Linux again

In 2003 I gave up on Microsoft Windows 98. It was old and I was frustrated at having the "Blue Screen of Death" (BSOD) and being unable to turn the thing off properly. 12 months previously I had a conversation with my brother and he introduced me to Linux and the whole open source philosophy. Although I have no background in programming (and still don't) I understood what he was going on about, namely that software which is open for anyone to contribute to is less likely to have security flaws or bugs and, if they do, then they are patched up quickly. Compared this to closed sourced proprietary software, where security flaws and bugs can go unnoticed for months or even years before virus writers begin to take advantage of them, and then being dependent upon the software owner to fix it (which they may not do since such actions might not be profitable and because keeping the bugs and flaws there might force people to buy their brand new software).

My first foray into Linux was Mandrake 9.1. 2003 was still early days for desktop Linux and I found it difficult to work on - which admittedly was also because I had newly migrated from Windows and had to learn a whole new set of tricks to use. While I enjoyed the change, Mandrake didn't suit me and I got frustrated enough to make a wholesale change to Kubuntu - Ubuntu using KDE - in 2006. In 2008 KDE 4 came out and I was one of those who decided to ditch it. I then discovered Xubuntu - Ubuntu running Xfce - and made that my new Linux desktop. Now I have migrated to the most popular Linux distribution - Ubuntu, which runs GNOME.

The great thing about Ubuntu and its various offshoots (Kubuntu, Xubuntu, etc) is that a new distribution is released every six months. So every six months there is an incremental improvement in the Ubuntu operating system - software becomes slightly better, slightly more user friendly, slightly less buggy, and always, always, reliable. The thing is that Linux started off as a creation of engineers - ugly but functional - but has evolved into an easy to use, user-friendly operating system without compromising its structural integrity.

The advantages are:
  1. Linux is free. Anyone can legally download and install and copy and modify it. While Linux is based upon the work of many volunteers, most of the work is done professionally by tech companies such as IBM, Sun Microsystems and Google (to name a few). Ubuntu itself was created by Canonical, an organisation created and funded by billionaire Mark Shuttleworth.
  2. Linux is widespread and thus reliable. While it is only running on 1% of desktops, Linux forms the backbone of the internet. Most web servers run a Linux/Apache system. All supercomputers run modified Linux operating systems. Even the London Stock Exchange has ditched Microsoft to run a Linux based trading system.
  3. Linux is secure. The idea that open source software is more secure than closed source may seem counter-intuitive, but those who program the code are not as affected by profit motives as programmers who work on proprietary software. Security and utility are more important than usability, a fact which kept Linux out of popularity but which has ensured a bullet proof reputation that has had usability built upon it as the years have gone by.
A new version of Ubuntu is ready every six months. The current version is 10.04. The number 10 represents the year, the 04 represents the month. The next version will be out in October, which will naturally be called 10.10. It will be followed by 11.04 next year, and on it will go.

I made the decision this year to delay my upgrade to 10.04. I kept running 9.10 for three months beyond the upgrade date. This was to ensure that when I finally did upgrade, I could also download all the software and security upgrades at once. The fact is that Ubuntu and Canonical are not perfect, and each new release brings a new set of problems - security holes, bugs that need to be fixed, and so on. Despite all the work they do in ensuring that the official release is workable, only once it is out being used by millions of people will the real issues begin to emerge. Since I had a few problems with my previous upgrade (from 9.04 to 9.10), I decided to delay the upgrade for three months. A few weeks ago I finally upgraded to 10.04 (I should call it 10.07 I suppose!).

And what has been the result? It has been a pleasure. I'm finding this the best Ubuntu version yet. The software is usable, there are no bugs annoying me, there are no things that stop me from doing what I used to do in the previous version. Of course it's not perfect and I'm certain that there are some out there who are unhappy, but not me. Moreover I think the choice to delay upgrading for three months has meant that most of the bugs have been ironed out (as soon as I installed Ubuntu, I downloaded a mass of software upgrades and bug fixes). I look forward to upgrading to 10.10 (once January 2011 comes around of course).

Here is a short list of free, open source software that I use on Ubuntu:
In short: consider moving to Ubuntu Linux. It really is a better alternative to Microsoft in my opinion.


2010 Q2 GDP

Update 14.20 UTC / 10.20 EST

Markets are down but not drastically. Enough of my hyperbolic ranting. I'm going to bed; it's 20 past midnight here in Australia.

Update 13.46 UTC / 09.46 EST

What are the odds of the DJIA dropping below 10,000 today? That would be a 4%+ drop. Let's see how bad the markets get over the next 30 minutes.

Update 13.37 UTC / 09.37 EST

Update 13.22 UTC / 09.22 EST

Update 13.13 UTC / 09.13 UTC

  • The Main driver of Q2 2010 GDP appears to be Gross private domestic investment (pg 23 of 37). The increase is about 25% annualized.

Update 13.04 UTC / 09.04 EST

  • Big increase in government spending obviously helped. 4.4% more than Q2 2009 (pg 11 of 37)
  • Federal Government increase was 9.2% more. (pg 11 of 37)
  • State and Local Government spending increased only a small amount, but this was after a series of decreases in previous quarters. (pg 11 of 37)
  • Big Jump in Imports during Q2 - 28.8%. Exports decreased slightly - 10.3% (pg 11 of 37)

Update 12.55 UTC / 08:55 EST
  • Big jump in personal savings rate, from 5.5% of disposable personal income last quarter to 6.2% this quarter (pg 28 of 37).
  • Drop in Motor Vehicle sales was -0.5% less than the previous quarter (pg 36 of 37)
  • Big increase in building structures I think, +14.4% more than the proceeding period and the first increase since Q2 2007

Update 12.46 UTC / 08:46 EST

Official Advance Result
  • 0.6% ¼ to ¼
  • 2.4% annualized
  • 2.8% annual
Download BEA release here.

This is lower than the Bloomberg Median but obviously higher than mine.

Update 12:40 UTC / 08:40 EST

Trying to fix the numbers here to make sense of it all. I'll comment soon.

Update 12:00 UTC / 08:00 EST

Bloomberg survey results:

Bloomberg Low Forecast
  • +0.3% ¼ to ¼
  • +1.0% annualized
  • +2.3% annual
Bloomberg Median Forecast
  • +0.7% ¼ to ¼
  • +2.6% annualized
  • +2.7% annual
Bloomberg High Forecast
  • 1.0% ¼ to ¼
  • 4.0% annualized
  • 3.1% annual

The time is 10:35 UTC. The US GDP advance figures will be released at 12.35 UTC. I am expecting GDP to rise but only quite slowly.

The upper limit will be the following:
  • +0.2% ¼ to ¼
  • +0.6% ¼ annualized
  • +2.2% annual

The lower limit will be the following:
  • +0.0% ¼ to ¼
  • +0.2% annualized
  • +2.1% annual
I will live blog the release. Let's see what happens.


My plan for America's economic future

A comment I made at Reddit:

I also happen to think Obama and the Democrats are doing the wrong thing. Keynesian stimulus programs work best when there is little, no or negative government debt. While it is fair to say that Hoover did the wrong thing by enforcing Austerity Hoover didn't have public debt of 55%+ of GDP. Because of the huge build up of debt before this recession (thanks mainly to Reagan, Bush 1 and Bush 2 and the Republican party in general) the current clime is not amenable to effective Keynesian stimuli.

What is left then? The only real possibility is monetary policy: adjusting the money supply to prevent deflation from getting too bad. At the moment monetary policy is hindered by laws preventing more creative options by the US Federal Reserve (eg creating money by fiat and giving it to people; creating money and depositing it into commercial banks, thus increasing their reserves and making them more likely to lend). Certainly Friedman was correct when he said that the Great Depression was hindered by high interest rates from the Federal Reserve. The Fed (and all central banks) always have the ability to control the money supply through open market action (buying bonds) and setting interest rates (as well as the more creative methods I have mentioned). Controlling the money supply won't result in any increase or decrease in money velocity (money demand) but it will result in stable prices (stable being defined as neither too much inflation nor too much deflation).

So my solution would be to kill the debt by raising taxes on the rich, instituting a market capitalisation tax and cutting defense spending. Since this will cause the economy to contract, and because a contraction will lead to deflation, the Federal reserve can pump more fiat money into the economy (via the regular and creative methods I described above) to keep prices stable. The result will be a longish, shallow recession alongside a reduction in government debt, which will make the inevitable recovery more sustainable.

But of course none of this directly addresses other major obstacles on the horizon, namely Peak Oil, overpopulation and global warming. With these very real problems it becomes more important than ever for the government to reduce its debt level to prepare for the coming crisis. Government will have to increase in size to create a negative-carbon, zero-oil dependant society alongside a steady-state economy and an ageing population in line with low birth rates and increasing natural death rates. And with this increase in expenditure must come a commensurate increase in tax revenues and tax rates.


Krugman vs Rogoff and Reinhart

I think Krugman is mistaken in this post.

The Rogoff/Reinhart study looks at multiple countries and discovers that growth tapers off once gross debt exceeds 90% of GDP. This argument is not based upon one single episode of US post-war experience but upon multiple countries since the 19th century. Irons and Bivens argue that "The empirical findings of GITD are very unlikely to be relevant to the United States economy of today" which is akin to saying "What applies to everyone else does not apply to America". Sadly this is just another way of expressing American exceptionalism.

Does Krugman really believe that America's single experience of High gross debt after WW2 completely cracks open the Rogoff/Reinhart argument? It seems likely that he has not read the paper at all.

To reiterate: Rogoff/Reinhart examine multiple countries over many years and have come to the conclusion that high gross debt badly affects GDP growth. Their research is NOT based simply upon one period of US history but upon dozens of different countries. To argue that this does not apply to the US is magical thinking, based upon American exceptionalism.

(posted in comments)


Common Misperceptions?

Austerity means cutting spending.

No, though this is one way it can be achieved. The other way is through increasing tax revenue by broadening the tax base and/or increasing the tax rate. Any policy which results in smaller fiscal deficits can be termed austerity. Progressives who worry about the US Federal deficit but don't want to cut services only have one option: raise taxes.

Deflation is always bad.

No. Stable prices should be the number one priority of monetary policy (conversely, smoothing out economic peaks and troughs should be the priority of fiscal policy). Yet prices naturally increase or decrease due to changes in supply and demand. The goal of monetary policy should therefore be to ensure price stability over the long term. This has actually been achieved in Japan, where the inflation index has hovered around 100 since 1993, implying that prices have been more or less stable in Japan for the past 17 years.

Which leads me to my next misperception...

Japan has a problem with deflation.

Not so. If stable prices are the goal then the Japanese Central Bank has done admirably. There has been neither inflation nor deflation over the long term in Japan since 1993. Any period of deflation has always been balanced out by a period of inflation. But is this really a good thing? Isn't Japan a basket case of an economy? My next misperception...

Japan's economy is permanently in ruin.

The following graph is from here.

Since 1993, the Japanese economy has grown. Not only has it grown, but GDP per capita has increased during that period. Both measurements indicate that GDP growth and GDP per capita growth can exist during a period of absolute price stability.

Of course the figures in the graph above do show periods of economic contraction. Certainly the 1997-2000 period was difficult, as was 2008 and 2009, but the trend is most obviously upwards.

And measuring GDP per capita is important when you consider that Japan's population has peaked and is at the point of shrinking - I have argued before that shrinking populations don't have to be seen as a bad thing for the economy.


Serious Data Problems with Government Debt Comparison

The publication of statistics by one US Federal government agency has resulted in serious problems when comparing sovereign debt levels. The CIA World Factbook is one of the more important sources of statistical data on the internet and can usually be relied upon, and is the basis for the statistics quoted on the Wikipedia article listing countries by public debt. Nevertheless my own study of primary statistical sources, specifically official releases from Eurostat, have led me to the conclusion that the level of sovereign debt throughout the Eurozone and the European Union is actually lower, as a percentage of GDP, than the amount of sovereign debt in the US reported by the CIA.

If true, this has serious policy implications for both the United States and the European Union. It also has serious implications on market valuation of US and European sovereign debt. These implications depend upon how widely the CIA World Factbook error has been disseminated amongst policy makers, academics, econ bloggers and those who work in sovereign debt markets.

In this article I will first explain what these serious data problems are, then discuss the implications for the market and then finally offer a solution.

1. The Problem

US Federal Government Debt can be measured two ways: First is gross debt, where all debt is tallied up and measured; Second is Public debt, which measures the amount of debt owed to the public. This second measurement of debt removes what is called "Intragovernmental Holdings", which is debt owed by one government body to another. Treasury Direct runs a webpage which measures both public and intragovernmental debt. For sovereign bond markets, only public debt is traded, which means that any risk analysis of sovereign debt requires a comparison of the public debt to the nation's GDP. According to the CIA World Factbook, the size of US Federal Government public debt was estimated to be 52.9% of GDP in 2009. My own study of the data suggests that this level was around 54.1% in 2009 and, in March 2010, had reached 56.8% of GDP. By and large, therefore, the CIA figure for the United States is accurate.

To find sovereign debt data for European Union countries (including those in the Eurozone) Eurostat publishes a regular debt analysis. This latest release indicates gross government debt throughout the EU16 to be 78.7% of GDP in 2009, and 73.6% for the EU27 in 2009. Here is a comparison between selected sovereign debt levels as recorded by Eurostat and those recorded by the CIA:

At first glance these figures seem to match. There is obviously some differences in methodology being used and perhaps even timing (the CIA numbers are estimates whereas the Euostat figures are more up-to-date). These figures, however, are erroneous when used in comparison to The United States for the following reason:

European Debt figures measure Gross government debt, while the US figure measures Public Debt.

"Apples are therefore being compared to Oranges", to use the modern parlance. While the CIA points out in its country comparison that This entry records the cumulative total of all government borrowings less repayments that are denominated in a country's home currency, the figures for Europe are Gross debt levels while the figure for the United States is Public Debt. This means that, on the chart, the level of US sovereign debt appears much lower than those in Europe. If "Apples are to be compared to Apples", then either the Gross debt of European nations needs to be compared to the Gross debt of the United States, or the Public Debt of European Nations should be compared to the Public Debt of the United States. European governments do, after all, have their own levels of intragovernmental debt.

For the record, Gross debt of the United States in 2009 was 86.4% of GDP, higher than both the EU16 and EU27.

We can know that the European figures measure Gross debt because the Eurostat release explicitly says so. On page 2, footnote 1, it says: Government debt is the consolidated gross debt of the whole general government sector outstanding at the end of the year (at nominal value). The only reasonable conclusion to make is that the CIA has erred by not representing the correct data and has, instead, created statistics that seriously underestimates US sovereign debt and/or seriously overestimates European sovereign debt. Of course the CIA does point out that If data for Intra-government debt were added, "Gross Debt" would increase by about 30% of GDP, but does not adjust their chart or figures to reflect this.

2. The implications

At issue here is whether or not policy makers, academics, econ bloggers and those in the sovereign debt market have used CIA World Factbook figures in their calculations and have erroneously believed that US debt levels are considerably lower than those in Europe. Certainly a series on sovereign debt risks published at Calculated Risk has based much of its discussion upon this erroneous data, including a graph which clearly indicates low US debt at 53% in comparison to high levels of European nations. Since Calculated Risk is widely read and respected, not least by Nobel Prize winner Paul Krugman, the potential for misinformation is great.

At the time of writing (2010-07-20), markets have priced various European sovereign debt at higher risk of default. Currently Greek 10 year bonds are over 10% while safer German Euro bonds are at 2.65%. Forex Markets have also sold off the Euro in recent months as the European sovereign debt crisis continues. Yet it seems incongruous that the markets should rate the Eurozone as worse than the US Dollar since both sovereign debt and government deficits are higher in the US than they are in the Eurozone. But this assumes that the markets actually know these levels of debt. If the market is using the same erroneous data, then it stands to reason that European sovereign debt is seriously undervalued when compared to the US. This is not to say that Greek debt is risky, but it might be less risky than what the markets have priced it.

As far as the debate between deficit "hawks" and "doves" is concerned, I am certainly in disagreement with Paul Krugman and other economists over the need for more stimulus from the Federal Government. I am, therefore, a deficit "hawk". Yet all effective policy debate needs reliable data, so whether a person is a deficit "hawk" or "dove" is of no consequence in this case.

3. The Solution

One way that the Eurozone has standardised data is through the European System of Accounts (ESA95). This is what has been used in the Eurostat data report to ensure that "Apples are being compared to apples" when various EU nations report their data. Of course the US is not a part of the European Union and does not need to subscribe to ESA95, but the statistical reporters of both currency zones either need to agree on a common statistical method or at least produce data from both methods to allow for accurate comparison. Although I am not a statistician I rely heavily upon the data that statistics brings. Any errors, therefore, may be serious.

In doing my research for this issue, I discovered that German public debt is around 42.9% of GDP. Yet this number does not include the debt incurred by the Länder, the equivalent of US States - but neither does the US public debt figure found at Treasury Direct. ESA95 obviously forces member nations to tally up total government debt, including those from state and local governments. Some nations, including the UK and France, are unitary states and have no comparable devolution of fiscal policy (ie ability to tax) to lower governments. This means that debt figures for these nations will appear quite high in comparison. In order for Apples to be compared to apples, total government debt needs to be tallied up.

Another important piece of data is the level of net debt that nations have. Many nations have money saved up through various industry funds. According to the CIA World Factbook, my own country Australia has public debt of 17.6% of GDP. Yet this level is a gross figure because it does not take into account the Australian Government Future Fund, which resulted from various large budget surpluses during the Howard government's term in power: rather than using the fiscal surplus to buy back remaining sovereign debt, a market for low-risk securities was maintained while simultaneously using the budget surplus to invest back into the economy. A similar program exists in Norway, whose public debt is 60.6% of GDP according to the CIA, but which is more than exceeded by the amount saved.

Accurate economic information is essential for all involved in economics and finance. If international comparisons need to be made then the statistical agencies of OECD countries need to release data that can be compared easily and transparently. Sovereign debt data needs to be released and compared in three forms:
  • Gross total government debt (gross debt of all levels of government added together),
  • Public debt (gross total government debt minus intragovernmental holdings)
  • Net debt (public debt minus government savings)
Naturally there are differences of sovereign debt risk assessment depending upon the style of governance: A unitary state like France is responsible for all government debt while a Federal government like the USA (or maybe Germany) has advantages in not having to underwrite debt accrued by the States.


One inevitable question that arises from the erroneous data being disseminated is whether the CIA deliberately misrepresented the figures. While this is possible I am more of the view that the CIA simply made a mistake. Hanlon's Razor states Never attribute to malice that which is adequately explained by stupidity, and this certainly applies to this case. After all, if the CIA was actively trying to deceive world markets they did so in an awkward and amateur way.

Until the three forms of sovereign debt (listed above) become the norm, and until the CIA changes its website, comparisons between levels of sovereign debt will be, at best, opaque. Considering the trillions of dollars that make up the sovereign debt market, the current reporting of debt levels is intolerable and dangerous.

DIsclosure: The author does not directly own any US or Euro-denominated bonds. I do have fund managers looking after superannuation accounts though.

© 2010
Neil McKenzie Cameron

Creative Commons License
Serious Data Problems with Government Debt Comparison by Neil McKenzie Cameron is licensed under a Creative Commons Attribution 3.0 Unported License.


June 2010 inflation analysis

The inflation index has dropped for three consecutive months, from 217.729 in March, to 217.579 in April, to 217.224 in May and to 216.929 in June. These deflationary results have resulted in increasing real interest rates.  Based upon the equation of (10 Year Bond Rate) minus (12 month inflation), real interest rates are on the rise:

What is concerning about this hat-trick of cpi decreases is that "three in a row" has only occurred four other times since 1954:

  • 1954-07-01 -> 1954-10-01 (4 in a row)
  • 1986-02-01 -> 1986-04-01
  • 2001-10-01 -> 2001-12-01
  • 2008-10-01 -> 2008-12-01
  • 2010-04-01 -> 2010-06-01
The 2001 and 2008 results occurred during/around a recession.

The June spread between the 10YBR and Federal Funds Rate is 302 basis points, which is the lowest since 2009-04-01 when the spread was 278 and rising. Any reduction in this spread is indicative of contractionary monetary conditions and negative results (whereby the Federal Funds Rate exceeds the Ten Year Bond Rate) are usually accompanied by a recession at some point (it was negative between 2006-07-01 and 2008-01-01, with the recession officially starting in 2007-12-01):

All in all, the signs seem to point towards contractionary effects on economic performance.


Correct prediction on Ireland

Time to bang my own drum, blow my own trumpet and announce to the world that I'm not as stupid as they think I am:

Me 2010-05-10: Of these nations, Ireland is the only one with a contracting economy experiencing deflation, so it is likely that Ireland will experience only moderate contraction and more stable prices in the coming months.

Today: The latest figures released by the Central Statistics Office show that Ireland’s Gross Domestic Product (GDP) rose by 2.7% in the first three months of this year.

Of course, year on year GDP has Ireland still at -0.7%, which is what I would define as "moderate contraction", especially in regards to previous GDP results.