"Kee" Points with Jim Kee, Ph.D.


I suppose the big headline event last week was the release of December’s trade statistics (U.S. Department of Commerce) showing an increase in exports (2.1 percent) and a decrease in imports (2.7 percent – the largest monthly drop in 4 years). Because this increases “net exports” (exports minus imports), it increases GDP numbers, with some analysts arguing that the narrowing trade gap alone could turn last quarter’s  minus 0.1 percent decline in GDP to a 1 percentage point increase. My advice on trade data is to be wary of the headlines. Sometimes a narrowing or widening of the trade gap (notice I didn’t use the pejorative terms “deficit” and “worsening”) can be bullish, and sometimes bearish. I’ll spend more time on trade data if it starts to dominate the media.


In Europe, credit default swap spreads (the price in basis points of debt guarantees) for European banks have been trending upwards lately. That pretty much assures that there will be plenty of “Europe” in the headlines. Other global measures (Libor-OIS, Treasury-Eurodollar) have not moved upward, which suggests that right now global markets are less concerned about ongoing Euro-problems threatening the global economy/financial system than they are about European banks. Going into these other measures would make for a pretty lengthy Kee Points(!), but it is worth following the St. Louis Fed’s Financial Stress Index, which combines them all. It has not turned upward like it did during the 2011 turmoil. At least not yet anyway.


I am seeing some concern that the Euro is getting too strong, suggesting the need for central bank (ECB) intervention. Others argue for letting the market work, that is, free exchange rates. This reminds me of the fixed versus flexible exchange rate debates between Milton Friedman and Robert Mundell. Friedman argued for flexible exchange rates, or letting markets rather than governments determine them. Mundell argued that this is a misconception; since governments legally define money, they should legally define its value in the same way that a ruler or other weights and measures are defined. That’s an oversimplification, but Mundell continues to make the case that the Federal Reserve and the ECB should work to minimize huge exchange rate swings because those swings make it difficult for businesses to plan and trade. I think we’ll see more official discussions to that end in the future.


The future of the U.S.: Northwestern University economist Robert J. Gorden argued in Bloomberg Markets magazine recently that the U.S. is probably on a lower growth path for a variety of reasons (aging population, income inequality, etc.), most notably declining productivity (output per unit of input). There is a growing “lower productivity growth going forward" movement that I don’t find very compelling. One of the best examples of the competing view was given by none other than Larry Summers (former Treasury Secretary and Director of Economic Advisors). Summers pointed out that before his talk, everyone was asked to silence their cell phones, which, he argued, contain more computing power than the entire Apollo space project and give each person access to more information than if they were standing in the Library of Congress. That wasn’t possible even 10 years ago, and in a few years more than 5 billion people will have them (smart phones). So Summers argued that an inevitable productivity decline was absurd.