Martin Wolf Looks the Economic Situation Squarely in the Eye

And boy is it depressing. Martin Wolf:

Struggling with a great contraction: In neither the US nor the eurozone, does the politician supposedly in charge – Barack Obama, the US president, and Angela Merkel, Germany’s chancellor – appear to be much more than a bystander…. Obama wishes to be president of a country that does not exist. In his fantasy US, politicians bury differences in bipartisan harmony. In fact, he faces an opposition that would prefer their country to fail than their president to succeed….

In the long journey to becoming ever more like Japan, the yields on 10-year US and German government bonds are now down to where Japan’s had fallen in October 1997, at close to 2 per cent (see chart). Does deflation lie ahead in these countries, too? One big recession could surely bring about just that. That seems to me to be a more plausible danger than the hyperinflation that those fixated on fiscal deficits and central bank balance sheet find so terrifying.

A shock caused by a huge fight over fiscal policy – the debate over the terms on which to raise the debt ceiling – has caused a run into, not out of, US government bonds. This is not surprising for two reasons: first, these are always the first port in a storm; second, the result will be a sharp tightening of fiscal policy. Investors guess that the outcome will be a still weaker economy, given the enfeebled state of the private sector. Again, in a still weaker eurozone, investors have run into the safe haven of German government bonds….

Nouriel Roubini, also known as “Dr Doom”, predicts a downturn. “A stopped clock”, some will mutter. Yet he is surely right that the buffers have mostly gone: interest rates are low, fiscal deficits are huge and the eurozone is stressed. The risks of a vicious spiral from bad fundamentals to policy mistakes, a panic and back to bad fundamentals are large, with further economic contraction ahead.

Yet all is not lost. In particular, the US and German governments retain substantial fiscal room for manoeuvre – and should use it. But, alas, governments that can spend more will not and those who want to spend more now cannot. Again, the central banks have not used up their ammunition. They too should dare to use it. Much more could also be done to hasten deleveraging of the private sector and strengthen the financial system. Another downturn now would surely be a disaster. The key, surely, is not to approach a situation as dangerous as this one within the boundaries of conventional thinking.

Ben Bernanke Disappoints Ryan Avent: Federal Reserve Communication Edition

RA:

Monetary policy: The Fed's have-it-both-ways policy: I appreciate that [Bernanke] lectured the government on its heedless fiscal policymaking, but I found the tone on monetary policy to be confusing and timid…. I just hope that whatever the Fed opts to do in September is spelt out more clearly than its August decision…. [T]he frustratingly vague nature of the August statement… is part of a broader pattern at the Fed of failing to use the expectations channel effectively…. It is absurd to speculate about whether the Fed has the ability to provide more of a boost to the economy while the expectations tool is sitting on the shelf. I think Mr Woodford is right in suggesting that the main value of Fed purchases is in demonstrating the central bank's commitment to achieving its stated goals. By leaving those goals vague, the Fed seriously undercut its own stimulative effort. I don't know why. I just hope the Fed works through its hang-ups about clearer signalling by the conclusion of the September meeting.

Ben Bernanke Disappoints Ryan Avent: Federal Reserve Communication Edition

RA:

Monetary policy: The Fed's have-it-both-ways policy: I appreciate that [Bernanke] lectured the government on its heedless fiscal policymaking, but I found the tone on monetary policy to be confusing and timid…. I just hope that whatever the Fed opts to do in September is spelt out more clearly than its August decision…. [T]he frustratingly vague nature of the August statement… is part of a broader pattern at the Fed of failing to use the expectations channel effectively…. It is absurd to speculate about whether the Fed has the ability to provide more of a boost to the economy while the expectations tool is sitting on the shelf. I think Mr Woodford is right in suggesting that the main value of Fed purchases is in demonstrating the central bank's commitment to achieving its stated goals. By leaving those goals vague, the Fed seriously undercut its own stimulative effort. I don't know why. I just hope the Fed works through its hang-ups about clearer signalling by the conclusion of the September meeting.

Who Is the Pain-Austerity Caucus at the Federal Reserve Talking to?

Paul Krugman quotes the arguments of the three Federal Reserve Bank Presidents who called for pain and austerity at the last meeting:

Incoherence at the FOMC: Messrs. Fisher, Kocherlakota, and Plosser dissented because they would have preferred to continue to describe economic conditions as likely to warrant exceptionally low levels for the federal funds rate for an “extended period,” rather than characterizing that period as “at least through mid-2013.”

Mr. Fisher discussed the fragility of the U.S. economy but felt that it was chiefly nonmonetary factors, such as uncertainty about fiscal and regulatory initiatives, that were restraining domestic capital expenditures, job creation, and economic growth. He was concerned both that the Committee did not have enough information to be specific on the time interval over which it expected low rates to be maintained, and that, were it to do so, the Committee risked appearing overly responsive to the recent financial market volatility.

Mr. Kocherlakota’s perspective on the policy decision was shaped by his view that in November 2010, the Committee had chosen a level of accommodation that was well calibrated for the condition of the economy. Since November, inflation had risen and unemployment had fallen, and he did not believe that providing more monetary accommodation was the appropriate response to those changes in the economy.

Mr. Plosser felt that the reference to 2013 might well be misinterpreted as suggesting that monetary policy was no longer contingent on how the economic outlook evolved. Although financial markets had been volatile and incoming information on growth and employment had been weaker than anticipated, he believed the statement conveyed an excessively negative assessment of the economy and that it was premature to undertake, or be perceived to signal, further policy accommodation. He also judged that the policy step would do little to improve near-term growth prospects, given the ongoing structural adjustments and external challenges faced by the U.S. economy.

And Krugman comments:

So, let’s see: Fisher thinks that the problem is “uncertainty” caused by our Muslim socialist president “fiscal and regulatory initiatives”. This happens to be just wrong, as shown by lots of evidence; businesses aren’t expanding because of lack of demand, not because they fear Obamacare. But even if it were true, you don’t have to refill a flat tire through the hole: monetary policy is what you use when demand is insufficient, for whatever reason.

Kocherlakota basically says that the Fed has already done enough, because unemployment is down since the Fed’s last policy change, while inflation is up. But the Fed’s policy was supposed to put unemployment on a steadily declining trend, which hasn’t happened, while inflation was clearly a temporary bulge from commodity prices, now fading out.

Plosser thinks things are better than they seem, or something. (Why do I think of Oscar Wilde saying that Wagner’s music was better than it sounds?) He also, if I read this right, believes that our problems are largely structural or external or something; maybe he thinks we’re suffering from a lot of structural unemployment, despite strong evidence to the contrary.

Indeed. I guarantee you that Kochrlakota's claim that the job market had improved and the inflation outlook worsened was believed by nobody around the table except for his two peers. Why not? Because it was false: the job market had not improved and the inflation outlook had no worsened. And I guarantee that everybody around the table (except perhaps for his two peers) rejected Fisher's argument for the reason Krugman gave: you don't refill a flat tire through the hole. And I can derive no coherent view of the economy and economic policy from Plosser at all. These do not seem to me like arguments intended to persuade anybody who has contact with reality.

As Krugman writes:

The point is that all three dissents sound like people who have decided that they’re against easy money, and are looking for reasons to justify that decision. I sort of knew that, but it’s useful to have that demonstrated so clearly.

Who Is the Pain-Austerity Caucus at the Federal Reserve Talking to?

Paul Krugman quotes the arguments of the three Federal Reserve Bank Presidents who called for pain and austerity at the last meeting:

Incoherence at the FOMC: Messrs. Fisher, Kocherlakota, and Plosser dissented because they would have preferred to continue to describe economic conditions as likely to warrant exceptionally low levels for the federal funds rate for an “extended period,” rather than characterizing that period as “at least through mid-2013.”

Mr. Fisher discussed the fragility of the U.S. economy but felt that it was chiefly nonmonetary factors, such as uncertainty about fiscal and regulatory initiatives, that were restraining domestic capital expenditures, job creation, and economic growth. He was concerned both that the Committee did not have enough information to be specific on the time interval over which it expected low rates to be maintained, and that, were it to do so, the Committee risked appearing overly responsive to the recent financial market volatility.

Mr. Kocherlakota’s perspective on the policy decision was shaped by his view that in November 2010, the Committee had chosen a level of accommodation that was well calibrated for the condition of the economy. Since November, inflation had risen and unemployment had fallen, and he did not believe that providing more monetary accommodation was the appropriate response to those changes in the economy.

Mr. Plosser felt that the reference to 2013 might well be misinterpreted as suggesting that monetary policy was no longer contingent on how the economic outlook evolved. Although financial markets had been volatile and incoming information on growth and employment had been weaker than anticipated, he believed the statement conveyed an excessively negative assessment of the economy and that it was premature to undertake, or be perceived to signal, further policy accommodation. He also judged that the policy step would do little to improve near-term growth prospects, given the ongoing structural adjustments and external challenges faced by the U.S. economy.

And Krugman comments:

So, let’s see: Fisher thinks that the problem is “uncertainty” caused by our Muslim socialist president “fiscal and regulatory initiatives”. This happens to be just wrong, as shown by lots of evidence; businesses aren’t expanding because of lack of demand, not because they fear Obamacare. But even if it were true, you don’t have to refill a flat tire through the hole: monetary policy is what you use when demand is insufficient, for whatever reason.

Kocherlakota basically says that the Fed has already done enough, because unemployment is down since the Fed’s last policy change, while inflation is up. But the Fed’s policy was supposed to put unemployment on a steadily declining trend, which hasn’t happened, while inflation was clearly a temporary bulge from commodity prices, now fading out.

Plosser thinks things are better than they seem, or something. (Why do I think of Oscar Wilde saying that Wagner’s music was better than it sounds?) He also, if I read this right, believes that our problems are largely structural or external or something; maybe he thinks we’re suffering from a lot of structural unemployment, despite strong evidence to the contrary.

Indeed. I guarantee you that Kochrlakota's claim that the job market had improved and the inflation outlook worsened was believed by nobody around the table except for his two peers. Why not? Because it was false: the job market had not improved and the inflation outlook had no worsened. And I guarantee that everybody around the table (except perhaps for his two peers) rejected Fisher's argument for the reason Krugman gave: you don't refill a flat tire through the hole. And I can derive no coherent view of the economy and economic policy from Plosser at all. These do not seem to me like arguments intended to persuade anybody who has contact with reality.

As Krugman writes:

The point is that all three dissents sound like people who have decided that they’re against easy money, and are looking for reasons to justify that decision. I sort of knew that, but it’s useful to have that demonstrated so clearly.

Yet Another Atlantic Monthly Fail

Why oh why can't we have a better press corps?

Megan McArdle:

Megan McArdle: "Before I was a journalist, I used to wonder why journalists were suppressing obvious important facts; after I became a journalist, I realized that it's often incredibly hard to know that there's a fact you're missing.  I seem to recall a scathing editorial about mortgage financing in maybe 2005, in which the outraged writer pointed out that banks were booking the asset value of the loans as if they were going to realize 100% of the payments . . . even though some of those loans would go bad!  Fraud!  Malfeasance!

. . . er, accounting.  Anyone who knows anything about accounting knows that what the writer was saying is absolutely true . . . and that if you look on the other side of the balance statement, you find that they have booked a corresponding allowance for bad debts.  You can argue that in 2005, those allowances weren't big enough--hell, I think at this point, it's not an argument, but a fact.  Nonetheless, the opinion column was ludicrously wrong.

And yet, understandably wrong. I'm sure that the writer had been fed the story by a consumer activist (I can probably name the group).  He looked at the financial statements, and the numbers checked out.  He'd never heard of such a thing as an allowance for bad debts, so how was he to know it was there?

No. It was not understandably wrong.

You write about what you know--so you know what facts to look for.

If you don't know about it, you don't write about it.

And even if you do know about it, you ask experts if you are missing something. And if you don't know any experts, you don't write about it.

The idea is to add to, not to subtract from the stock of knowledge.

Yet Another Atlantic Monthly Fail

Why oh why can't we have a better press corps?

Megan McArdle:

Megan McArdle: "Before I was a journalist, I used to wonder why journalists were suppressing obvious important facts; after I became a journalist, I realized that it's often incredibly hard to know that there's a fact you're missing.  I seem to recall a scathing editorial about mortgage financing in maybe 2005, in which the outraged writer pointed out that banks were booking the asset value of the loans as if they were going to realize 100% of the payments . . . even though some of those loans would go bad!  Fraud!  Malfeasance!

. . . er, accounting.  Anyone who knows anything about accounting knows that what the writer was saying is absolutely true . . . and that if you look on the other side of the balance statement, you find that they have booked a corresponding allowance for bad debts.  You can argue that in 2005, those allowances weren't big enough--hell, I think at this point, it's not an argument, but a fact.  Nonetheless, the opinion column was ludicrously wrong.

And yet, understandably wrong. I'm sure that the writer had been fed the story by a consumer activist (I can probably name the group).  He looked at the financial statements, and the numbers checked out.  He'd never heard of such a thing as an allowance for bad debts, so how was he to know it was there?

No. It was not understandably wrong.

You write about what you know--so you know what facts to look for.

If you don't know about it, you don't write about it.

And even if you do know about it, you ask experts if you are missing something. And if you don't know any experts, you don't write about it.

The idea is to add to, not to subtract from the stock of knowledge.

Searching for Clues as the Fate of the World Hangs in the Balance

In this article, I look for clues in the charts as the fate of the markets and the free world  hangs in the balance on the actions (or inactions) of the FOMC.  We must wait until mid – September, and until then, the markets will be ripe with rumors.  The Fed is already in full [...]

Books Bought By Big Picture Readers (August 2011)

I always find it interesting to see what books TBP readers are buying. In addition to throwing off a few shekels, the Amazon code embedded in links lets me track your collective purchases. Its anonymous — I don’t know who bought what — but I can tell what everyone who clicked on a given book bought.

These are the most popular books purchased in August:

A Gift to My Children: A Father’s Lessons for Life and Investing (Jim Rogers)

Bailout Nation (Barry Ritholtz)

Contrarian Investment Strategies (David Dreman)

Endgame: The End of the Debt Supercycle and How It Changes Everything (John Mauldin)

Go the F**k to Sleep (Adam Mansbach)

Why We Eat More Than We Think (Brian Wansink)

Speculative Contagion: An Antidote for Speculative Epidemics (Frank K. Martin)

Stumbling on Happiness (Daniel Gilbert)

The Big Short: Inside the Doomsday Machine (Michael Lewis)

Manias, Panics, and Crashes: A History of Financial Crises (Charles P. Kindleberger)

The Little Book of Value Investing (Christopher H. Browne)

Fiscal Hangover: How to Profit From The New Global Economy (Keith Fitz-Gerald)

The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street (Justin Fox)

The Tao of Pooh (Benjamin Hoff)

Trend Commandments: Trading for Exceptional Returns (Michael W. Covel)

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