Tuesday, April 6, 2010

Macro Bits and Pieces

As I peruse my usual sources of information I am overwhelmed by the lack of excitement this week. Butler lost to Duke. The healthcare reform vote is over for the time being. Spring is slowly arriving and our neighborhood deer are feasting on new green shoots. We postponed our China finger-wagging. The US and the world economy seems to be generating some momentum and the stock market is making us feel rich enough to maybe purchase an Ipad (whose market entry finally happened).

This is the usual environment surrounding Macro when we aren't in a recession -- ho hum. It isn't easy to get people excited about bits and pieces. But lurking below all this information is a scenario that has both good and not-so-good implications. Two stages usually follow the worst part of the recession -- one (the recovery) in which the declines get smaller and then one in which true expansion takes place. We now appear to be in the expansion phase and we are already seeing tell-tale signs -- including rising commodity prices and increases in interest rates. This is normal. This is expected. This shows that resource slack is declining and we are starting the movement toward normal capacity production. If this continues for a while it will eventually impact labor and employment. Once this occurs the signs of the expansion will be broader and should engender a more optimistic stance from consumers.

So far so good. But now think about your latest battle with the flu -- the bug left your body and you felt stronger so you decided to cook dinner, wash your car, and mow the yard. Hmmm -- you did a bit too much and now you are back in bed. The economy is no different. While the patient is feeling stronger right now -- this won't lead to a lasting recovery until three things happen. First, the disease has to be gone before a full recovery is possible. Note that we still have not done much to resolve the housing or the credit problems that preceded the recession. If excessive use of leverage by private companies and government precipitated the recession, this too needs to be addressed. Second, even with the original disease gone, we have to make sure that we don't overdo the recovery...we don't want to do too much too soon. If the world economy jumps into fifth gear too quickly and oil prices rise to $90+ per barrel or if long-term interest rates, including mortgage rates, jump another 100 basis points -- surely this will negatively impact the pace of economic growth. Third, we have to pay close attention to side-effects of whatever drugs we took. That is, in the past year or two the government spent a lot of money. The Fed emitted a great deal of liquidity into the economy. We now have future prospects of inflation and much larger deficits and debt that must be financed. This means we will have to make collective decisions about the future course of expenditures and taxes.

The point of this post is to emphasize that while the news seems a little boring right now -- there is much to think about and much to do. We should not get lulled to sleep by a nice cup of calming tea. Avoiding a double-dip recession or an extended period of slow growth is possible but it means sticking to the medicine and the right treatments.


  1. Boring? What about drama in the Eurozone?

    I was at a networking event here in Rome last night and a GM of a extrusion plant wondered out loud if the Chinese were going to let the yuan float. What would be the implications for the US and the global economy if they did? Other than foreign governments, is there internal pressure within China to allow their currency to float?

    Plus the recent gain in dollar strength is got to be primarily due to the Eurozone troubles. Don't you agree? There's just too much dollar liquidity right now and the return to growth hasn't been as strong as some had anticipated. So while the recession is over, the risk of a double dip is still what causes sleepless nights for policy makers.

    I fear that we are setting up for some more pain as inflationary pressures may come to a head before any significant improvement in the labor market.

  2. Not disagreeing with any of your points too much, but I see talking heads saying oil will go above $US100, and sooner than we think. Volcker is pimping a VAT


    But what worries me most is the saber rattling in the Middle East. Iran, Turkey, and others are bashing Israel, and as we use to say in the 1960s "just one nuke can ruin your whole day".

  3. John/Mike,

    Thanks for pointing out that there are lots of issues out there but it just seemed to me it was a quiet week. Some of these items you mention are just playing themselves out. John mentions China and Europe. Pressure for China to be a fairer world trader has been going on for decades. The currency issue is one of many with them. I wouldn't predict any abrupt changes around the corner. I agree that some of the dollar's strength is from EU weaknesses -- especially concern over Greece right now. But we can easily exaggerate the speed and size of impacts of exchange rates. Mike -- I agree that there is plenty to be concerned about in the foreign policy area. I can't add much, however, to that.

  4. Wow number of posts really seems to have dropped off. Now back to the topic of the intensity of activity. While I don't consider myself an Austrian I do agree with some of the things they say. No shock to anyone that Paul K does not but he does seem to be bashing them a little


    with comments pro and con

    Same for the FT article on the same topic


    with comments as well.

    Econstories produced a vid that went viral and they are taking some credit for the Austrian School getting more exposure into the public eye. If you have not seen the vid it is worth a click.


  5. Mike,

    Like after the Great Depression, economists have spent a lot of words debating causes and proper policies. I think it is fair to say that 80 years later it remains a bit of a mystery. This recession will be the same. As far as spreading blame -- there's lots of finger-pointing going on. I don't think it very useful. For example, for Wolfe to say that fractional reserve banking was a culprit is disingenuous. Or that inflation-targeting got out of hand. Let's face it -- once the train gets off the track even the best braking systems no longer work. Fractional reserves and inflation-targeting have done a lot of good. I doubt the world would be better off in the future with 100% reserves or willy nilly approaches to inflation...I think the best we can do is to try to find ways to discourage excessive and poor quality leverage...

  6. Hi Larry,

    I was not saying I agree with these guys, just trying to point out that there seems to be an uptick in economic discussion which to some extent is due to the econostories video.

    My back ground is more hard science than social science, so I look at theories (whatever their source) as something that teaches more from mistakes being pointed out that from their predictive ability.

    Part of my concern about reserves is that some fairly recent changes seem to have put demand deposits in the same bucket as saving deposits in terms of reserve requirements. Banks have at times used these mixed deposits in ways I question. This is not a dis of fractional reserve banking; rather pointing out that banks need to be careful about how they use the money they don't keep in reserve, and it is easy to find examples of banks abusing how they use the money.

    My concern about inflation is not so much with the fed messing around with over night rates or stuff like that. The current govt spending, massive borrowing, obligations for SS, SSI, govt. medical programs, and interest on what the govt has borrowed seem to make inflation-targeting a non factor.

    Until govt spending gets more in line with govt revenue collections I don't know of any approach to inflation that is not willy nilly.

  7. As a scientist you may have less background on some of these issues. I have been reading about them for 40 years. That doesn't necessarily mean I know more than you -- it just means I may have a longer term perspective. So when I read that people might want to go to a 100% reserve banking system I shudder a bit. As you say, the heart of the issue is the banks use of the funds. We agree that they need to be more careful with their loans. 100% reserves puts us in a world where we either get very weak or very socialized banks. There are, I believe, better ways to get them to use money more wisely.

    I think you and I are pretty much on the same wavelength with respect to inflation. It is very tempting to inflate our way out of the current debt crisis. Our public officials will swear an oath against doing this, but the real trick is how much they use the excuse of current economic weakness to postpone and postpone and postpone the eventual need to rein in money (ie raise interest rates.

  8. Hi Larry,

    My undergrad degree was math, but my MS was in Urban and Regional Planning and Economic Development and I worked for a RDC (Regional Development Center) as well as other places. Not to say my economic background matches yours, but it may be a little stronger than you think. However I found I could maximize my personal economic situation by learning and applying new technologies, like GPS, ahead of the curve. I did lots of consulting with high end Garmin products when differential correction was still required. But I still had major responsibilities for economic development at the RDC. I also have a very strong amateur astronomy background and interest.

    I was not claiming we should have a 100% reserve system; just that demand deposits should have a higher reserve than saving deposits. My concern is not the lack of a 100% reserve, but that in many cases the reserve is less than 10% for the largest banks and that for the smallest banks the reserve may be 0%. I do think the current reserves are too low, but you probably could set a better reserve rate than I could. What % of demand deposit and bank notes do you think should be kept in reserve? In fact I would like to see less leveraging across the board; not just in banks but stock and commodity markets as well.