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Friday, August 26, 2011

What's Next, Pestilence?

That's what the lady at the post office asked me when I went to mail stuff.

GDP: If you go to page 8, which is 2005 chained-dollar levels (real), you see that GDP grew 11.8 billion in the first quarter and now is reported as having grown 32.6 billion in the second quarter. Life really gets ugly when you realize that government spending dropped 38.2 billion in the first quarter and only 5.5 billion in the second quarter, which change alone pretty much accounts for the relative difference.

GDP would have come in better if production levels on autos had stayed up; that's an artificial drop which is unkinking in the third quarter. But still, this is quite flat.

In fact:
This graph is of percent change from a year ago in real GDP.

The US does not have any history of falling this far below 2% from a year ago without an ensuing recession. There has been only one case of staying close to even the 2% line without recession, and that was in the mid 1990s, when the Fed stepped on the credit pedal. Not an option this time.

Under these circumstances, Uncle Ben's speech seemed a bit odd, but it definitely adds up to a plea for fiscal stimulus (federal spending). The official story:
Consequently, although we expect a moderate recovery to continue and indeed to strengthen over time, the Committee has marked down its outlook for the likely pace of growth over coming quarters. With commodity prices and other import prices moderating and with longer-term inflation expectations remaining stable, we expect inflation to settle, over coming quarters, at levels at or below the rate of 2 percent, or a bit less, that most Committee participants view as being consistent with our dual mandate.
But clearly even the Fed doesn't believe this:
Notwithstanding the severe difficulties we currently face, I do not expect the long-run growth potential of the U.S. economy to be materially affected by the crisis and the recession if--and I stress if--our country takes the necessary steps to secure that outcome.
What steps!!!!?????? He drones on for quite some time before we get to it:
Normally, monetary or fiscal policies aimed primarily at promoting a faster pace of economic recovery in the near term would not be expected to significantly affect the longer-term performance of the economy. However, current circumstances may be an exception to that standard view--the exception to which I alluded earlier. Our economy is suffering today from an extraordinarily high level of long-term unemployment, with nearly half of the unemployed having been out of work for more than six months. Under these unusual circumstances, policies that promote a stronger recovery in the near term may serve longer-term objectives as well.
A plea for Congress to spend money like water. Congress is quite good at that, but it isn't good at all at spending money productively - there has been little real stimulus actually fed through to Main Street. But balance the budget!
To achieve economic and financial stability, U.S. fiscal policy must be placed on a sustainable path that ensures that debt relative to national income is at least stable or, preferably, declining over time. As I have emphasized on previous occasions, without significant policy changes, the finances of the federal government will inevitably spiral out of control, risking severe economic and financial damage.
Just not NOW, you jerks:
Although the issue of fiscal sustainability must urgently be addressed, fiscal policymakers should not, as a consequence, disregard the fragility of the current economic recovery. Fortunately, the two goals of achieving fiscal sustainability--which is the result of responsible policies set in place for the longer term--and avoiding the creation of fiscal headwinds for the current recovery are not incompatible.
This speech is the best possible one the Bernank could have given, and by knocking out some "irrational exuberance", it will have a stimulative effect on the economy.

I think Judge Posner would agree about pestilence.
Steve Hayward at Powerline passed on Charles Krauthammer's twitter feed (yes he has one):

"Earthquake, Hurricane, Obamacare. When does it stop? Seven more and I vote we let the Israelites go."

Tell your mail lady great minds think alike.
Carl - Unfortunately The Pos has not kept up with the green shoots of the national debt. We are currently at 9.9 trillion.

But hey, a few weeks ago he was correct. Our problems do have no easy answer.
Good read from Bruce Krasting, a bit and link:

"Then Jon tips Bernanke’s next move:

it is worth remembering, when the Fed has said it is prepared to act during this long-running economic crisis, it generally has acted.

Bernanke is tipping his hand (via Jon) in order to prepare the market for what is to come in a few weeks. This is a heads up to the insiders that more monetary gas is in the works. The stock market’s first reaction to today’s non-event was to sell off hard. But after the word got around that this was just a delay (and a short one at that) stocks caught a bid. Basically, the plan by Bernanke to leak his intentions worked."

Ron - I think very highly of Bruce, but I don't think Ben has the space to make bond purchases.

The banks are in negotiations with the regulators to try to figure out how to handle all the excess money in their system. A lot is from Europe, but I don't think Europe has any quick out. Nor, it would see, do the Germans.

Anyway, there's nothing to do with the cash but put it on reserve at the Fed. This qualifies as an asset, and it raises their net portfolio so they need more capital to cover. Either they have to change the rules (are Fed reserves really something that will entail risks to capital bases?), or the banks have to dump the cash.

I do not think a buying campaign would have the slightest effect in these circumstances except to enthuse traders and cause them to boot up asset prices. It would cut the dollar a bit and raise inflation a bit.

However the inevitable will happen anyway.

The Fed truly is not in business to make short-term profits for stock traders, and if it were to do this, it would take a major loss of credibility. Look for several of the older ones to scream bloody murder before that happens.
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