Economics 101-Remedial

Posted by tED magazine on Monday, February 06, 2012

By Joe Salimando

Investigate economics/economists & you find that – as once was said about North Dakota…there’s no there there. For example, you think that there is a Nobel Prize in Economics. Wrong.

Economists, forecasters, and pundits, peddle opinions. Unfortunately for them, there are things called Facts. These tend to demolish what economists say (for example, that 2012 & 2013 will be OK).  

Some elements:

1. See the graphic below, recently updated, from Gregor.us:

Anyone predicting future oil prices must deal with this graphic. If consumption goes up (if we don’t use less as the Chinese & Indians use more), what happens to prices?

With consumption rising, we’ll take drastic actions to expand production (punch more holes in the ocean floor, boil tar sands, etc.). The cost of doing those things is exorbitant.

But see the graphic – production has flattened out since ’05. What choice do we have? If we don’t boost production, oil’s cost goes up. If we do these extraordinary things to increase output…the cost goes up.

2. When the first estimate of real Gross Domestic Product in Q4/2011 came in at 2.8%, economists of all stripes were encouraged However: 1.94 percentage points of that 2.80 came from an inventory build. This can’t be sustained; it won’t be.

Further: To get Real GDP, subtract inflation from the economy’s nominal growth. The figure subtracted for inflation in the Q4/2011 first GDP estimate was 0.4%. In another reality (i.e., the one in which you and I live), the CPI for the 12 months ending November 30, 2011 was +3.4%.

What this means: Be cautiously realistic – ratchet that 0.4% annual inflation up to 2.0%. That takes 1.6 percentage points OFF supposed Q4 growth…which would mean Q4 GDP was 1.2%. Now, subtract the inventory build.

Chances are, the economy did not grow – not really, not at all – in Q4/2011.

3. The “other” $15 trillion

Money-printing is a dumb solution to global financial problems. Read especially a James Bianco post (replete with lots of graphics, including the one below) to The Big Picture blog on 8 major national central banks:

Saith Bianco: “The combined size of these eight central banks’ balance sheets has almost tripled in the last six years from $5.42 trillion to more than $15 trillion and is still on the rise!”

A post to ZeroHedge.com from Russ Winter on this $15T (as opposed to another $15T— the U.S. total debt) offers this perspective:

“Tattoo this on your forehead, CBs [Central Banks] hold well over 15 trillion in securities and loans to banks of various and often dubious quality, an immense gamble…a monster contingent liability.”

Note from blogger: This was written in response to the recent appearance of a very optimistic economist at an industry event.