Category Archives: Economy and Meltdown

Guest Post: The iKrug

Submitted by Pater Tenebrarum of Acting Man blog,

A Cell Phone Will Save the US Economy

It appears it is after all not Scott Sumner who ‘saved the US economy‘ by urging the helicopter pilot to create even more money ex nihilo than hitherto. What will save us instead is Apple, or rather, its latest product, the iPhone 5. Who needs Bernanke when this wondrous device stands ready to pull the economy up by its bootstraps?

A story has made the rounds lately – propagated by ‘economist’ (we should use the term loosely…) Michael Feroli at JP Morgan, that sales of the iPhone “could potentially add from one-quarter to one-half of a percentage point to the growth rate of U.S. gross domestic product in the final quarter of the year”.

If we were to assume that he is correct, then what this would mainly tell us is how useless a statistic GDP actually is. However, there are some reasons to doubt the results delivered by his abacus. According to a Bloomberg article:




“Here’s Feroli’s math: Assume sales of previous-generation iPhones continue “at a solid pace,” while the new model from Apple (AAPL) sells about 8 million units in the last three months of 2012. Assume the average selling price for the new models is about $600. (True, people who get the new phone as part of a calling plan pay less than the sticker price, but the sale gets reported to the government for what it would have cost on a stand-alone basis.)

Out of that $600, about $200 is the imported cost, leaving $400 as the value captured in the U.S. Multiply $400 times 8 million and you get a pop of $3.2 billion, which is enough to boost the annualized growth rate of the economy by one-third of a percentage point. Feroli, the bank’s chief U.S. economist, expects the U.S. economy to grow at an annual rate of about 2 percent in the fourth quarter, and says the iPhone will “limit the downside risk” to that projection.“


Now, before we continue, a few words about the iPhone 5. It is undoubtedly a marvel of engineering (as a friend and card-carrying Apple fan told us, the aluminum unibody alone is a stunning achievement of modern-day milling methods). However, many observers seemed to agree that apart from a sleeker design combined with lower weight and a somewhat bigger screen than the predecessor model, it offers only incremental improvements.

Its new map application is generally regarded as a letdown compared to the previous Google map app. All in all, the phone allegedly lacks, as one journalist at Reuters put it, a ‘wow’ factor.  Mind, we are not trying to put the new iPhone down – we merely want to make the point that its release has not exactly made the iPhone 4 (or previous models) completely outdated or unusable.



The iPhone 5 – will its release add to economic growth?

(Image via



Another somewhat more famous economist has chimed in on the topic, the man who has forever destroyed what was left of the nimbus attached to the Nobel Prize for Economics by somehow winning it, namely Paul Krugman.

Not surprisingly, Krugman used Feroli’s line of argument regarding the iPhone  to fashion a screed designed to convince readers of his column that more government spending is called for. We kid you not.


Broken Windows, Carts and Horses….

Krugman’s article on the topic in the NYT is entitled „The iPhone Stimulus“. Below are a few excerpts:


„So is the new phone as insanely great as Apple says? Hey, I’ll leave stuff like that to David Pogue. What I’m interested in, instead, are suggestions that the unveiling of the iPhone 5 might provide a significant boost to the U.S. economy, adding measurably to economic growth over the next quarter or two.

Do you find this plausible? If so, I have news for you: you are, whether you know it or not, a Keynesian — and you have implicitly accepted the case that the government should spend more, not less, in a depressed economy.“


Wow. So if that is what it really means, then some readers may already decide on the spot that Feroli’s theory has just been disproved. Seemingly unwittingly, Krugman is shooting his whole intellectual house of cards down in this first paragraph. However, you will be surprised just how deluded this political hack actually is. Bear with us.


„The crucial thing to understand here is that these likely short-run benefits from the new phone have almost nothing to do with how good it is — with how much it improves the quality of buyers’ lives or their productivity. Such effects will kick in only over the longer run. Instead, the reason JPMorgan believes that the iPhone 5 will boost the economy right away is simply that it will induce people to spend more.

And to believe that more spending will provide an economic boost, you have to believe — as you should — that demand, not supply, is what’s holding the economy back. We don’t have high unemployment because Americans don’t want to work, and we don’t have high unemployment because workers lack the right skills. Instead, willing and able workers can’t find jobs because employers can’t sell enough to justify hiring them. And the solution is to find some way to increase overall spending so that the nation can get back to work.“


The short version of the above paragraph is: we can consume ourselves to prosperity. And if you accept that premise, then you must of course  accept what comes next. After bemoaning the reluctance of businesses and consumers to engage in an orgy of mindless spending (except of course when there’s a new i-gadget released), Krugman reminds us of  his solution: the government must jump into the breach.


„Why not have the government step in and spend more, say on education and infrastructure, to help the economy through its rough patch? Don’t say that the government can’t add to total spending, or that government spending can’t create jobs. If you believe that the iPhone 5 can give the economy a lift, you’ve already conceded both that the total amount of spending in the economy isn’t a fixed number and that more spending is what we need. And there’s no reason this spending has to be private.“


Yes, why not, indeed? We’ll explain that in just a moment, but let us first point out what the fundamental error in this whole iPhone/GDP story is.

It is actually a variation on the ‘broken window fallacy’ – it completely ignores a basic economic concept that we would normally expect every economist to be aware of, namely opportunity cost. We mentioned above that the predecessor of the iPhone 5 remains perfectly serviceable in order to underscore this crucial point.

By buying the iPhone 5, the buyers will no longer be able to buy something else. Every buyer of the new iPhone has a personal scale of valuation that ranks the items he wants to spend his funds on. Obviously, for all those who actually go out to buy the new iPhone, some goods or services that are ranked lower on their value scale will end up not being bought.

Would people cease to buy smart-phones if there were no new iPhone? Of course not – but it is a good bet that at least some users of the predecessor model would not yet junk it. It is highly questionable given the incremental improvement the iPhone 5 represents that they are really gaining much more than the satisfaction that comes from owning what is held to be the latest and greatest gadget (but we are not arguing with that – they want it, and that means they feel it is useful to them). It seems likely though that absent the new iPhone, they would spend the funds on something else instead – so the argument that “total spending” in the economy  will increase is standing on a very flimsy foundation.

Let us assume though that instead of spending the funds on consumption, they were to decide to save instead. Would that be ‘bad’? According to Keynesians like Krugman, the answer is yes.

However, we would not even have this discussion if no-one had first produced the iPhone. How do things get produced? To make production possible, one must invest in capital goods. And savings are what funds these investments – they are the sine qua non.

Note here that it is not money created from thin air by Ben Bernanke that can fund production. What funds production is the pool of real funding.  Unless at least some people refrain from consuming their entire economic output, no new additions to the economy’s capital structure will be possible. In fact, there must be savings to merely maintain the existing production structure (for a brief overview of capital theory, interested readers might want to check out our previous essay on the production structure that summarizes the essential points).

In other words, when Krugman insists that more spending and consumption will bring the economy back on track, he is putting the cart before the horse. Increased consumption is an effect of economic growth, not the cause of it.

What about his suggestions regarding government spending? Is there not something to be said for ‘infrastructure’ or ‘education’ spending’?  Are these not worthy causes?

The problem with this line of argument is that the government is the one organization that is the least able to decide what types of spending are economically sensible. Since the government has no profit motive – it ultimately obtains all its funding by means of coercion – it has no way to engage in proper economic calculation (although the people it hires to implement the spending can up to a point make inferences by observing the private sector).

In other words, once again the main problem is opportunity cost. Say for instance that government decides to finance the building of a bridge. How can it possibly know if the resources expended on building the bridge would not have satisfied more urgent consumer wants if they had been employed differently? The answer is, it cannot possibly know that. Without a profit motive and without economic calculation enabling it to compare input costs to expected income, there simply is no way to know.

This is also the reason why socialism is literally impossible: a socialist community has no market for the means of production, and hence lacks the very basis of economic calculation, as calculation without money prices is obviously not possible. Chaos is the inevitable result, or as Ludwig von Mises pointed out (in ‘Calculation in the Socialist Commonwealth’):


“Without economic calculation there can be no economy. Hence, in a socialist state wherein the pursuit of economic calculation is impossible, there can be—in our sense of the term–no economy whatsoever. In trivial and secondary matters rational conduct might still be possible, but in general it would be impossible to speak of rational production any more.”


Of course we are luckily not living in a command economy. Ours is still a market economy, if a severely hampered one. And yet, the basic problem of being unable to calculate confronts every government agency, regardless of the fact that the problem is even more acute in full-blown command economy.

Therefore, Krugman is wrong when he asserts that “there’s no reason this spending has to be private”. There is a very good reason: government spending is extremely likely to waste scarce capital and liable to induce intra-temporal discoordination in the production structure – in other words, its spending will create a configuration of the economy’s capital structure that is not in accordance with consumer wants.

Apple’s iPhone offering is certainly different in this regard: it obviously does conform to consumer wants. Apple’s profits provide ample proof for this assertion – in fact, it is the most profitable company in the world. However, this does not mean that one  can safely ignore opportunity cost when arguing that spending on the new iPhone will add to overall economic growth.



The performance of Apple’s stock price speaks for itself – click for better resolution, chart by StockCharts.



Krugman Discovers A ‘Theory’

However, what really takes the cake is a small posting of Krugman’s on the same topic that we discovered incidentally when searching for the article discussed above on Google. Apparently Krugman felt the need to address the topic of obsolescence in more detail and on this occasion lets us in on the fact that he has indeed heard about the ‘broken window’ before. The post is entitled “Broken Windows and the iPhone 5”.

When seeing the headline, we at first thought that Krugman would attempt to refute that the broken window fallacy appealed to him. Far from it!


“The key point is that the optimism about the iPhone’s effects has nothing (or at any rate not much) to do with the presumed quality of the phone, and the ways in which it might make us happier or more productive. Instead, the immediate gains would come from the way the new phone would get people to junk their old phones and replace them.

In other words, if you believe that the iPhone really might give the economy a big boost, you have — whether you realize it or not — bought into a version of the “broken windows” theory, in which destroying some capital can actually be a good thing under depression conditions.”


(emphasis added)

Once again, this man has actually won the Nobel Prize for Economics. Perhaps it is time for the prize committee to consider demanding its return. 

So it is the ‘Broken Window Theory‘ now, is it? Actually, as noted above, the concept is known as the ‘Broken Window Fallacy‘. It was originally formulated in the form of a parable by the great French economist Frederic Bastiat, who explained that in economics, one must not only consider that which is immediately seen, but also that which is not seen.

It is a fallacy to believe that destruction can make us richer –  in fact, Krugman admonishes us to simply deny that opportunity costs exist in what he refers to as ‘depression conditions’. The implication of this assertion is that fundamental economic laws magically cease to apply whenever the economy suffers a downturn.

This view is erroneous – economic laws are not dependent on economic conditions. This is akin to arguing that the laws of nature will cease to be operational on Wednesdays. Not surprisingly, Krugman is also a supporter of the view that ‘war is good for the economy’ – even if it is war against imaginary space aliens, or what we might call Krugman’s version of  ‘Plan 9 From Outer Space‘.



Paul Krugman: getting ready to break some glass to save the economy. In Krugman’s capable hands, a fallacy becomes a ‘theory’.

The US Will Spend Between $3 And $7 Per Gallon Of Gasoline "Saved" By Consumers Driving Electric Vehicles

Sometimes you just have to laugh – for fear of the hysterical crying fit that would ensue from recognizing our shameful pathological reality. To wit: Reuters is reporting on a CBO study that shows the US electric car policy will cost $7.5bn by 2019. The report finds that the government’s policy will have ‘little to no impact’ on overall gasoline consumption. 25% of the cost of the program is going up in Fisker Karma-inspired smoke as part of the $7,500 per vehicle tax credit and the rest of the cost is in grants to such well-deserved and successful operations as GM’s Chevy Volt – which will backfire since the more electric vehicles the automakers sell (thanks to government subsidy) the more ‘higher-margin’ low-fuel-economy guzzlers it can sell and still meet CAFE standards (re-read that – amazing!) In 2012, 13,497 Chevy Volts and 4.228 Nissan Leafs have been sold (all that pent-up demand) as the CBO notes that despite the $7,500 subsidy, the cost-differential to conventional cars remains too wide – inferring a $12,000 tax credit would be more comparable.


Via Reuters: US electric car policy to cost $7.5 bln by 2019-CBO

U.S. government standards mandate that by 2025, automakers to show corporate average fuel economy (CAFE) of 54.5 miles per gallon or about 39 miles per gallon in real world driving.

… The federal tax credits apply to the first 200,000 electric vehicles sold by each manufacturer. But these sales will leave room for automakers to continue to sell models with low fuel economy, the CBO said.


The more electric and other high-fuel-economy vehicles that are sold because of the tax credits, the more low-fuel-economy vehicles that automakers can sell and still meet the standards,” according to the report.



While drivers of these electric vehicles use less gasoline and emit less greenhouse gas such as carbon dioxide, the cost to the government can be high, the CBO found. The U.S. government will spend anywhere from $3 to $7 for each gallon of gasoline saved by consumers driving electric vehicles.



The costs of electric vehicles — fully electric and plug-in hybrid electric — are much higher than similar-sized gasoline vehicles, and the federal tax credit of $7,500 per vehicle is not enough to bridge the gap, the CBO said.


The CBO said an average plug-in hybrid vehicle with a battery capacity of 16 kilowatt-hours is eligible for the maximum tax credit of $7,500.


“However, that vehicle would require a tax credit of more than $12,000 to have roughly the same lifetime costs as a comparable conventional or traditional hybrid vehicle,” the CBO said.

The Commodity Matrix: What Is The Resource Of Tomorrow, And Who Will Benefit From It?

While it is impossible to predict where the S&P will be in 10 years (or even 1), one can safely make some assumptions about what the world will look like in a decade (assuming of course it hasn’t blown up by then). It will be hungry, it will be thirsty, it will demand resources, and it will be crowded (and it will certainly have lots and lots of wheelbarrows carrying pieces of paper to and fro the local bakery). Implicitly then, countries which control the production and export of various key natural resources and commodities channels will become increasingly more strategic and important. However, for some economies, such as the Middle East, whose entire export-based welfare is reliant on a core set of commodities, this export-benefit may be a doubled-edged sword, should it lead to militant antagonism by one time friends and outright enemies, and/or complacency leading to lack of revenue stream diversity.  In order to determine who the key resource players in the future will be, we present the below commodity trade matrix which answers two questions: how important is a commodity to a country, and how important is a country to a commodity. As GS notes, those on the riskier side of this equation are economies that are heavily reliant on oil, such as the Middle East or even Russia (which albeit scores better on other hard commodities). On the other hand, food exporters enjoy relatively better diversity in their trade portfolios. We highlight the LatAm economies here, while Canada and the US also look healthy. Will food (and water) be the oil of the future, and will the next resource war be not over black, or even yellow, gold, but, pardon the pun, edible gold?

Some additional observations via Goldman:

Not all countries are blessed with abundant resources, and even among those that are, some countries have benefitted a great deal more than others as a result of the quality of their institutions. Indeed, resource wealth can, and has, tempted institutions to retain the revenues narrowly, rather than distribute  them broadly or develop others parts of the economy. This is the reason why the presence of resources hasn’t historically guaranteed economic success. Australia, Canada, Russia, Brazil and South Africa are countries that have high levels of hard commodities per capita, while Argentina and the US should be added to the list if soft commodities are included.

But what are the resources of the future? We think it very likely that food, water and therefore land, will become increasingly important, tilting the advantage in favour of those capable of feeding the next billion people. As two of the world’s largest populations industrialise (hence producing less of their own food) and become wealthier (and hence hungrier), the way food flows around the world is likely to change significantly. Russia, South Korea, Japan and much of Western Europe are major food importers currently, while Brazil, Argentina, the US, Australia, Thailand and Canada sit on the other end of food trade. Here we have to mention Africa and India as regions with huge potential, but in need of greater institutional support to deliver it.

The current debate on the resources curse (the potential for resource-rich countries to become imbalanced) is also important. Being heavily reliant on a particularly commodity is risky as a result of the possibility of big shifts in the global economy, innovation-led substitutes or new discoveries. It is not implausible, for example, to imagine EM consumers extinguishing their demand for cigarettes just like their health conscious Western brethren did a few decades ago. This puts tobacco-heavy African economies like Zimbabwe at significant risk. Above is a commodity trade matrix to answer two entwined questions: how important is a commodity to a country, and how important is a country to a commodity? As expected, those on the riskier side of this equation are economies that are heavily reliant on oil, such as the Middle East or even Russia (which albeit scores better on other hard commodities). On the other hand, food exporters enjoy relatively better diversity in their trade portfolios. We highlight the LatAm economies here, while Canada and the US also look healthy.

The last question is which countries have succeeded despite resource deficits? Japan and South Korea stand out here, which cements our argument that necessity, in this case driven by constraints, is the mother of innovation.

The Zero Hedge Daily Round Up #130 – 09/20/2012

If it’s one thing I’ve learnt from posting on Zero Hedge, it’s the understanding of the readers who come to this website.

Their mentality is a different beast to the podcast. 

Well, not according to the download statistics, although I imagine many of my listeners don’t actually read Zero Hedge, so who knows. 

I’m sure many of us have never had a care for finance until discovering Zero Hedge, yet the subject is irrelevant. We come here for the insight and with the understand that “money makes the world go round.” So what better way to discover the truth, than through finance?

We’re a bunch of truth seekers, looking for more knowledge to satisfy our curiosity.

To aid the future.

Your respect will be won back one day…. I just need a little more time to finish writing this ‘Merkel is Fat’ joke. It turns out the Schnitzel ate her! *face slap*

This is the Zero Hedge Daily Round Up.

1. BOFA slash 16,000 workers. 2. U.S. household worth: breakdown. 3. U.S. recession imminent. 4. Chinese armada apparently false. 5. Reality hits Italy. 6. Greek Neo-Nazi party surge. 7. Obama’s oil dilemma. 8. New York low income spend 25% on cigs. 9. Pawlenty has Pawlenty.

Alternatively, you can download the show as a podcast on iTunes or any RSS capable device.

RSS Feed:

Julius Reade

P.S. For those paranoid about the government:…

“Forceful And Timely Action” To Nowhere

Wolf Richter

“Japan’s experience is a sobering real-world reminder of why forceful and timely action is appropriate,” Boston Fed president Eric Rosengren said in his desperation to rationalize the Fed’s QE3 decision. It would restart the printing press in a massive way. It would be a flood of money—in contrast to the “muted” response from Japan to its two decades of economic stagnation.

And it has already been successful, he said: “I would say in sum that regardless of the event window chosen, stock prices are up substantially, mortgage rates are lower, and exchange rates are lower.” Thus, he’d named the three goals of QE3: manipulate stock prices into the ether, repress yields on mortgages (and on everything from savings to corporate bonds), and demolish the dollar [read…. QE, Zimbabwe, And The Surreptitious 30% Haircut Every Decade].

Then he claimed that “appropriate fiscal policies”—namely even larger deficits—could “provide significant positive effects” to battle Japanese-style stagnation.

Alas, no country has done that better, for longer, and to a greater extent than … Japan. Two decades of deficit spending haven’t had any lasting success in stimulating the economy, though they goosed various sectors temporarily. And they left behind a political culture of deficits-don’t-matter and an insurmountable pile of debt.

Japan perfected the art of ZIRP (zero-interest-rate policy) years before it became a noun. The 10-year Japanese government bond (JGB) has yielded less than 2% for many, many years. Currently, JGBs yield 0.81%, less than half of the 10-year Treasury note’s 1.78%. Yields on short-term Japanese debt, savings accounts, time deposits, etc. have been at practically zero for just as long.

And Japan plowed into “quantitative easing” before that euphemism was even invented. The Bank of Japan’s balance sheet is stuffed with over ¥80 trillion (well over $1 trillion) in JGBs, in addition to other assets it bought along the way. That’s about 25% of Japan’s GDP, while the Fed’s balance sheet holds assets that amount to “only” 22% of GDP.

Rosengren, having kept an eye on the housing market, must have been agog at its recent “recovery.” OK, there were prior “recoveries” that crashed, but this one is different. Japan too had a real estate bubble. After it burst in 1990, there were several “recoveries.” Yet it just marked 21 consecutive years of declines.

Culturally, the Japanese are attached to land, not houses. A house is usually a “one-generation” structure designed to be torn down by the next generation. Hence, the Ministry of Land, Infrastructure, Transport, and Tourism reports land prices. As of July 1, residential land prices dropped 2.5% from last year—after having dropped 3.4% in 2011 and 3.7% in 2010. Commercial land prices dropped 3.1%.

But there are two scourges that Japan has not inflicted on its people: high unemployment and inflation. By US standards, unemployment is phenomenally low: 4.3% in July. However, Japanese society approaches work differently, and unemployment numbers may not be comparable to US numbers. By all accounts, it is currently much harder for young people to enter the workforce as jobs have become scarce—and less remunerative. More work for less pay. Same as in the US [read…. Calamity Economy Strikes Again, But Hope Is Back In Vogue].

And Japan has enjoyed price stability for the last 15 years. Periods of minor inflation alternated with periods of minor deflation—though the numbers hide painful price increases in a variety of items, including gasoline, cars, doctor copays, or services like water.

So I wonder what Rosengren was thinking when he said, “Japan’s experience is a sobering real-world reminder of why forceful and timely action is appropriate.” The Fed’s four-year frenzy of “forceful and timely actions” coincided with the greatest stimulus frenzy in Congress where annual deficits of over $1 trillion have become the norm. Yet, they accomplished little in the real economy. Same thing in Japan. But they did get Japan into a mess from which there is now no good exit.

To keep a sense of humor about all this: here’s the awesome parody of Bernanke’s contractions and gobbledygook about printing money, mixed with elements of Capt. Queeg from the movie “The Caine Mutiny.” A hilarious video masterpiece of 1.5 minutes.

And here’s my book about Japan: “funny as hell nonfiction about wanderlust and traveling abroad,” a reader tweeted. “What a fantastic finish,” another tweeted. Reviewers wrote, “Super enjoyable, great antidote to everyday life,” “hilarious, thrilling in many ways,” “an incredible climax,” “full of cultural complexity, passion, and shock.” Read the first few chapters for free…. BIG LIKE: CASCADE INTO AN ODYSSEY, at Amazon.