the fish will have become nearly colourless. Click on the image below to see this happen.

The fish are changing colour over a period of time and this is happening although no individual fish is undergoing a change. The change in colour is being accomplished not by the fish but by the predators. This of course reminds us that Darwin's book is titled "On The Origin of Species by Means of Natural Selection" and not, as some people seem to think, "The Improvement of Species through Personal Endeavour".

Some writers, mostly of a creationist bent, have argued that evolution violates the laws of thermodynamics because more evolved life forms embody less entropy than more primitive life forms. But this is true only if you believe in a non-Darwinian kind of evolution. A refrigerator that is cooled from 30o to 0o Celsius undergoes a reduction in entropy. But for this to happen a compressor has to do work and throw heat into the surrounding atmosphere, so that the entropy of the universe as a whole is higher than before.

It is the same with evolution. Even if it is accepted that a more evolved life form contains less entropy than a more primitive life form, the reduction does not come without a cost. As our example above shows, any kind of evolution requires Nature to do a lot of work. To change the redness of our fish just a little bit, tens of thousands of water birds had to work for tens of thousands of years. Evolution is an energy-intensive process, requiring a huge increase in entropy of the universe as a whole. Biology does not contradict physics. And this follows from the fact that creatures do not evolve, but are evolved.

(Thanks to Nikhil George for help with images.)

Category: Science

Philip George
Debunker of Keynesian, monetarist and Austrian economics

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