Working Papers

2010 12

‘That’s an Eternity from Now’: The Day of Reckoning for the Tierney-Simmons Wager

John Tierney collects on his ‘peak oil’ bet with the late Matthew Simmons:

Five years ago, Matthew R. Simmons and I bet $5,000. It was a wager about the future of energy supplies — a Malthusian pessimist versus a Cornucopian optimist — and now the day of reckoning is nigh: Jan. 1, 2011…

When I found a new bettor in 2005, the first person I told was Julian’s widow, Rita Simon, a public affairs professor at American University. She was so happy to see Julian’s tradition continue that she wanted to share the bet with me, so we each ended up each putting $2,500 against Mr. Simmons’s $5,000.

Just as Mr. Simmons predicted, oil prices did soar well beyond $65. With the global economy booming in the summer of 2008, the price of a barrel of oil reached $145. American foreign-policy experts called for policies to secure access to this increasingly scarce resource; environmentalists advocated crash programs to reduce dependence on fossil fuels; companies producing power from wind and other alternative energies rushed to expand capacity.

When the global recession hit in the fall of 2008, the price plummeted below $50, but at the end of that year Mr. Simmons was quoted in The Baltimore Sun sounding confident. When Jay Hancock, a Sun financial columnist, asked if he was having any second thoughts about the wager, Mr. Simmons replied: “God, no. We bet on the average price in 2010. That’s an eternity from now.”

The past year the price has rebounded, but the average for 2010 has been just under $80, which is the equivalent of about $71 in 2005 dollars — a little higher than the $65 at the time of our bet, but far below the $200 threshold set by Mr. Simmons.

What lesson do we draw from this? I’d hoped to let Mr. Simmons give his view, but I’m very sorry to report that he died in August, at the age of 67. The colleagues handling his affairs reviewed the numbers last week and declared that Mr. Simmons’s $5,000 should be awarded to me and to Rita Simon on Jan. 1…

posted on 29 December 2010 by skirchner in Commodity Prices, Economics, Oil

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Krugman versus Simon

Chris Alden recalls the June 1998 issue of Red Herring.

posted on 24 December 2010 by skirchner in Economics

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If the China ‘Bubble’ Bursts…

International Economy poses the somewhat loaded question to 30 pundits, including my CIS colleague John Lee. My answer would be ‘go back and look what happened in 1998-99.’ China has grown in importance since, not least to Australia, but Australia has already weathered a scenario in which East Asia and commodity prices crashed.

posted on 23 December 2010 by skirchner in Economics, Financial Markets

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A Higher Frequency CPI

Not content with a monthly CPI, an article in Slate looks at the prospects for an even higher frequency CPI in the US. According to the article, the US CPI costs $US234m a year to compile at a monthly frequency, which works out at about US$0.75 per capita. The ABS tells us that a monthly CPI in Australia would cost $A25m a year compared to the $A10m it spends compiling the existing quarterly release, which works out at around $A1.11 per capita.  There must be economies of scale in compiling the CPI. Otherwise, the ABS quote looks expensive, even at PPP exchange rates.

I recall a certain market economist in the late 1990s who would embarrass the ABS by pointing out the above-CPI increases in the cover price of the ABS CPI publication.

I make the case for a monthly CPI in Australia here.

posted on 22 December 2010 by skirchner in Economics, Financial Markets, Monetary Policy

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Shorting Human Ingenuity

The other side of the long commodities trade:

When you buy commodities, you’re selling human ingenuity.

…Why bet against human ingenuity by buying physical commodities when you can bet on it by investing in the enterprises whose task is to remove the bottlenecks and lower commodity prices? So devote cash to the fixers, not the source: What I know is that I’d much rather buy the companies – for example the low cost integrateds, E&Ps and drillers – whose job it is to fix the world’s emerging energy problems than I would buy the energy itself.


posted on 21 December 2010 by skirchner in Commodity Prices, Economics

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DIY Macro

The NYT notes an unfortunate trend in its 10th Annual ‘Year in Ideas’: DIY macro. Nothing taxi drivers haven’t been doing for yonks!

posted on 20 December 2010 by skirchner in Economics

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Frank Gehry Designs Me a New Office

The new UTS Business School building. Here’s Gehry selling us on his design:

Mr Gehry says it is inevitable that any new building draws some criticism, but he hopes that ultimately Australia will embrace the project.

“A lot of junk is built in cities around the world and nobody really complains,” he said. “This is a small building. I don’t think it is going to destroy the town, I promise.”

posted on 17 December 2010 by skirchner in Misc

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No Benefit for Borrowers in RMBS Support

I have an op-ed in today’s Age arguing that the government’s expanded support for the mortgage securitisation industry is of no benefit to retail borrowers. Henry Ergas makes related points in The Australian:

where is the evidence that the benefits from the subsidy outweigh its costs? Indeed, where are the estimates of just how large that subsidy is likely to be, and to whom it will accrue? And where is the analysis showing that what Australia needs is yet more lending on houses, this time funded by taxpayers?

Don’t waste your time looking, for the answers are nowhere to be found.

As Michael Stutchbury notes, the whole banking package was premised on Joe Hockey’s lies about the big banks. But what does it say about the government that it allows public policy to be driven by the cynicism and opportunism of a populist federal opposition?

posted on 14 December 2010 by skirchner in Economics, Financial Markets

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Ronald Coase on China

Ronald Coase turns 100 later this month and has a book out in June on China:

How China Became Capitalist controversially argues that China’s growth potential will be inhibited in future without a vibrant market in ideas.

posted on 11 December 2010 by skirchner in Economics

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The Year RBA Watchers Got an Involuntary Early Retirement

Ross Gittins, giving his traditional address to the Australian Business Economists’ annual forecasting conference:

It’s become a lot harder for you guys to predict now the nation’s economics editors have retired from the prediction game. But that’s the way the more loud-mouthed of your brethren seem to have wanted it.

A loud-and-proud Chris Joye translates:

Ross Gittins delivered a fascinating speech this week during which he gave me a subtle slap for forcing the RBA to stop tipping-off journos about the internal executive’s rate recommendations prior to its Board meetings, which in and of itself is an acknowledgement that demonstrates how right we were to push this line (our actions also brought about the demise of the former Shadow Governor, Terry McCrann, after the October meeting).

Gittins’ remarks effectively concede that the economic writers in question can’t play the prediction game nearly as well now that they have a more circumscribed relationship with the Bank. Glenn Stevens denies that Board decisions have ever been leaked, but there is a distinction between the outright leaking of a Board decision and the backgrounding and nudging of economics writers that previously took place.

posted on 10 December 2010 by skirchner in Economics, Financial Markets, Monetary Policy

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The Shorter Institutional Economics

Your favourite blog in 140 characters or less.

posted on 10 December 2010 by skirchner in Misc

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Should Central Banks Publish an Official Interest Rate Projection?

The case for and against. Since the RBA already produces economic forecasts endogenised to an assumption about the future path of monetary policy, it would make sense to publish the cash rate projection as well. Changes in the projection would heavily condition the expected real cash rate and could even reduce the need for changes in the actual cash rate.

posted on 10 December 2010 by skirchner in Economics, Financial Markets, Monetary Policy

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The ASX-SGX Merger and the National Interest

ASX commissioned Access Economics to produce a report on why the ASX-SGX merger is in the national interest. As the report notes, internationally ‘no previously proposed cross-border exchange sector transaction has failed to proceed on the basis of regulatory disallowance.’ But in Australia, as Jennifer Hewett has noted, ‘the politics are overwhelmingly stacked against it’.

posted on 09 December 2010 by skirchner in Economics, Financial Markets, Foreign Investment

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Inflation Pop Quiz

Take Zimran Ahmed’s pop quiz:

You’re a responsible Brazilian living in your decent Sao Paolo apartment (paid off!). You have a tidy pile of cruzeiros in your local bank, saved from the income your reasonable private sector job generates. But it’s 1979 and you’re worried about inflation looming on the horizon. What do you do?

Nic Rowe re-phrases the question for the benefit of a PhD candidate operating under the constraints faced by an economics blogger:

Using a macroeconomic model with monopolistically competitive firms, explain how an increase in the expected future price level will cause an increase in the current price level. Also explain whether there is an effect on real output.

Your answer must use words only, with no diagrams or equations. Be very precise about all the mechanisms that would be involved in this interdependent system of simultaneous causation. Your answer must assume no previous knowledge of economic theory or familiarity with economic concepts on the part of the reader. Try to make your answer as realistic as possible, using 10 real-world goods as examples. These should be goods that a homeowner with liquid domestic currency assets living in Sao Paolo Brazil in 1979 might want to buy in response to an increase in the expected future price level. Any transactions in your explanation must be shown to be consistent with double-entry bookkeeping. Please write clearly.

You have 2 hours to answer this question.

Of course, this has never been a deterrent to Scott Sumner, who writes blog posts faster than you can read them.

posted on 08 December 2010 by skirchner in Economics, Financial Markets, Monetary Policy

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The Most Pronounced Disinflation Since 1981

Inflation outcomes are the ultimate test of whether monetary policy has been too easy or too tight. With disinflationary pressures in the US at their most pronounced since the Volcker disinflation of the early 1980s, critics of quantitative easing would do well to ponder the counter-factual in which US monetary policy was not as accommodative. The data suggest that the risk of inflation being too low has been greater than the risk of inflation being too high.

posted on 07 December 2010 by skirchner in Economics, Financial Markets, Monetary Policy

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The Conservative Case for Quant Easing

David Beckworth argues that conservatives need QE to work to reduce the risk of more government intervention.

posted on 03 December 2010 by skirchner in Economics, Financial Markets, Monetary Policy

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Tories for FDI Protectionism

Opposition to FDI in Australia often comes from the political right. Canada is no different, with Mark Milke noting the hypocrisy of Canada’s Tories:

The decision by the federal Conservative government to reject the Australian mining company BHP Billiton Ltd.’s takeover bid of Potash Corp in Saskatchewan was only the latest in a series of anti-investment moves by a plethora of Canadian governments…

Those who claim that resource ownership akin to oil and gas reserves was at stake are fibbing. As with oil and gas, the subject of the takeover attempt was a company that extracts the resource; it was not about ownership of the resource itself. Oil, gas and potash all belong to provincial governments.

posted on 02 December 2010 by skirchner in Economics, Foreign Investment

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The FHA as Predatory Lender

The FHA takes over from Freddie and Fannie:

While everyone has been watching Fannie and Freddie, the administration has quietly shifted most federal high-risk mortgage initiatives to FHA, the government’s original subprime lender. Along with two other federal agencies, FHA now accounts for about 60 percent of all U.S. home purchase mortgage originations. This amounts to more than $1 trillion and is rising rapidly. The administration justifies this policy by saying it is necessary to support the mortgage market, yet borrowers are once again receiving high-risk loans…

The Dodd-Frank Act, however, exempts FHA and other government agencies from appropriate standards on mortgage quality. This will give low-quality mortgages a direct route into the market once again; it will be like putting Fannie and Freddie back in the same business, but with an explicit government guarantee.

For example, thanks to expanded government lending, 60 percent of home purchase loans now have down payments of less than 5 percent, compared to 40 percent at the height of the bubble, and the FHA projects that it will increase its insured loans total to $1.34 trillion by 2013. Indeed, the FHA just announced its intention to push almost half of its home purchase volume into subprime territory by 2014-2017, essentially a guarantee to put taxpayers at risk again.


posted on 01 December 2010 by skirchner in Economics, Financial Markets

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