I'm enjoying Ghosts

That is, the album Nine Inch Nails has released free on the internet.

Trent Reznor's decision obviously has Radiohead's "In Rainbows" in mind, but with one significant difference - Ghosts is copyrighted under a creative commons licence, which means that people who own it are allowed to copy it and distribute it as much as they want to.

With that in mind, if you wish to download Ghosts II-IV (which are not available at the NIN site), then click here where you can legally download the entire release.

Worked

2 days at Christian school, came home and they rang me up again to work tomorrow. It's been good - both Anna and I are enjoying the return to traditional family mode.

But I'm tired. I'm going to bed early. Good night.

Sunn O)))

Imagine if Enya died, and was then brought back to life as a vampire and began playing her music again.

Well, that's what Sunn O)))'s album Black One is like.

Recessions, Unemployment and Peak Oil

Again, the following chart was produced by FRED at the St Louis Fed:



This is a chart showing unemployment rates and GDP growth in the US since 1969. They grey lines are official recessions.

As you can see, GDP growth during recessions shows a "correction" before it continues upwards. Sometimes this correction is a small plateau, other times (say 1980-1982) there is a slight dip.

The important thing to note is how unemployment responds to recessions - namely a mighty jump upwards followed by a more gradual downward trend as the economy recovers. In some cases, namely the last two recessions (2000 and 1991), unemployment doesn't peak until a few years after the recession ends, which led to the phrase "jobless recovery" becoming popular.

Assuming America is in a recession now, one very obvious indicator would be a rapid rise in unemployment. In the following months, I am reasonably certain that we will see this occur.

The problem is, however, determining how severe the current recession is likely to be. Naturally, if the recession is severe, the result will obviously be a decline in GDP (instead of the plateaus seen in the graph above), along with skyrocketing unemployment.

The last two recessions - 2000 and 1991 - were mild compared to past recessions, which is why unemployment levels never rose too high. Nevertheless, there is always a level of hyperbole that accompanies recessions. Take this for example:

Housing is in its "deepest, most rapid downswing since the Great Depression," the chief economist for the National Association of Home Builders said Tuesday, and the downward momentum on housing prices appears to be accelerating.

The NAHB's latest forecast calls for new-home sales to drop 22% this year, bringing sales 55% under the peak reached in late 2005. Housing starts are predicted to tumble 31% in 2008, putting starts 60% off their high of three years ago.

"More and more of the country is now involved in the contraction, where six months ago it was not as widespread," said David Seiders, the NAHB's chief economist, on a conference call with reporters. "Housing is in a major contraction mode and will be another major, heavy weight on the economy in the first quarter."

A home-sales measure tracked by the association that includes data on cancellations from 30 large U.S. builders that account for one-quarter of all sales shows sales down 65% from their peak in 2005, Seiders said. Government measures of home sales do not include numbers from contracts that were signed but buyers later backed out.

Vacant homes for sale in the U.S. now number about 2 million, Seiders said, an increase of 800,000 from 2005. That inventory overhang is bedeviling builders, who have been forced to cut prices and write down the value of their holdings.

The problem with this report is whether or not the people quoted are merely engaging in hyperbole, or whether their statements are factual. Unfortunately, I have to side with the NAHB on this one and say that the current recession will probably be the worst since the Depression of the early 1930s. Since that depression is the worst ever recorded in history, it is difficult to predict the chances of anything exceeding it.

I am on record (somewhere on this website) in arguing that Peak Oil will cause an economic downturn at least as bad as the Depression. Since I believe that the peak has been reached, I have to therefore wonder whether my prediction will come true. If it does, there will be a severe contraction in American (and world) GDP accompanied by exceptionally high jobless levels. Moreover, I would also argue that economic recovery would be slow, resulting in a correspondingly slow fall in unemployment.

Doom gloom doom gloom. But it won't be the end of the world, just the end of an era.

Update:
Craig has some questions for me:

Let's get some hard figures around it Neil. 30% unemployment? By what year? 2010?

Like weather, economics is notoriously hard to predict, especially when you start putting in figures and dates.

I will make this firm prediction - US unemployment will rise above 7% this year (2008).

After that, who knows? The monetary conditions that plagued the Great Depression - notably world-wide deflation - will not be in evidence.

Look at the following graph, again courtesy of the St Louis Fed:



The blue line represents US GDP during the Great depression, from 1929 until 1940. As you can see, GDP declined by nearly one third from 1929 until 1933, before staging a recovery and then hitting another wall in 1937. After that, GDP increases and the war intervenes.

The red line is my own piece of graffiti on the graph, and represents what could happen in the next few years. Rather than a deep drop in GDP followed by a recovery, we have a situation in which GDP pretty much increases only incrementally over a ten year period. Now the line I have drawn is simply arbitrary, but it shows that it is possible to have the same GDP outcome but have a very different way of getting there.

My graffiti is not, of course, accurate - I expect there to be a recession in 2008 which means that GDP should contract. What I am trying to point out, however, is that the potential route over the next five to ten years is very unlikely to result in a one-third drop in GDP and 30% unemployment. What is probably likely is that unemployment may never get below, say, 8% while GDP may never expand by more than 1% per year (annualised). (note: these figures are for America)

The reason for this argument is twofold:

1) Monetary policy will prevent a 1930s style deflationary spiral. It was massive deflation which caused the massive contraction of GDP and the 30% unemployment.
2) Peak Oil's effects are a gradual drop-off in oil production. The current plateau has been reached and it is more than likely that a drop-off in production will occur. Demand destruction caused by expensive oil will cause oil prices to drop as the recession bites and people begin to be more economical in their use of cars. However, once an economic recovery begins to start up, oil prices will not be low enough to stimulate growth, and resulting oil price increases will "nip (the recovery) in the bud".

Add these two together and you get a reasonably flat and stagnant period of economic performance.

Off to work

I'm working today - my first day back since Anna finished on Friday. I'm looking forward to it!

Update:
Bit rusty, but everything went well. I'm working at the same school tomorrow.

The Dungeon Master has gone

Gary Gygax, creator of Dungeon's and Dragons, is dead.

Rate cuts are benefiting lenders, not borrowers

Here's a very interesting graph, courtesy of FRED at the St Louis Fed:

The blue line at the top represents average 30-year mortgage rates in the US. The red line represents the effective Federal funds rate (what the Fed sets whenever they get together, with occasional forays into the market). The data on this graph goes back 12 months.

As you can see, there is a spread between mortgage rates and the Federal funds rate. It is this spread that usually represents the "profit margin" that lenders make when they lend money for mortgages. As you can see, for the first quarter of the graph, things were reasonably under control, with an average 1% spread between the two rates. Then notice that around May 2007, mortgage rates went up significantly, increasing the spread to around 1.5%.

August 2007 was, of course, when the market suddenly woke up to the fact that something awful was happening, and the Fed has since lowered rates significantly.

But notice - mortgage rates have not dropped by much at all. So while the Fed has been pouring money into the market, lenders have increased the "spread" between the Federal funds rate and the mortgage rate - which now stands at 3%.

What does this mean?

Put simply - it means that banks and other mortgage lenders are spooked. Even though mortgage rates have not changed much, the reduction in the Federal funds rate means that mortgage lenders have become very risk averse. They have money coming in, but not as much going out - a classic credit crunch scenario.

This "spread" is unlikely to change much in the short-medium term. So long as people keep defaulting on their mortgages and/or losing their jobs, lenders will keep their money on a short leash.

Iraq war breeding secularism amongst young Muslims

From the department of I-honestly-didn't-see-this-coming:

After almost five years of war, many young Iraqis, exhausted by constant firsthand exposure to the violence of religious extremism, say they have grown disillusioned with religious leaders and skeptical of the faith that they preach.

In two months of interviews with 40 young people in five Iraqi cities, a pattern of disenchantment emerged, in which young Iraqis, both poor and middle class, blamed clerics for the violence and the restrictions that have narrowed their lives.

"I hate Islam and all the clerics because they limit our freedom every day and their instruction became heavy over us," said Sara Sami, a high school student in Basra. "Most of the girls in my high school hate that Islamic people control the authority because they don't deserve to be rulers."

Atheer, a 19-year-old from a poor, heavily Shiite neighborhood in southern Baghdad, said: "The religion men are liars. Young people don't believe them. Guys my age are not interested in religion anymore."

The shift in Iraq runs counter to trends of rising religiousness among young people across much of the Middle East, where religion has replaced nationalism as a unifying ideology. While religious extremists are admired by a number of young people in other parts of the Arab world, Iraq offers a test case of what could happen when extremist theories are applied.

Well this goes counter to what alarmists have been saying about the spread of Islam.

Reasons for blogging?

From the department of altruism never existed:

Blogging may help people feel happier and more satisfied with their friends, according to Melbourne researchers.

The findings, from researchers at Swinburne University of Technology, show that after two months, new bloggers felt more socially connected than those who did not blog.

Psychologist James Baker said this suggested that blogging could actually be good for people - helping them to feel part of a community.

"It makes people feel closer and more connected," Mr Baker said.

"That's good because there's been a fair bit of press about the dangers of blogging ... so you'd hope there's some sort of benefit."

The research, conducted by Mr Baker and Professor Susan Moore, is based on two surveys, with the first asking 134 new users of the social networking site MySpace whether or not they intended to blog.

The results, published in the latest edition of the journal CyberPsychology & Behaviour, showed people who intended to blog were more psychologically distressed than those who didn't intend to blog.

They had higher levels of depression, anxiety and stress, and were more likely to use self-blame and venting to cope and also less satisfied with the number of friends they had.

Two months later the researchers followed up 59 of the same group of MySpace users, this time comparing those who had blogged to those who had not.

The findings, which have been submitted to a journal, showed the bloggers were happier about the number of friends they had, both online and face-to-face, and were more likely to reach out to these friends for help.

'They felt more socially integrated," Mr Baker said. "They felt that their friends were a better fit and they connected better."

The researchers are planning further research that will look at the experiences of a larger group of bloggers.

Advantage Australia?

From the department of slightly:

Commodity exports from Australia, the world's biggest shipper of coal, iron ore and wool, are forecast to gain to a record for a fifth straight year driven by demand for steelmaking raw materials led by China.

Sales may reach A$189.1 billion ($178 billion) in the year ending June 30, 2009, the Canberra-based Australian Bureau of Agricultural and Resource Economics said today in a statement. That compares with a revised A$145.6 billion this fiscal year.

Prices for the nation's top five commodity exports, iron ore, coking and thermal coals, gold and crude oil have risen to records this year, benefiting producers including BHP Billiton Ltd. Robust economic growth is expected in China this year along with strong demand for Australia's resources, the bureau said in a report.

``China is far and away the biggest underlying force'' driving sales, Peter Arden, an analyst at Ord Minnett Ltd., an affiliate of JPMorgan Chase & Co., said by phone from Melbourne. ``The outlook is very, very rosy.''

This is obviously good news, not just because it is "good" that people overseas want our commodities, but because it will help to reverse one of Australia's economic imbalances - the current account deficit. This will, however, be a case of "I'll believe it when I see it" because the current account deficit is one of Australia's most intractable economic problems.

Australia's economy, like all modern economies, buys goods from overseas. It also sells goods overseas as well. The problem is, however, that Australia buys more than it sells. So where does it get the money to buy overseas goods? It borrows it from overseas lenders. In the September quarter last year, Australia borrowed a total of US$49.9 billion. This is called a current account deficit, and that figure represents some 5.4% of GDP. Australia has been borrowing money from overseas for a long time, and the amount of money Australia owes to overseas lenders is now around 53.5% of GDP - over US$610 billion.

Now I'm a great believer in balance when it comes to economics. A deficit is not "bad" but continual deficits are "bad". Similarly, a surplus is not "good" but continual surpluses are, in fact, just as "bad" as continual deficits. The idea is to get things in balance.

In order to reverse Australia's net debt and reduce it to zero, the current account must, at the very least, be reduced to zero as well. In short, this means that Australia needs to export more and import less, to save more and borrow less, to produce more and to consume less.

Since Australia's economy is heavily dependent upon commodities (like coal, iron, gold, copper, etc) as well as agriculture (like wheat and rice), the current commodities boom and increase in grain prices will act to increase the price of the goods we sell. This will, in turn, act to reduce Australia's current account deficit.

One of the more fortunate results of a conservative government that wasn't influenced by voodoo economics is that Australia's public debt (the amount of money all of Australia's governments owe) has basically been erased. Eleven years of fiscal prudence by Howard and Costello has meant that the government can now actually afford to do things like cut taxes and/or increase spending. This is where Australia and America differ.

Nevertheless, there are some weaknesses in Australia's economy.

The first is that inflation is increasing. It is expected that the Reserve Bank of Australia will raise rates to 7.25% today. Australia's economy, unlike America, is still showing signs of strength so our central bank is right to increase rates. Moreover, this increase in rates will do exactly what is needed to reverse the current account deficit - it will curb domestic spending, making us less likely to consume and more likely to save. If things work out okay (and they probably won't), this decrease in domestic spending will be balanced out by the increase in overseas exports mentioned in the news report quoted above.

The second is that, while Australia does not have the same subprime mess that the US has, our housing market is still significantly overvalued - perhaps more so than the US market ever was. I am astounded that housing prices here in Australia have remained stratospheric while they have been crashing in America for over 12 months now. Today's interest rate rise will, at the very least, deflate the bubble slightly. Hopefully it will pop it, and an Australian economic downturn is a possibility.

The third is that it is China and Japan that are buying all the commodities we produce... and both Japan and China turn those commodities into goods that are then sold to America. With the American dollar now low and its economy in recession (face it, it is), it is only a matter of time before Chinese and Japanese industry is affected by America's recession... which will, in turn, reduce the need for Australian commodities. It is this last point which is important because it assumes that the commodities boom will eventually end, leaving Australian mines and mine workers with less work and money.

Regardless of what happens - whether the commodities boom pops earlier or later - the right thing to do is to discourage domestic spending and to reduce the current account deficit accordingly. This will result in, hopefully, higher interest rates over the medium term. Over the long term, however, it will be dependent upon tighter monetary policy which targets inflation at a lower rate - something which has yet to become policy anywhere, mainly because it is my proposal for Absolute Price Stability.

In short, Australia is probably more likely to weather the brewing economic storm than America, but still has some serious shortcomings that need to be addressed sooner rather than later. The current account deficit is the key - reduce that and you will reduce a whole range of economic problems. Increasing interest rates and cooling the economy down is exactly what is needed at this point, even with a global recession heading our way.