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The sad state of the economy

Some “conflicting” comments: Federal Reserve Vice Chairman for Supervision Randal Quarles on Monday brushed off criticism of the central bank’s monetary policy choices and plans and said key remarks from the Fed’s leader last week didn’t signal a shift in the interest-rate outlook. According to him: “The data show we are doing a pretty good job of meeting the employment and inflation goal laid out by Congress”. Vice Chairman Richard Clarida is more nuanced: “In recent decades, the asymmetry has been toward disinflation forces,” Vice Chairman Richard Clarida said in an interview with Bloomberg Television. Asked about the price impacts… Read More

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Guided by “potential”: How has that worked?

Here´s Tim Duy writing for Bloomberg: The Economy’s Too Robust for the Fed to Bow to Markets – Growth would need to slow to around 1.8 percent before the central bank considers slowing the pace of interest-rate hikes. But will growth slow enough to ease what the Fed believes are underlying inflationary pressures? In general, central bankers believe the economy currently operates at or beyond full employment… Policy makers are, however, sufficiently concerned about the potential for overheating that they would prefer that unemployment didn’t drift much lower. From the perspective of the Fed, that means growth needs to slow to… Read More

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Timothy Taylor Says Fed Will Resort to QE Early in Next Recession—But Will That Work?

Global interest rates are still near historical lows; indeed 10-year German bunds pay 0.49% interest, and 10-year Japanese government bonds pay 0.12%. The US pays more, a 10-year Treasury offers 3.10% or so. Timothy Taylor of the excellent Conversable Economist pointed out recently that the US Federal Reserve will likely face the zero bound early in the next recession, and will have to resort to QE. Depending on when the next recession is, the Fed may be back to the capital markets buying bonds before it has sold much of its existing $4.0 trillion stockpile of bonds and mortgage-backed securities,… Read More

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That many think the US Federal Reserve should reconsider its plans to raise interest rates and reduce the size of its balance sheet is not surprising. What is eyebrow-raising is that many mainstream, or “establishment” economists are also warning the Fed that it may be going too far in its preemptive strikes against inflation. For example, Joachim Fels, global economic adviser at Pimco (the world’s largest bond manager) said at a Reuters Global Investment 2019 Outlook Summit in mid-November that rate hikes risk pushing 2-year Treasury yields higher than those on longer-term bonds, which many investors regard as a totem… Read More

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11 years on, and the Great Recession and its aftermath are still a “mystery”

Recently, there have been several attempts at “making sense” of all that happened. For example, Bernanke has tried to answer the question of why the recession was so deep, while Jason Furman/Martin Sandbu try to make sense of the “slow recovery”. Brad DeLong is more encompassing asking, “Was the Great Recession more Damaging than the Great Depression?” What were the views from years ago? More than seven years ago, when the “recovery” from the “Great Recession” was about to complete two years, many were worried the recovery was “too slow”. For example, Mark Thoma argued, “It’s not the lack of confidence fairy that is… Read More

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Why?

More than 10 years after the fall, we remain perplexed by the failure to answer basic questions such as “why was the crash so deep” and “why we are still haunted by it”. Recently, Bernanke has tried to answer the first question, while Jason Furman/Martin Sandbu take a stab at the second. Now, Brad DeLong “goes for broke”, asking, “Was the Great Recession more Damaging than the Great Depression?” Your parents’ — more likely your grandparents’ — Great Depression opened with the then-biggest-ever stock market crash, continued with the largest-ever sustained decline in GDP, and ended with a near-decade of… Read More

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Jason Furman/Martin Sandbu have the wrong premise

In The US´s lost decade, Martin Sandbu writes: I was recently presented with an intriguing thought experiment by Jason Furman, the chair of Barack Obama’s Council of Economic Advisers. He asked me: “Assume that on September 16, 2008, you were put in charge of US fiscal and monetary policy. You are given perfect foresight about the slowness of the recovery and the lack of an inflationary spiral. You are allowed to use the same tools (maybe plus a little) so nothing highly exotic, but you can use them sooner, keep them on for longer, and dial them differently. If you… Read More

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This week George Mason University icon Tyler Cowen interviewed Nobel Prize winner Paul Krugman, and the economic figure of Hyman Minsky came up. Krugman pondered if there was a “Minsky financial cycle” in the near future—often dubbed “a Minsky moment”—referring to a scenario in which elevated asset prices suddenly decline, triggered by a sudden market reappraisal of prospects.  To be sure, it can be argued asset values are high presently, especially in global institutional real estate, and especially in Asia. Also, the PE’s on the US stock market are well above long-term averages. Presently, the specter of higher interest rates… Read More

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China weighs on copper prices

Copper is a fascinating and important asset. Traders have known for decades that “Dr. Copper” can foretell recessions, and indeed, we’ve found that including front-month copper futures in our models improves their ability to forecast nominal GDP. Despite the general bullish turn in most asset prices, copper is down substantially from last year, trading around $2.60 per pound, from around $3.40 at the start of the year. I’d proposed in my last post on this subject that this was due to the increasingly weak Chinese economy. This thesis has held up upon deeper investigation. Eyeball the plot above, comparing co-movements between… Read More

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The United States, in its finest hour, took on Imperialist Japan and Nazi Germany. Of course, that was WWII. To finance the war effort, the US issued $186 billion of war bonds, which provided the entire federal government with about three-quarters of its income during the war years. Taxes were raised also. But the lion’s share of funding came from borrowing, and the consequent run-up of the national debt, from almost 40% to 100% of GDP in four years. A lot of money was printed too, say economic historians. “The government used monetary policies to finance the part of federal… Read More

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