Aiding by Trading

An article in Slate strongly urges, that "buying any products made by Third World labor" should be avoided. The basic argument is simply that one should not exploit the poor. Going a bit beyond the most simplistic reasoning, however, one should quickly come to issue the reverse recommendation: Let the poor in and compete with their products on the same conditions as the rest on the market! So goes a brilliant post on Brad DeLong's Semi-Daily Journal, pointed to by Anne. And there is not really much for me to add here. Nothing but this post from Ivan, which more or less gives the same free-trade advice when it comes to child labor. And it does seem to me, although I have been lucky enough to not actually having had to make the choice, that the alternative of letting the children starve should after all be worse than having them to work.

One other thing; why do people in the First World so often arrive at the "let's not buy their products" conclusion? My guess is that it has to do with identification. People that makes your clothes and shoes, that we make business with, that live in cities like we do, those people exists in a way that force us to acknowledge their existence. And when they are poor and miserable it becomes, as should be clear from the articles pointed to above, partly our problem. And the easiest way to get rid of it is, apparently, to throw these people out from our world. The Slate writer would evidently feel much more comfortable if poor people lived their lives in rural areas with no contact whatsoever with the First World. Just so we could be sure that *we* are not part of their problems, just to make sure that we could safely and morally forget about them. A quick and easy fix, only way too quick and easy.

Long-Term Oil Price - Higher Than Most Think

Few people, at least among those regularly reading newspaper could have stayed unaware of the current situation on the oil-markets. With crude-oil prices nearing $50 (WTI spot and short dated futures), about double that of the (now obsolete?) OPEC target interval, this is quite natural. However, in spite of this, markedly less people, even among sector analysts, seem to know, or fail in my humble opinion to take warning enough from, that crude-oil markets actually don't see prices to go back anytime soon. When I checked my Bloomberg screen on this today, U.S. crude prices (WTI) for all deliveries (or actually cash settlement) before end of 2005 were above $40. Swap prices, indicating average price for oil over the contract's lifespan, where above $35 for all contracts out to 2008. Here is Lex' take (which prompted me to check the the longer contracts) from this mornings Financial Times (subscription required, for the online edition a separate and rather expensive one)

Most forecasts are wrong and rarely more so than in the oil market. For the last four years prices have turned out higher than expected. But recent forecasting errors pale into insignificance compared with the range of expectations for the long-term oil price.

Rising demand within a global oil system running at full capacity, rather than a withdrawal of supply, underpins the current high crude price. Concern over a lack of spare capacity has pushed forward prices higher, further into the future, than during earlier oil price shocks. Based on forward swaps, the price of Brent crude in 2010 is $33.50 per barrel. The oil majors, meanwhile, are using a long-term price of about $21-$22 to evaluate investment projects.

Either the forward market or the oil companies' assumptions are incorrect. If it is the latter which are overly conservative, investment may fall short of the level needed to rebalance the market. The altenative source of new supply is through government investment within the Organisation of Petroleum Exporting Countries. However, to fund investment and maintain social welfare programmes, Opec requires prices well above $20. There is no guarantee that Opec can engineer a high oil price, but, if it cannot, investment could be at risk.
With the oil majors yet to consider the supply opportunities which are economic at $25, the new equilibrium price of oil is unlikely to be as high as current spot prices above $40. What is increasingly clear, however, is that a long-term oil price of $20 is too low.

Languages for Blogs

In spite of the strong influence from the English language that doomsayers think will soon make an end to the Swedish language, that of the Honour and the Heroes, it is still going strong. Our language was flexible enough to transform and survive under the heavy German influences during Hanseatic times. We really shouldn't need to worry about it as it nowadays finds use in more areas than before, even for writing blogs. So when Lennart Frantzell is kind enough to link to me with the fluttering words in which he tells that this blog is an : "exempel paa de mer initierade bloggar som nu boerjar synas paa webben", it is tempting to respond to his recommendation that I should start write it in Swedish instead. I really do think that he has a good point in, as he does, writing a blog about USA from USA in Swedish. After all, my blog mirrors his by being at least partly about Sweden from Sweden in English (did you know that gasoline in Sweden costs well over $5 a gallon?). And as long as I want to keep the possibility open for other than the people who already knows about Swedish life to read about it, I have to use my English.

(And if you don't like that, you would really hate my French.)

FOMC and the Economy

As you already have heard, the Federal Reserve's Open Market Committee hiked the key interest rate by 25 basis points. The motivation however, was weak. Taken out of its policy context, it would probably have been read by most market participants as a motivation for leaving the rate unchanged, rather than hiking it. You can find the main part of their statement at Brad DeLong's webjournal together with his opinion, which very efficiently spells out doubts that many people (at least in the bond markets) probably share:
I have a hard time imagining a world next summer in which the Fed is sorry that it did not raise interest rates today. But I have an easy time imagining a world next summer in which the Fed is sorry that it did raise interest rates. So I'm having a hard time understanding their thinking.
Barry Ritholz sees signs indicating possibilities for the "sorry it did raise"-scenario. Under the headline "Double Squeeze: Between a Rock and a Hard Place" he quotes a commentator as saying:
"for the first time in 3 years, there are no government tax cuts, no checks, no other one-off items to spur the economy forward. The refinance afterburner has flamed out, and the Fed is raising rates."
That's a bearish one (three) liner when it comes to the prosperity of the economy and the business cycle development, and quite bullish for bond-prices. Prices which by the way actually strengthened on the FOMC announcement.

A Farewell to Industry

Some of the last remaining industries in the Hammarby area just south of central Stockholm are now being demolished to make room for housing construction. This crane has been preserved as a memory of all work that was done in the harbour. General Motors, for instance, had a large plant for assembling autos at the same dock. More reading in the language of the Heroes and Honour here and here.

Media Power

The media is a powerful thing, as Abiola Lapite points out in this post:

John McMillan and Pablo Zoido [...] use bribe prices in Peru to see "which of the democratic checks and balances--opposition parties, the judiciary, a free press--is the most forceful"? They found that

Montesinos paid a television-channel owner about 100 times what he paid a judge or a politician. One single television channel's bribe was five times larger than the total of the opposition politicians' bribes. By revealed preference, the strongest check on the government's power was the news media.

Precariuosly though, media's function as a "check and balance" has now, as it seems, been severly degraded. As indicated by what media has conveyed to the public, it really looks like it has given up its freedom. From Counterspin Central: The unofficial "FIRST AMENDMENT ZONE.":
"Newsweek poll:

'Do you think Saddam Hussein's regime in Iraq was DIRECTLY involved in planning, financing, or carrying out the terrorist attacks of September 11th, 2001, or not?'

Taken Sept. 2-4.




Macro Commentary

I'm picking up some good macro commentary from comments. Does a pretty good job in summarizing the current situation, I guess:
There has been considerable investment in productivity enhancing technology, while there has not been a large investment in expanding capacity. Consumer demand is to an extent satisfied from abroad, and there is not enough domestic demand to warrant capacity expansion. This is especially so since capacity expansion was emphasized from 1996 till the beginning of the recession in 2000.

The recent increases in the Federal Funds rate coupled with a decrease in long term interest rates is highly unusual at the beginning of a Federal Reserve tightening cycle. After a 10 month series of Federal Funds rate increases in 1994, it was apparent the economy was slowing and long term interest rates began to decline several months before the Fed finished the cycle.

Bond investors now appear convinced there is no inflation to worry about and the economy is still weaker than the Fed has indicated. Employment prospects simply do not appear promising. There seems little reason then for the Fed to continue to raise short term rates. I think the Fed will raise, but I would much prefer a halt and hope growth will begin to increase enough to generate better than 150,000 jobs a month.

Could it be possible that economic growth may continue pretty much the way it is now? We are growing reasonably well, just not fast enough to create enough domestic demand to significantly add to job creation. We might continue in this way for quite a while. About 150,000 jobs created a month, enough to meet job creation needs due to labor force growth. Fairly low long term interest rates, reflecting little inflation and moderate economic growth. A stable housing market, stable dollar, moderate growth in the stock market. The most important problem in the near term may be the persistence of high energy costs and a crimping of household budgets to meet these costs.

Tired of Protecting Civilians?

If I remember it correctly, U.S. forces used to point out to the media that they were taking "extraordinary" measures to protect civilians, as in this story from last year. Now, it seems, they have sadly been brutalized to a point where they don't seem to care that much anymore. Newspapers (like this) report on one of this weeks U.S. air raids on Iraq, quoting "The Health Ministry [which] said that of those injured, 17 were children and eight were women". The Wall Street Journal Online (subscription) does not allow the health minister to be quoted on these numbers, but gives the U.S. military a chance to remind us about their "extraordinary" protectiveness towards civilians:
Dr. Ali Awad of the Fallujah General Hospital said 30 people were killed and more than 40 were injured, including women and children.

The military said intelligence showed up to 60 suspected enemy fighters may have been killed.
But there is no denial, no excuse, no nothing. The military just leave the scene to the Amnesty International who, according to this newspiece:
is calling for an inquiry into recent attacks in which civilians were killed in Iraq in circumstances which may have violated international law.

"There are worrying reports about the mounting casualties amongst civilians who find themselves caught in the battle between American troops and insurgents," said Abdel Salam Sidahmed of Amnesty International Friday . "It is time to ask questions about whether these casualties could have been avoided, and whether needless deaths could be prevented in the future."
It also seem that the U.S. military failed to impress with any extraordinary measures to protect civilians during last weekend's actions, leaving even more room for the Amnesty International's complaints. The newspiece continues:
Thirteen civilians, including a young girl and a television cameraman working with al-Arabiya television, were killed in Haifa street in Baghdad on 12 September when US troops fired from a helicopter at a crowd, allegedly in response to shots fired from the same area. A US army spokesperson justified that attack and described the operation as "successful". The spokesperson said the US army did its best to "eliminate collateral damage". However, press reports contradict the US account that shots were fired at the helicopter from the same area.

"Multinational troops must take necessary precautions to protect civilians, and respect the principles of necessity and proportionality," said Mr. Sidahmed. "Amnesty International is seeking clarification of the measures multinational forces are taking to ensure that they comply fully with their obligations under international law."

Markets Trust Fed on Inflation

Following up on posts and comments (Brad DeLong) about the credibility of the Federal Reserve when it comes to controlling inflation, I pick the following from my office desk, dated Sept 1. As the bondmarkets - the nominal and the real-yield bonds - show; the Fed is expected to neutralize most of the inflationary impulse from swings in the labor-market:

The strong market impact the non-farm payroll figures have had historically is summarized in the following table. The market moves on the day the figure have been released, expressed as yield change, is tabulated together with the released figure, and the expectations for it according to Bloomberg's economist survey. Over the last 12 months, 10 year nominal yields have tended to increase about 0.13 percentage points (13 bps) for every unexpected extra hundreds of thousands of people on the payrolls, 10 year inflation-linked real-yield treasury bonds, TIPS, have tended to increase 10 bps, and their implied expectations of future inflation, the break-even spread, has tended to increase only as little as about 3 basis points.

As evident from these figures, the market trusts the Federal Reserve to, at least in the long run, counteract most inflationary impact from changes in payrolls. The final bond-market impact of the economy's performance could hence be viewed as channeled mostly through real-yields.

Non-Farm Payrolls - Change in thousands and yield moves in bps on announcement days:

Date..............Figure...Expect..Surprise..10y Treas..TIPS..B/E













2004-08-06..........32.......240.......-208......-18.0...-15.9 -2.1


Broken Canon Cameras

Six years ago or so, I bought a small, inexpensive - or at least affordable - camera: one for ordinary 35mm film with a zoom lens covering focal widths between like 35-105mm. Very useful - so useful that I actually wore it out in a couple of years. The electrically powered lens, or rather the switch controlling in, broke down. Later on, I bought a similar camera, only that it had a 3 Mpixel digital sensor where earlier models would have had the film. Useful indeed, and I wore that one down too. More precisely, the zoom lens broke, and that in less than a year. Both these cameras were from Canon. Annoyingly, the digital one (a Canon PowerShot A70, similar to Canon PowerShot A75 and also to Canon PowerShot A60 and Canon PowerShot A80) was bought in USA, and Canon's guarantee thus (for some reason that just might be connected to Canon's knowledge of their products quality) covered its use only in the Americas. Since I'm a European, I then had to buy another camera, and this time I did so from another manufacturer. Same performance, higher price, and hopefully better durability. Otherwise I might have to come back to that one in a later post.

Swedish Euro Opposition Strengthens

The Euro opposition has increased. Now, one year after the Swedish Euro-referendum, when membership in the European currency union were turned down, the opposition to the Euro has stiffened further. According to Sweden's leading tabloid, Social-DemocraticAftonbladet, six out of ten Swedes are opposed to the Euro. Partly to blame, perhaps, is that all the doom and gloom that the proponents threatened us with, were we to keep the Swedish Krona, plainly didn't happen. Personally, I still think its very much a pro-market thing for an advanced country with an open economy to keep its currency floating. Frictions in the labor market might thus to some extent be counterbalanced by currency liquidity. If the collective wage negotiating process leads to excessive increases, the currency market might simply devalue these (in USD term) by selling off the Krona. The EMU-opponents campaign has been kind enough to save and post an article I wrote ahead of the referendum to the Swedish daily business paper, Dagens Industri. With knowledge of the language of the heroes and honor, you can read it here. Our Prime Minister, Goran Persson, leader of the Swedish Social-Democrats, who was the main force in favor of a Swedish EMU-entrance, have declared that another referendum will probably have to wait until after 2010.

On the Wisdom of Prices

Abiola Lapite is the first one out in what Daniel at Crooked Timber sees as a possible continuation discussion on "The Wisdom of Crowds". A propos the purported failure of a certain crowd to give answers with good precision to some general questions Abiola doesn't:

"think that one can draw from the results obtained the conclusion that markets will display the same erratic judgment as crowds do...with markets, unlike with large numbers of individuals voting on a question, there's a built-in incentive for individuals to get the answers right".

He is of course right, and indeed, incentives are important, they probably even form a necessary condition, to make markets effective. And it's more than that. Markets let you see the "answers" of others, prices are shown together with volumes and sometimes also order depth. In this context, one often thinks about purely speculative markets, like betting exchanges (Bush or Kerry, Tottingham vs Leeds, etc...), but for "real" markets, non-speculative participants (a.k.a "liquidity traders") contribute with even more information. By buying or selling the goods they afford or can produce given the current price, they reveal important information about fundamental aspects concerning the good such as demand, substitution possibilities, production costs etc.

Finally, there is the selection process. Successful speculators are rewarded, thereby gaining financial strength; less successful ones are soon forced out of the market. Survival of the fittest eventually helps to enforce efficiency. At least insofar skill might with some precision be told apart from luck, and then also might be rewarded fairly enough. These are rather strong assumptions I guess, and one should probably not expect market to regulate themselves or even be the best solution for all "social information processing". But they are surprisingly often the best solution.

Welfare-State Survival

Chris asks in a comment to an earlier post about "Swedish consensus in favor of government at or above 50% of GDP? Why do Swedes not talk of 'welfare queens' etc?". Now, there are lots of such talk, but still the welfare-state survives because its popular support. How come?

From my everyday experience of being a welfare-state citizen, two explanations pop up on the top of my head. The first one is about psychology. You somehow come to think of things as being you own if you have regular access to them. I sometimes think some of the income stream I receive from the Government as mine, though it actually belongs to the other taxpayers. Even though they could easily cut of that flow, they don't, because they too have somehow come to think of that money as belonging to parents, farmers, fishermen, the disabled, the poor, car drivers north of the Dalecarlia river etc...

Even in the USA I think people have become to think of taxpayer's belongings as their own. In a free market economy you don't really expect roads serving large population centers to be entirely government subsidized. Yet toll-free roads are common, which actually leads to sub-optimal investment and consumption, producing Soviet-style queues (except that the people in it sit in expensive cars rather than stand outside in poor clothing). The road simply belongs to you because it always has. The Government cannot take back things it has already given away - it has given us a finger and soon we will take the whole hand.

The other reason is about politics. The non-socialist parties keep explaining that a smaller Government yields higher growth and in the end more rather than less welfare. But the socialist voters don't trust them, and they have really no reason to do so. As long as the non-socialists focus on tax-cuts for the rich and leave questions of growth enhancement as something to decorate their speeches with, they really have a credibility issue. Recently though, the Swedish conservatives have tried to change this. Incentives to work should be enhanced through tax-cuts for the poor and benefit reductions for the unemployed. Interesting initiative (in Swedish), and a quite promising one too!

The Internet Saves Our Car

Once again we've been able to find cheap spare parts to our car from scrapyards linked to the internet. Many Swedish auto-scrapyards display their spare part inventories in "Bildelsbasen". Highly recommended! Search and find the part you want at a location near you, call them up and strike a deal! All business is local so I'll conclude in the language of the Heroes and Honor: Det är mycket latt att komma i kontakt med skrotar som har de bildelar man letar efter på "Bildelsbasen". Rekommenderas varmt!

War Really Sucks

How could they kill the children!? An important question that has been asked in the press during the recent days, for a perfectly horrible reason. One could also ask how they could wage war. Even though most politicans who have done so have been less outspoken than the Chechnyan terrorists about the targets of their actions, children have most often been included. Hiding the children behind euphemistic target descriptions such as the"basic economic and social fabric of the [enemy's] country" doesn't save them, they suffer and die all the same. As U.S. WWII bombing strategist Curtis LeMay admitted: "I suppose if I had lost the war, I would have been tried as a war criminal." (Links to Wikipedia)

"Become North Korea, or You Will be Iraq"

The pre-emptive war in Iraq might have caused lots of damage to global security, at least according to experts quoted in the following newspiece from Reuters via ABC-News. With benefits offered to nuclear N.Korea, and Iraq invaded with no signs of WMD's the message the U.S. have sent should be quite clear: "You've got to become North Korea, or you will be Iraq". : Iran Sees Nuclear Lesson in Iraq, N.Korea -Experts:
...Iran, which President Bush has branded part of an "axis of evil" along with North Korea and prewar Iraq, saw Baghdad fall to U.S.-led forces in April 2003, the same month that North Korea told the United States it possessed nuclear weapons.

Now, with 138,000 U.S. troops in Iraq and North Korean diplomatic talks promising attractive benefits for Pyongyang, Ray Takeyh of the Council on Foreign Relations said the message to Iran was clear.

"You've got to become North Korea, or you will be Iraq," said Takeyh, the council's senior fellow for Middle Eastern studies.

"Biological and chemical weapons don't deter the U.S. military and are no guarantee of territorial integrity or sovereignty," he said. "But nuclear weapons have a bargaining utility."

Added Vali Nasr, a Middle East expert who teaches at the Naval Postgraduate School: "(Iran has) come to believe, rightly or wrongly, that they're more likely to manage a threat to the regime if they have a nuclear capability."

The International Atomic Energy Agency, the U.N. nuclear watchdog, said in a new report that Iran plans to process 37 tonnes of raw uranium. That could give the country enough material for five bombs, though the IAEA found no conclusive evidence of an Iranian arms program.

Tehran insists the only purpose of its nuclear program is the peaceful generation of electricity.

The Bush administration, which accuses Iran of pursuing nuclear weapons, intends to try to persuade the IAEA board, at a meeting later this month, to find Iran is not in compliance with its nuclear Non-Proliferation Treaty obligations and to send the issue to the U.N. Security Council.

The United States, which severed diplomatic ties with Tehran after the 1979 Islamic revolution, has refused to rule out the possibility of military action against Iran.

But some experts doubt Iran can be stopped from acquiring nuclear weapons given the country's industrial development and the momentum of its nuclear program, which began in the 1970s under the U.S.-backed shah.

Job Report to Dissappoint?

Kevin Drum listened to Bush's speech at the Republican convention yesterday. He might have found an indication of what is to be released in the job report due today at 14.30 CET.

The Washington Monthly:
"BUSH SPEECH....There was no mention in the speech of job creation. Something tells me this means that Friday morning's job numbers aren't going to be so hot."

Update: As a background, here are comments from the White House regarding their policy on the jobs report and Bush's speech.

Bush Won't Know August Payrolls Data Before Speech, Aide Says
By Roger Runningen and Simon Kennedy
Sept. 2 (Bloomberg) -- President George W. Bush will not see
the Labor Department's August employment report before accepting
the Republican Party's presidential nomination tonight, White
House spokeswoman Claire Buchan said.
Bush speaks at 10 p.m. in New York, 10 1/2 hours before the
Labor Department is scheduled to release payrolls data for last
month. Bush and administration economists typically see the
statistics the evening before their public release.
Neither the president nor his speechwriters will see the
data, ``to avoid any misperception that he's signaling
information in advance,'' Buchan said.
Economists surveyed by Bloomberg News expect the report to
show an increase of 150,000 jobs in August, based on the median
forecast, after 32,000 were added in July.


Yesterday, I took my youngest kid to his scheduled monthly medical examination. The nurse greeted us by asking where his mother could be, did she lost her way in the corridors maybe?

Welcome to 2004 folks! Although we are still biological beings with all the differences between the sexes that mammals usually display, we do not:

1. Lock in mothers into their houses with the children, banning them from social life in the outside world.

2. Send fathers away from their children and families, keeping them from duties that might involve taking care of any living creature whatsoever.

And most of us are quite happy for that! Terri Eriksson at Aftonbladet for instance, brilliant columns (in Swedish).

Popular Posts