Ignoring the Yield Curve sign.
Just checking in
Work has eased up a touch, at the end of a teaching year. So I am checking in to see how things stand in my narrow little blogworld.
First, the astonishing news that the yield curve continues inverted after a year now, with no recession in sight. There was a time six months ago when markets had priced in a pretty significant chance of a downturn, but it just hasn’t happened. True, it has been only a quarter of a percent inverted for many months, but that has between 30 and 40 percent chance of bringing on a recession, according to Estrella and Mishkin (96). This must be the longest inversion ever without a recession following it.
The Fed has apparently inquired into this oddity, and believes that the story is the amount of credit flowing in for long term lending, presumably mainly from East Asia. Makes sense, but it turns our standard interpretation on its head. Instead of the inversion representing tightness in the short-run relative to “the markets”, it is telling us about excess liquidity that is hitting in the long run part of the yield curve. We live in interesting times.
I think the story should be combined with the obvious Keynesian facts that the world is helping to support the US economy in a time when it would otherwise have stumbled from the housing slump. Continued export of everything, helped by a falling dollar, keeps an even course for the economy and for investment. We have finally become an open economy, in the export sense and not only as importers. Capital pouring in while export orders continue – it is a different picture from the standard textbook macro and financial world.
I will claim another accurate prediction to offset my overeager jeering that the Fed had engineered a recession. Looks like the analysis that Asia would have to let the dollar down gradually has proved accurate. It may help that Middle Eastern oil money is sophisticated enough to diversify early. May they find plenty of Third World opportunities. Yet China still has a large trade surplus, presumably indicating the country is accumulating foreign exchange. Their overhang is growing faster than they are easing the adjustment by letting the dollar fall. Perhaps outward investment in Africa, Latin America and Australia will help to relieve their predicament. And of course the US still has a large trade deficit, indicating we have a long way to go to get adjusted.
Keep an eye on the “dollar adjusted” price of oil. Oil prices are down 9% from last year in dollars, but in euros you need to add 6% to that.
Keep an eye on the Republican implosion as well. It is not just Iraq – or the “Mayberry Machiavellis” (I got the phrase from Frank Rich) who are running the show. It is still fundamentally that they lack a vision to cohere around. They run better in opposition, obviously, but their opposition is based on an obsolete anti-Government position (“starve the beast”) that will not be trusted with governing for any length of time. Until they put together a philosophy of governance capable of resisting pressures for cronyism, they will continue to look like Mugabe because they act like Mugabe. There is some hope for them in the pragmatism of a Mitt Romney (Mormons always were better at making the trains run on time than on thinking abstractly about principles), but in his case, at least, it just looks opportunistic.
How will they sort themselves out? Since they are more ready to opt for pragmatism than the Democrats, it may be that in their next opportunity they actually invent some interventions that have a chance to work. I still think school vouchers had, and has, some potential, but they need to throw out the knee-jerk anti-government stance to get it into shape to perform and persuade.
Four mega-policies of the last 30 years are theirs, at least in spirit, and are essentially successful. 1. Free trade (with structural adjustment) has paid off handsomely for the world economy and for the ideology of capitalism relative to socialism. 2. Welfare reform was a good idea, though painful in execution. We can be thankful that it was essentially pragmatic Democrats who implemented it, and for the economic recovery that smoothed the adjustment. 3. The Earned Income Tax Credit, essentially Milton Friedman’s Negative Income Tax, (originating in the years when we were all Keynesians) was brilliant and has made all the difference to the budget pictures in the US and in Blair’s Britain. 4. Cap and trade systems for CO2 have helped move business into seriously engaging global warming, which is what they were designed to do. Ironic that Bush resisted the latter. All of these are pre-NeoCon. There was a time when the Republican critique of Socialism brought forth actual solutions, and not just rip-offs and Bad Cop role playing. The big question is how long it will take for that side of the party to reassert itself.
And the answer, I suspect, depends heavily on how willing Democrats are to commit to communitarian-based problem solving, rather than just pandering to interest groups. The ideologies of socialism and then of civil rights made real progress. Interesting to note the difference in response: socialism brought forth reasoned, pragmatic analysis. Civil rights opened up the opportunistic Wedge Issue politics that Nixon started, and that has essentially run its course with the current collapse. If the Democrats engage as thoughtfully this time, then they will push the Republicans out of their rut and we may get some more dialectical progress. Read that as an endorsement of any of the big 3 Democratic candidates: Edwards, Clinton and Obama are all taking a thoughtful approach to fundamentals, and I say Bravo. Forget Iraq. Get on with governing.
* Estrella, Arturo and Frederic Mishkin, “The Yield Curve as a Predictor of U.S. Recessions,” Current Issues (by the NY Fed), June 1996.
Work has eased up a touch, at the end of a teaching year. So I am checking in to see how things stand in my narrow little blogworld.
First, the astonishing news that the yield curve continues inverted after a year now, with no recession in sight. There was a time six months ago when markets had priced in a pretty significant chance of a downturn, but it just hasn’t happened. True, it has been only a quarter of a percent inverted for many months, but that has between 30 and 40 percent chance of bringing on a recession, according to Estrella and Mishkin (96). This must be the longest inversion ever without a recession following it.
The Fed has apparently inquired into this oddity, and believes that the story is the amount of credit flowing in for long term lending, presumably mainly from East Asia. Makes sense, but it turns our standard interpretation on its head. Instead of the inversion representing tightness in the short-run relative to “the markets”, it is telling us about excess liquidity that is hitting in the long run part of the yield curve. We live in interesting times.
I think the story should be combined with the obvious Keynesian facts that the world is helping to support the US economy in a time when it would otherwise have stumbled from the housing slump. Continued export of everything, helped by a falling dollar, keeps an even course for the economy and for investment. We have finally become an open economy, in the export sense and not only as importers. Capital pouring in while export orders continue – it is a different picture from the standard textbook macro and financial world.
I will claim another accurate prediction to offset my overeager jeering that the Fed had engineered a recession. Looks like the analysis that Asia would have to let the dollar down gradually has proved accurate. It may help that Middle Eastern oil money is sophisticated enough to diversify early. May they find plenty of Third World opportunities. Yet China still has a large trade surplus, presumably indicating the country is accumulating foreign exchange. Their overhang is growing faster than they are easing the adjustment by letting the dollar fall. Perhaps outward investment in Africa, Latin America and Australia will help to relieve their predicament. And of course the US still has a large trade deficit, indicating we have a long way to go to get adjusted.
Keep an eye on the “dollar adjusted” price of oil. Oil prices are down 9% from last year in dollars, but in euros you need to add 6% to that.
Keep an eye on the Republican implosion as well. It is not just Iraq – or the “Mayberry Machiavellis” (I got the phrase from Frank Rich) who are running the show. It is still fundamentally that they lack a vision to cohere around. They run better in opposition, obviously, but their opposition is based on an obsolete anti-Government position (“starve the beast”) that will not be trusted with governing for any length of time. Until they put together a philosophy of governance capable of resisting pressures for cronyism, they will continue to look like Mugabe because they act like Mugabe. There is some hope for them in the pragmatism of a Mitt Romney (Mormons always were better at making the trains run on time than on thinking abstractly about principles), but in his case, at least, it just looks opportunistic.
How will they sort themselves out? Since they are more ready to opt for pragmatism than the Democrats, it may be that in their next opportunity they actually invent some interventions that have a chance to work. I still think school vouchers had, and has, some potential, but they need to throw out the knee-jerk anti-government stance to get it into shape to perform and persuade.
Four mega-policies of the last 30 years are theirs, at least in spirit, and are essentially successful. 1. Free trade (with structural adjustment) has paid off handsomely for the world economy and for the ideology of capitalism relative to socialism. 2. Welfare reform was a good idea, though painful in execution. We can be thankful that it was essentially pragmatic Democrats who implemented it, and for the economic recovery that smoothed the adjustment. 3. The Earned Income Tax Credit, essentially Milton Friedman’s Negative Income Tax, (originating in the years when we were all Keynesians) was brilliant and has made all the difference to the budget pictures in the US and in Blair’s Britain. 4. Cap and trade systems for CO2 have helped move business into seriously engaging global warming, which is what they were designed to do. Ironic that Bush resisted the latter. All of these are pre-NeoCon. There was a time when the Republican critique of Socialism brought forth actual solutions, and not just rip-offs and Bad Cop role playing. The big question is how long it will take for that side of the party to reassert itself.
And the answer, I suspect, depends heavily on how willing Democrats are to commit to communitarian-based problem solving, rather than just pandering to interest groups. The ideologies of socialism and then of civil rights made real progress. Interesting to note the difference in response: socialism brought forth reasoned, pragmatic analysis. Civil rights opened up the opportunistic Wedge Issue politics that Nixon started, and that has essentially run its course with the current collapse. If the Democrats engage as thoughtfully this time, then they will push the Republicans out of their rut and we may get some more dialectical progress. Read that as an endorsement of any of the big 3 Democratic candidates: Edwards, Clinton and Obama are all taking a thoughtful approach to fundamentals, and I say Bravo. Forget Iraq. Get on with governing.
* Estrella, Arturo and Frederic Mishkin, “The Yield Curve as a Predictor of U.S. Recessions,” Current Issues (by the NY Fed), June 1996.
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