by Kris Sayce on July 1, 2009
We can’t help ourselves. We feel like the proverbial dog with a bone. If you’re fed up with the ‘Output Gap’ then you may want to skip the next few paragraphs and just head on down to the item on ‘Pauline-Hansonomics.’
We almost think we should pay the RBNZ a royalty for using the chart below…
Source: Reserve Bank of New Zealand
We intimated it on Monday, but we still can’t fathom out how it’s possible for the red line ‘Actual GDP’ to be above the blue line ‘Potential GDP.’ It doesn’t seem possible.
Surely if ‘Actual GDP’ is greater than predicted ‘Potential GDP’ the blue line would just shift up to where I’ve placed the green line. The green line becomes the new ‘Potential GDP’ as the economy has shown it can produce at a higher level than previously thought.
It can’t possibly produce more than it produces. For example, if Born Again Keynesian (BAKs) economists forecast the economy can produce 100 units per day, but it actually produces 105 units per day, then the economy isn’t producing at 105% of its potential, it is producing at 100% of its potential. It’s just that the bar has been raised.
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by Kris Sayce on June 30, 2009
If you missed yesterday’s Money Morning on ‘Born Again Keynesians’ (BAKs) love-affair with the Output Gap, then take a quick read now. You can click here for it.
You’ll need to read it as a primer for the following item. And don’t forget, you can now leave comments on the Money Morning website, as ‘Nick99′ already has for yesterday’s story.
Now you’ve read the primer I won’t need to give any further background.
But I will mention this, yesterday was a torrid day for your editor. We just couldn’t get our pea-sized brain around the idea of Actual GDP and Potential GDP. We’re still none the wiser. Sure, we understand that ‘potentially’ an economy can produce more if it’s at full capacity, but the problem is where do you draw the line?
Is the ultimate potential GDP where you have 100% employment and every business and consumer is using every form of new technology to improve their productivity?
If not, then the concept of Potential GDP must be a subjective number. It is therefore subject to manipulation and inaccuracies as various BAKs feed in their own economic modeling to extract the result they’re after.
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by Kris Sayce on June 29, 2009
What’s an ‘Output gap’?
Well, it’s the latest phrase being used by ‘Born-again Keynesians’ to argue there won’t be any inflation.
We say ‘latest,’ but the idea has been around for years. It’s just that now is the time that mainstream economists need to use it to back up their anti-inflationary case.
Your editor was kindly supplied with the following chart over the weekend by a Money Morning reader…
Evidently it is from an email sent out by Macquarie Group interest rate strategist Rory Robertson. According to Robertson, because the green line is so far below the zero line, inflation won’t be a problem until it rises above the green line.
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by Kris Sayce on June 4, 2009
Your editor writes from home this morning, as we pre-recorded a radio interview for ABC Coast FM early this morning [that's 91.7 on your dial for those in the Gold Coast area].
The show was due to be aired later on this morning.
They were interested in your editor’s views on government subsidies. It won’t surprise you to learn that we weren’t short of things to say. The main subject on the agenda was Queensland’s scrapping of the 8-cent per litre fuel subsidy.
Who benefited from it? Who would lose out from its removal? And were there any circumstances where subsidies were good? There was also a question about the first home-buyers bribe as well.
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by Kris Sayce on June 3, 2009
Before I get on to the US dollar, a quick note about today’s GDP number. It won’t be released until after today’s Money Morning has been delivered to your inbox, so we’ll reserve most of our comments until tomorrow.
However, we will state one thing. Based on the trade figures yesterday, it provides proof that artificial stimuli don’t benefit the economy at all.
In fact, it is more likely that if it wasn’t for the stimulus packages, the trade figures would have been even better, and Australia would not have been at risk of going into a recession at all…
More on that tomorrow.
Well, the US dollar is trading around the support level that Gabriel mentioned in yesterday’s Money Morning. That was based on the weighted US Dollar Index.
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