September 2

WHY oh why does the Fed, in its minutes from their August 10 meeting, released the other day, say (at the start of the policy action section) that:

inflation was likely to stabilize near recent low readings in coming quarters and then gradually rise toward levels they consider more consistent with the Committee’s dual mandate for maximum employment and price stability

On what basis did they come to that conclusion? macroeconomics says that when unemployment is high and when there's a large output gap, then inflation falls; historical precedent says the same; so why does the Fed think inflation is soon going to stabilize and soon thereafter start rising? do they just say that so they can keep sitting on their hands?

I have argued before, repeatedly, that the Fed is pushing-on-a-string: current monetary policy measures are intended to ease credit strains and encourage greater lending, which, it is hoped, would stimulate economic growth. But the easy money is not getting to the public because (a) the public has more debt than it wants so doesn't, in aggregate, want to take on more debt, and (b) the financial sector has more non-performing loans and questionable credit already on its books so doesn't, in aggregate, want to increase its exposure to risky credit. These roadblocks are what is preventing Fed policy from being as effective as hoped, and is thus why the Fed is pushing on a string.

However, this is not to suggest that there aren't potential Fed policy tools that could be implemented that would not be limited by those roadblocks and therefore should not be just more ways of simply pushing on that same string. As Krugman said years ago in his 1998 paper Japan's Trap, printing money is not sufficient when you're at the zero bound. What could they do, that they haven't yet done, to avoid the whole string problem? Bernanke knows --- he just hasn't done it yet: free money / helicopter drop.

The Fed has expanded the monetary base, but its sitting in excess reserves, due to roadblocks mentioned above. But if all private citizens got a check in the mail for $1000, surely a reasonable proportion of that found money would be spent. Yes, some of it would likely be applied to reducing credit balances; but surely this would be the most likely policy tool the Fed could employ to stem deflationary pressures by goosing the economy. I've mentioned this in past forecast meetings: give the money to the people, not the banks.

More on this in The right kind of helicopter drop. David Beckworth.

Chris Whalen says to forget QE; instead, get tough on banks, via Reuters.
I totally agree with the idea of putting more heat on banks, and forcing them to clean up their books; but not with using the GSEs to subsidize housing; wasn't that a big part of the problem before? should housing be subsidized more than it is already? this isn't fair to non-homeowners, and it doesn't help the market clear; there's more efficient ways of getting money into hands of households than doing it via GSE-engineered refinancing of all mortgages

The inflation cure. Paul Krugman.

Jan Hatzius is shrillish. Krugman again.

And now that the writing is on the wall, Morgan Stanley finally admits 2nd half growth won't be as robust as it had been forecasting. I suspect they're still too bullish. In any case, the reason why I'm linking to this is because I think this is just classic:

There's no mistaking the weakness of incoming US data.... However, unless we know why the economy has weakened, we have trouble assessing the future. In our view, the main culprit for weakness relative to our forecast is waning or less-than-expected support from global growth

Seriously? Not the waning of fiscal stimulus? Not the end of the inventory bounce?? Not stagnant labour markets and continuing credit contraction??? With Europe having had a better-than-expected Q2 and with Asia still strong, the problem confounding U.S. growth is weak global growth? Surely they jest.

Similarly (more closing of barn doors, post horse), BoA sliced their 2010 and 2011 forecasts, also via zerohedge.

After salami-slicing our forecast in recent months, we are ready to make a deeper cut.

Normally I wouldn't link to stuff like this --- but I make exceptions when its about one of my favourite economists: nope, not David Malpass; and, no, not Larry Kudlow or Ben Stein; this one's about Brian Wesbury:
Wrong! Krugman.

And how's this for impeccable logic? Apparently, Ethan Harris, head of economics at BoA/ML thinks the U.S. economy is so bad that the chance of avoiding a double dip back into recession may actually be pretty good, via Bloomberg.

back in the real world:
The world is flat - and getting flatter. John Taylor, via zerohedge.

Just as cash-for-clunkers and housing purchase subsidies merely delayed the day of reckoning for automobile and housing sales, we fear that last year’s substitution of public central bank leverage for private balance sheet repair has merely delayed the full extent of household expenditure adjustment. Given the scale of the credit cycle that just ended, the probability of a double-dip recession is far higher than the historical comparison to other post-war cycles suggests. From a starting point where the Fed is already committed to purchase hundreds of billions of dollars of Treasuries just to maintain its current policy stance, we expect the persistence of weak labor markets to force it to launch “QE2”, further depressing back-end yields.

To draw on Thomas Friedman’s analogy, as the deleveraging process becomes globalized the developed world’s yield curves will literally flatten. Shifts in the yield curve in August are the beginning of a larger trend reflecting weak economic performance well into next year, anticipating central banks’ efforts to counter that weakness.

Canada's housing bubble: an accident waiting to happen. Canadian Centre for Policy Alternatives. that title reminds me of an older post:
Personal debt in Canada: the ticking time bomb. Bankruptcy Canada.

A termite-riddled house: Treasury bonds. Gonzalo Lira.

valuation update. Doug Short.

is this a scary chart?

from Long-term trends in public finances in the G-7 economies. IMF.

Who Are You Going to Believe, the IMF or Your Lying Eyes? Dean Baker.

A quantitative approach to tactical asset allocation. Mebane Faber, via SSRN.

Equity risk premiums - the 2010 edition. Aswath Damodaran, via SSRN.



data:

vehicle sales were down in August; domestic sales fell to 8.7 million from 9.1 in July, while total sales fell to 11.5 from a downwardly-revised 11.6 in July and down 19% from August 2009; GM's sales fell 25% from the previous August (which was boosted by cash-for-clunkers), Ford's fell 11%, Toyota's fell 34%, Honda's 33%; on the other hand, Chrysler's sales were up 7%

jobless claims pretty much as expected, little changed; no surprises from productivity or ULCs either

Eurozone GDP was revised up to 1.9% from 1.7% YoY

ICI says that it just recorded the 17th consecutive week of net outflows from domestic equity mutual funds, and the outflows are growing



non-BP Gulf of Mexico oil rig link of the day:

despite some reports saying no oil spilled, Coast Guard says otherwise:
Mile-long sheen after Gulf oil platform explodes. MSNBC.

and a reminder that Canadian shores are not immune from accidents.



other fare:

German military report: peak oil could lead to collapse of democracy. der Spiegel.

A date that will live in oblivion. George Packer, The New Yorker.

What President Obama called the end of the combat mission in Iraq is a meaningless milestone, constructed almost entirely out of thin air, and his second Oval Office speech marks a rare moment of dishonesty and disingenuousness on the part of a politician who usually resorts to rare candor at important moments.

along the same lines:
Flying the flag, faking the news. John Pilger, New Statesman.
Loud noises from Washington about a US pull-out from Iraq are a poor disguise for America’s determination to keep waging war.

In his book Propaganda, published in 1928, Bernays wrote that the "intelligent manipulation of the organised habits and opinions of the masses is an important element in democratic society", and that the manipulators "constitute an invisible government which is the true ruling power in our country".

Stephen Hawking has a new book coming out in a week, called The Grand Design, co-written by American physicist Leonard Mlodinow: God was not needed to create the Universe. Telegraph.

Roger Federer pulls a rabbit out of his hat. amazing shot!