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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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“Panic”

In Bernanke´s response to Krugman´s comments on his paper presented at the Brookings Conference on 10 years after Lehman, Bernanke begins: Why was the Great Recession so deep? Certainly, the collapse of the housing bubble was the key precipitating event; falling house prices depressed consumer wealth and spending while leading to sharp reductions in residential construction. Was the collapse of the housing bubble the key precipitating event? Apparently not. Sweden, for example also experienced a similar rise in house prices, but there was no “collapsing bubble”. However, the recession in Sweden was “greater” (or deeper) than in the US. Bernanke… Read More

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David Beckworth: The Fed Is Loading Torpedo Tubes, USS Economy in Sight

When the yield curve inverts, the US economy capsizes, sure as—well, sure as running some torpedoes into the hull of the USS Economy. David Beckworth’s latest and worthy post regards the rather cavalier attitude at the US Federal Reserve as the central bank, seemingly on automatic pilot, targets rate hikes through next year. The above chart is not comforting. Yet, notes Beckworth, “the FOMC’s own summary of economic projections implies a yield curve inversion over the next year or so.” Oh, is that all? Already, various Fed FOMC members have mumbled something along the lines that “this time is different.… Read More

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Yellen is confused & confuses

She made two apparently contradictory statements on Friday (Sept 14). In one: Former Federal Reserve Chairwoman Janet Yellen said Friday that she is concerned the economy might overheat. “At a time like this, I would be worried that the economy is in a situation where it could overheat,” Yellen told reporters on the sidelines of a conference at The Brookings Institution. “I don’t think it would be very rapid but I think it could occur,” she said. Yellen said her view is based on the empirical relationship between inflation and unemployment — known as the Phillips curve, a closely watched… Read More

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I was but an earnest graduate in public policy school, hip-deep in academic tomes and pondering worldly thoughts, when a grizzled John Gronouski, WWII vet, former postmaster general and Ambassador to Poland, gave me that advice. Funny what one remembers from years past and classes gone by, and disco nights better not had. But through the decades that sage wisdom stuck.  Maybe I did learn something in school. Of course, newspapers have declined, but the online world is alive with classified-site Craigslist and several national job websites, such as Indeed.com. The New York Times took a page from Gronouski’s book… Read More

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Has The Fed Drawn Precisely and Exactly the Wrong Lessons From 2008?

One might think so from reading the buzz-causing Some Implications of Uncertainty and Misperception for Monetary Policy just issued by the US Federal Reserve. Briefly, the Fed staffers posit, “because monetary policy acts with a lag, waiting for inflation to materialize before reacting is undesirable, particularly when economic conditions are such that outsized deviations of inflation from its target are a plausible outcome.” “Outsized deviations”!  We are but fleeting moments from that old standby, “runaway inflation.” I rather suspect this new Fed study is but a sophisticated version of the Inflation Boogeyman, and another paean to the usual central-banker tight-money… Read More

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Is the US Economy really “Booming”?

Bloomberg’s Noah Smith, while rarely worth reading, is usually among the least-bad writers at what once was a serious financial news outlet. However, his post on Bloomberg last week: “Why the US economy is having a boom” is wrong enough to call for a response. In this post, Smith makes the case that the US economy is having a boom, and then goes on to detail what lies behind this boom. Before going through his case, let’s start by asking the question: “Is the US economy in a boom?” The word “boom” evokes some temporary period of above-average economic growth. The Roaring… Read More

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“Foggy Recollections”

Cecchetti & Shoenholtz remember the 10th anniversary of Lehman: The most intense period of the broadest and deepest disruption of U.S. and European finance since the Great Depression began with the failure of Lehman Brothers on September 15, 2008… In our view, three, interrelated policy responses proved critical in arresting the crisis and promoting recovery. First was the Fed’s aggressive monetary stimulus(!), including the introduction of unconventional policy tools, such as quantitative easing, targeted asset purchases, and forward guidance, at the effective lower bound for interest rates. After Lehman, within its mandate, the Fed did “whatever it took” to end… Read More

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