Category Archives: U.S.

22/7/19: What Import Price Indices Do Not Say About Trump’s Trade War

A few days ago, I saw on Twitter some economics commentators, not quite analysts, presenting the following 'evidence' that Trump tariffs are being paid for by China: the U.S Import Price index has declined in recent months, to below 100. In the view of some commentators, this signifies the fact that the U.S. is now paying less for imports from the ret of the world because Chinese producers are taking a hit on tariffs imposed onto their goods by the Trump Administration and do not pass through these tariffs onto the U.S. consumers.

The argument is a total hogwash. For a number of reasons.

Firstly, as the U.S. Bureau of Labor Statistics notes (see, import price indices do not incorporate tariffs and duties charged at the border. They actually explicitly exclude these. The indices do not include any taxes, by design.

The indices are quality-balanced, so they are rebalanced to reflect relative quality of goods and commodities supplied. If the U.S. importer gets a better quality (new model, improved model etc) of a good from the exporting country for the same price as the older model, this registers as a decrease in the import price index.

Worse, as BLS notes: "Import/Export Price Indexes cannot be used to measure differences in price levels among different products and services or among different localities of origin. A higher index number for locality A (or product X) does not necessarily mean that prices are higher than for locality B (or product Y) with a lower index number. It only means that prices have risen faster for locality A (or product X) since the reference period."

Note the words: "reference period". Which leads to yet another major problem with the argument that BLS index shows that 'China is absorbing tariffs costs' from the Trump Trade War: it is based on a spot (one point) observation. So let's take a look at the time series. Remember, Trump Trade War started at the very end of 1Q 2018 (March 2018). So here are 'reference period' consistent comparatives for import price indices for a range of regions and countries:

What the chart above tells us is that over the period of the trade war so far, U.S. imports price index indicates some deflation of imports costs, somewhere in the region of 1.13 percentage points. But over the same period of time, China index experienced a decline of 1.36 percentage points. If China is 'paying for U.S. tariffs', the U.S. is paying more than China does, which is of course, entirely possible, but immaterial to the data at hand.

Worse, if declining import price indices are an indicator of a country 'paying for tariffs', well, Canada seems to be paying for most of the Trump Trade War globally, while Japan is paying a little-tiny-bit. Tremendous! Art of the Deal! And all the rest applies.

Of course, what the declines in the vast majority of import price indices suggests is the opposite of the 'China is paying for the U.S. tariffs' story. Instead, they tell us about the inherent weakening in the global demand, the deflationary pressures in key commodities markets (yes, oil, but also soy beans, etc), the deflationary pressures from new technologies and, finally, the changes in currencies valuations.

No, folks, there are no winners in the trade wars, but there are smaller losers and bigger losers. When you impose tariffs on final and intermediate goods, consumers and producers loose. When you impose trade restrictions on imports of basic commodities, without altering global markets supply and demand, you are simply substituting suppliers (see  The latter change might involve some costs, but these costs are much lower than restricting trade in higher value added goods.

2/10/18: Government Debt per Employed Person

We often see Government debt expressed in reference to GDP or in per capita terms. However, carry capacity of sovereign debt depends not as much on the number of people in the economy, but on the basis of those paying the lion’s share of taxes, aka, working individuals. So here is the data for advanced economies Government debt expressed in U.S. dollar terms per person in employment:

Some interesting observations.

Ireland, as a younger, higher employment economy ranks fifth in the world in terms of Government debt per person employed (USD 115,765 in debt per employed). In terms of debt per capita, it is ranked in the fourth place at USD 54,126.

Plucky Iceland, the country hit as hard by the Global Financial Crisis as Ireland and often compared to the latter by a range of analysts and policymakers, ranks 22nd in terms of Government debt burden per employed person (USD 56,185) although it ranks 13th in per capita terms (USD 32,502). In simple terms, Iceland has higher employment rate than Ireland, resulting in lower burden per employed person.

When one considers the fact that non-Euro area countries have more sovereign control over their monetary policies, allowing them to carry higher levels of debt than common currency area members, Irish debt per employed person is the third highest in the world after Italy and Belgium, and higher than that of Greece.

Out of top ten debtors (in terms of Government debt per employed person), six are euro area member states (10 out top 15).

Looking solely at the euro area countries, Ireland’s position in terms of debt per capita is woeful: the country has the highest debt per capita of all euro area states at EUR43,659 per person, with Belgium coming in second place with EUR40,139. In per-employee terms, Ireland takes the third highest place in the euro area with EUR93,378 in Government debt, after Italy (EUR98,314) and Belgium (EUR94,340).

4/5/16: Canaries of Growth are Off to Disneyland of Debt

Kids and kiddies, the train has arrived. Next stop: that Disneyland of Financialized Growth Model where debt is free and debt is never too high…

Courtesy of Fitch:

Source: @soberlook

The above in the week when ECB’s balancehseet reached EUR3 trillion marker and the buying is still going on. And in the month when estimates for Japan’s debt/GDP ratio will hit 249.3% of GDP by year end

Source: IMF

And now we have big investors panicking about debt: So Stanley Druckenmiller, head of Duquesne Capital, thinks that “leverage is far too high, saying that central banks and China have allowed for these excesses to continue and it's setting us up for danger.”

What all of the above really is missing is one simple catalyst to tie it all together. That catalysts is the realisation that not only the Central Banks are to be blamed for ‘allowing the excesses of leverage’ to run amok, but that the entire economic policy space in the advanced economies - from the central banks to fiscal policy to financial regulation - has been one-track pony hell-bent on actively increasing leverage, not just allowing it.

Take Europe. In the EU, predominant source of funding for companies and entrepreneurs is debt - especially banks debt. And predominant source of funding for Government deficits is the banking and investment system. And in the EU everyone pays lip service to the need for less debt-fuelled growth. But, in the end, it is not the words, but the deeds that matter. So take EU’s Capital Markets Union - an idea that is centred on… debt. Here we have it: a policy directive that says ‘capital markets’ in the title and literally predominantly occupies itself with how the system of banks and bond markets can issue more debt and securitise more debt to issue yet more debt.

That Europe and the U.S. are not Japan is a legacy of past policies and institutions and a matter of the proverbial ‘yet’, given the path we are taking today.

So it’s Disneyland of Debt next, folks, where in a classic junkie-style we can get more loans and more assets and more loans backed by assets to buy more assets. Public, private, financial, financialised, instrumented, digitalised, intellectual, physical, dumb, smart, new economy, old economy, new normal, old normal etc etc etc. And in this world, stashing more cash into safes (as Japanese ‘investors’ are doing increasingly) or into banks vaults (as Munich Re and other insurers and pension funds have been doing increasingly) is now the latest form of insurance against the coming debt markets Disneyland-styled ‘investments’.

12/4/16: Look, Ma… It’s [not] Working: IMF & the R-word

A handy chart from the IMF highlighting changes over the last 12 months in forecast probability of recession 12mo forward across the global economy

Yes, things are getting boomier... as every major region, save Asia and ROW are experiencing higher probability of recession today than in both October 2015 and April 2015, and as probability of a recession in 2016 is now above 30 percent for the Euro area and above 40 percent for Japan.

In that 'repaired' world of Central Banks' activism (described here: we can only dream of more assets purchases and more government debt monetizing, and more public investment on things we all can't live without...

Because, look, it's working: