Monday, May 18, 2009

Hussman Watch

John Hussman Watch

Hussman lastest article looks mostly correct with the exception of when he addresses the idea of pundits referring to consumers increasing their savings as being bad to the economy

He says
"At present, it is not valid to say that the economy is weak because people are saving too much, because if gross savings were up, gross investment would also be up."

Well the problem is that when pundits say 'people' are saving too much they refer to US consumers and to some extend to the corporate sector not to "gross domestic savings"(that is, total saving including consumer, corporate and government entities) that Hussman is addressing, in fact one of the arguments of the pro-stimulus people is that since consumers are saving more its up to the government to borrow and spend so to keep gross domestic saving from collapsing national income(Like in the example he outlined)

So yes he is right that gross domestic savings is not rising(Mainly due the government deficit) but its not rising because left to its own devices it would have risen and the government decided to try to cushion its impact by increasing government investment(thus lowering government saving) by running deficits and through the stimulus plan, so the pundits are wrong from a nit picky English perspective but their main point still stands, a rise in consumer saving in a macro level while desirable in the long-run is not its good for the economy at all when it happens in a major way very quickly, if uncontrolled it would lead the US into a deep depression,
yes savings equals investment but only because 'investment' includes inventories, so if everybody stopped buying from wall-mart tomorrow the rise in WMT inventories would show up as 'investment' even though WMT had no intention on increasing investment, in fact its just the opposite they will cut jobs, stop expanding till they see a pickup in sales(Hussman acknowledges this by saying "Output that is not consumed represents 'investment' even if it is unintentional 'inventory investment.' ")

This article from Wikipedia nails it
Savings Identity
"Note that this is an "identity", meaning it is true by definition. This identity only holds true because investment here is defined as including inventories. Thus, should consumers decide to save more, and spend less, the fall in demand would lead to an increase in business inventories. The change in inventories brings savings and investment into balance without any intention by business to increase investment.[2]

Note, that as such, this does not imply that an increase in savings must lead directly to an increase in investment. Indeed, business may respond to increased inventories by decreasing both output and intended investment. Likewise, this reduction in output by business will reduce incomes, forcing an unintended reduction in savings. Even if the end result of this process is ultimately a lower level of investment, it will nonetheless remain true at any given point in time that the S=I identity holds"

Therefore Hussman setup a bit of a straw man and is nit picking pundits and analysts because when they say a 'this rise in savings is hurting the economy' they do not mean 'gross domestic saving'(Which is affected by government deficits and investment) but they refer to consumer and business saving(that is gross domestic private saving), which a major quick rise in a macro level would result in a economy much weaker than otherwise(The so called Paradox of Thrift)

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