This is What Economic Analysis Looks Like

For those of you accustomed to reading all the star economic blogs, I want to direct your attention to one of the best economic analyses I've yet seen in the blogosphere. Here is John Mauldin at The Big Picture:

Oil in the 4^th quarter rose from roughly $81 to $89, or about 10%. On an annualized basis, this is 40%. Inventory investment is equal to the change in book value of the inventories, minus what is known as the IVA, or inventory valuation adjustment, which is used to correct for prices going up or down. Because the value of oil rose and thus cost more to acquire, the accounting requires that you reduce the value of the current inventories. Thus “real” imports fell at a 13% annual rate. Why? Because the deflator rose by 19%, largely because of the rise in the price of oil.

And the punchline:

If oil were to go back down this quarter by the same amount, that “growth” could be wiped out. There is no conspiracy here. It is just a statistical necessity, like hedonic measurements, and it is all very clear in the fine print; but when there are wide swings in oil prices over a quarter, and because our imports of oil are so large, you can get these odd accounting factoids. Which the gunslingers on TV (and elsewhere) miss in their urge to be the first to get out a bullish statement!

There is much more meat there, and it is all worth reading. Mauldin next proceeds to explain why the United States is headed toward a major monetary crisis, based purely on US debt levels.

Meanwhile, the rest of the economic blogosphere debates whether boosting "NGDP" will set us on the path to recovery. Folks, our problems run much deeper than that.

I have been reading The Big Picture for a couple of weeks now, and I am absolutely sold.