Prieur’s readings (November 23, 2009)
This post provides links to a number of interesting articles I have read over the past few days that you may also enjoy.
• Paul Krugman (The New York Times): Interest rates: the phantom menace, November 20, 2009.
Well, what I hear is that officials don’t trust the demand for long-term government debt, because they see it as driven by a “carry trade”: financial players borrowing cheap money short-term, and using it to buy long-term bonds. They fear that the whole thing could evaporate if long-term rates start to rise, imposing capital losses on the people doing the carry trade; this could, they believe, drive rates way up, even though this possibility doesn’t seem to be priced in by the market. What’s wrong with this picture?
• Michael Panzner (Financial Armageddon): Economists: wrong again, November 21, 2009.
As if they didn’t cause enough damage by espousing theories that failed to account for the inefficiencies and irrationalities of the real world, many economists are advocating aggressive spend-and-borrow policies to revive the financial crisis-hit US economy that reflect an astonishing degree of naïveté and ivory tower hubris. In a word, the Keynesian Kool-Aid drinkers are saying that debt doesn’t matter. As I see it, there are plenty of reasons to challenge the apparent indifference of Paul Krugman, Dean Baker, James Kwak, and others to the parabolic rise in public debt, including the fact that the latest crisis, like many of those before it, stemmed from a similar complacency about the risks of unrestrained borrowing. But as someone whose long experience in financial markets helped him to anticipate the kinds of earth-shattering developments most economists didn’t see coming, I find the popular argument that current low yields on government bonds are a vote of confidence on current policies to be utterly ridiculous.
• The Economist: Dealing with America’s fiscal hole, November 19, 2009.
For years America’s fiscal problems had a surreal quality. No one disputed that an ageing population and health-care inflation could bust the budget, but that prospect was decades away and procrastination seemed painless. No longer. A giant hole has opened in the budget because of stimulus, bail-outs and a recession that has savaged economic growth and tax revenue.
• Robert Shiller (The New York Times): What if a recovery is all in your head? November 21, 2009.
Beyond fiscal stimulus and government bailouts, the economic recovery that appears under way may be based on little more than self-fulfilling prophecy. Consider this possibility: after all these months, people start to think it’s time for the recession to end. The very thought begins to renew confidence, and some people start spending again – in turn, generating visible signs of recovery. This may seem absurd, and is rarely mentioned as an explanation for mass behavior late in a recession, but economic theorists have long been fascinated by such a possibility.
• John Hussman (Hussman Funds): Alert for tanks, November 23, 2009.
In the current situation, the assumption that the credit crisis is behind us is completely out of line with what possibly could result from the marriage of deep employment losses and an onerous reset schedule on mortgages that have extremely high loan-to-value ratios. A major second wave of mortgage losses isn’t a question of whether the economy will post a positive GDP print this quarter or next. Rather, it is a structural feature of the debt market that is baked into the cake because of how the mortgages were designed and issued in the first place.
• Aline van Duyn (Financial Times): Local woes spark fears of US double-dip recession, November 20, 2009.
Government props are still essential, not least in the housing markets. Sustaining these is not easy.
• Mark Thoma (CBS MoneyWatch): What causes employment to lag output in recoveries? November 20, 2009.
I showed that after a recession ends, the recovery of employment lags the recovery of output … the lag has increased substantially in recent recessions. The delay in the recovery of employment has increased from about one quarter prior to 1990 to more than a year in the past two recessions. What explains the existence of a lag, and why has the time delay between the recovery of output and the recovery of employment been increasing in recent recessions?
• Nopporn Wong-Anan (Reuters): Escalation of US-China trade row biggest global threat, November 20, 2009.
A serious escalation in trade or currency disputes between the United States and China could be the biggest risk to global stability over the next few years, a top Morgan Stanley executive said. If a “bi-partisan anti-China currency bill” being planned by both Republican and Democrats is passed and signed into law by President Barack Obama, China could retaliate, Morgan Stanley Asia chairman Stephen Roach told an American Chamber of Commerce session in Singapore.
• Richard Baldwin and Daria Taglioni (Vox): The illusion of improving global imbalances, November 14, 2009.
Global imbalances are shrinking at a fabulous rate. This column argues that these improvements are mostly illusory – the transitory side-effect of the greatest trade collapse the world has ever seen. A global recovery will almost surely return the US, Germany, China and others to their old paths.
• Robert Skidelsky: Who much is enough? November 20, 2009.
The economic downturn has produced an explosion of popular anger against bankers’ “greed” and their “obscene” bonuses. This has accompanied a wider critique of “growthmanship” – the pursuit of economic growth or the accumulation of wealth at all costs, regardless of the damage it may do to the earth’s environment or to shared values.
• William Rees-Mogg (times Online): A gross insult to the people of Europe, November 23, 2009.
The EU should be trying to woo the public, not alienate them. They should listen to the sceptics.
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