Worthwhile Reading - June 1

Making sausages, data in China. WSJ.
The focus these days is on the mismatch between China’s electricity consumption and a key measure of industrial output.
For most of the past decade, China’s industrial value-added growth (IVA) –industry output less input costs – has moved broadly in step with movements in electricity consumption. But the relationship’s broken down recently: electricity use is still seeing negative growth, while IVA is growing at a decent positive rate again.
Some China analysts are crying foul: If IVA growth figures are being cooked, surely that means China’s recent GDP data have been overstated too. China’s statisticians use IVA output to estimate what accounts for nearly half of China’s GDP.
China’s association of electricity generators has a solution: it’s stopped publishing consumption data.

Record demand, record angst; and More government borrowing doesn't necessarily mean more total borrowing. Brad Setser, Follow the Money.
if central banks believe that the only acceptable, safe alternative to long-term Treasury notes is short-term Treasury bills, they will end up lending to the US at incredibly low rates so long as the Fed keeps rates low. Key countries end up piling up short-term Treasury bills at a rate that has to make everyone nervous. US policy makers have to worry about the weak foreign bid for long-term bonds, and the risk that the rise in mortgage rates will choke off the recovery. And at some point, foreign central banks will have to worry about the lack of interest income of their (now once again growing) foreign portfolio.

Treasury myths. Models & Agents.

Anything but academic. John Hussman.
agrees with John Taylor, not Paul Krugman, about the likelihood of significant inflation over the next decade; also says:
There is very little chance, in my view, that the current downturn is over. We have enjoyed a nice reprieve – if over a trillion dollars in redistribution could not accomplish even a reprieve, it would be a surprise. It's clear that investors are hopeful that we can simply return to rich valuations, debt-financed economic expansion, and abnormal profit margins based on excessive leverage. From my perspective, this hope is as thin as those that we observed at the peak of the internet bubble, the housing bubble, and the profit margin peak of 2007.

Place your wagers. Contrary Investor.
We continue to believe the financial markets are trying their best to discount a typical consumer and/or corporate demand led economic recovery of the type seen over the past half century. Yet when we look at things like the credit markets, personal income circumstances and the complexion of household balance sheets crying out for deleveraging, current conditions are quite different than any recession of the prior half-century, with the government acting as Atlas holding up the world of "demand", per se, for now. Just what type of a valuation multiple do we put on a financial market under these character circumstances? We believe this is a very important question the financial markets will be facing head on during the second half of this year and early next. For now, the key recovery fingerprints of every single economic recovery of the last half century are missing from the current puzzle (housing demand, auto demand and reacceleration in consumer credit growth). Standing in for these classic drivers is the US government. For how long will this be the case and what should investors be paying for this stand in role?

*** Why there is more pain to come. T2 Partners.
see comments on slides 24/25, 30, 63/64 & 71 in particular

Zoellick warns stimulus 'sugar high' won't stem unemployment. Bloomberg.

Let's do the time warp again. Steve Keen.
basically debunks any forecasts (and specifically that of the Australian Treasury) produced by economists who (a) didn't foresee the credit crunch, (b) continue to use models that don't take account of the credit crunch, and (c) assumes that the credit crunch is just a short-term one-off event that shocks the economy below equilibrium, but from which point the economy will revert back to its long-run equilibrium growth path (as if nothing fundamental ever happened in the interim) which actually requires an above-average growth rate in the mid-term to make up for the short-term growth lapse; Keen then uses his own dynamic economic model, derived from Minsky's Financial Instability Hypothesis, which, unlike traditional static and DSGE economic models, accounts for asset markets and the level of debt, to make his own forecasts:

But what if the crisis is one of solvency instead? What if the real cause of the crisis is not merely a sudden drop in confidence resulting in lower rates of creation and circulation of credit, but too much debt altogether?

That possibility is captured in my Minsky model, in which a series of booms and busts leads to one final bust where the accumulated debt is so great that the economy can no longer service it. Output and employment collapse, and the only way out is to deliberately reduce the debt....

The Ponzi Finance system however is inherently unstable: the growth of unproductive debt during a boom–when people borrow money to speculate on rising asset prices–adds so much to debt that the amount accumulated in the previous boom is never completely repaid before the next boom takes off. The debt to GDP ratio therefore ratchets up over time, until ultimately, so much debt is taken on that the economy experiences not merely a recession but a Depression.