Economists | - Part 13

Lindsey: U.S. Entering Deflation Trap

Despite yesterday’s somewhat sanguine view, if Federal Reserve Chief Ben Bernanke really thinks that the U.S. economy is headed for serious trouble due to various traps that have been encountered (said traps having previously been set by the deflation and/or liquidity monsters), he has more company with each passing day. Earlier today in “the land of deflation”, one former Fed head lent his support to this view as reported by Reuters.

Former Federal Reserve board member Lawrence Lindsey said on Thursday it will be “obvious” by the end of this year that the U.S. economy has entered a “deflationary trap.”

“We know from (Fed) Chairman (Ben) Bernanke’s recent comments that it is now at least a concern … By the end of this year I think it will be quite clear,” Lindsey said in an economic forum in Tokyo.

“I would expect by December we will see further quantitative easing” by the Fed, he said.

December seems like such a long time away…

Paul Krugman sketched out the situation for Bernanke creating a new “Fed misery index” that he chose to call a “Fed fail index” since he figures the central bank deserves an “F” for the job it’s been doing in achieving full employment and stable prices.

Like many others in recent years, this discussion again strikes me as something that historians will look back upon in a few decades and wonder, “What were those guys thinking? They run an economy on asset bubbles for twenty years and then they wonder why normal monetary policy doesn’t work any more.”

Pompous, Self-Important Squabbling

The Telegraph’s Jeremy Warner files this report on the escalating cat-fight between two of the world’s best known economists regarding the best cure for the world’s economic ills.

Not since Ken Rogoff’s famous attack on Joe Stiglitz has the dismal science of economics provoked such pompous, self-important, personalised squabbling. Professors Paul Krugman and Niall Ferguson, of course, have form; they’ve been at it on and off for nearly a year now over the efficacy of deficit spending in fighting the downturn, and today they return to the fray.

The occassion was another piece that Ferguson, an eminent economic historian, has penned for the Financial Times on the dangers of attempting to spend your way to economic recovery. Foolishly – or perhaps deliberately, for it is sometimes possible to imagine that the two have secretly agreed to slag each other off for the publicity – he mentions Krugman by name. “Those economists, like New York Times columnist Paul Krugman”, he writes, “who liken confidence to an imaginary “fairy” have failed to learn from decades of economic research on expectations. They also seem not to have noticed that the big academic winners of this crisis have been the proponents of behavioural finance, in which the ups and downs of human psychology are the key”.

Quick as flash, Krugman has risen to the bait. On his New York Times blog, he writes “Brad DeLong does the necessary on Niall Ferguson; no need for me to pile on”. But then he attempts to do precisely that, and with a ladle too. The detail of the argument need not bother us here.

Warner comes down on the side of Ferguson, taking the position that can be summed up as, “If the trillions of dollars already spent didn’t fix our problems, why should we think that trillions more dollars will?” going so far as to compare Krugman to Former Vice President Dick Cheney in the shared view that “deficits don’t matter”.

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This item at The Economist offers some encouraging words for precious metals investors, suggesting that now is the time to sell your gold baubles since the average 2010 price has come within 29 percent of the inflation-adjusted average price from 1980, offering up this long-term chart that says more about paper money than it does about the yellow metal.

Don’t try to probe too deeply the logic logic behind the advice “Perhaps now is the time to sell. After the January 1980 peak, the price fell by 55% over the following two years”. What’s important to understand here is that bashing gold after the recent correction is just more evidence that the long-term bull market still has a very long way to go.

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“The Ketchup Packet Soup Train”

The Daily Show’s Jon Stewart talks about the most recent report on the labor market, the effectiveness of the last stimulus program, and the extension of unemployment benefits, a program he refers to as something other than a “gravy train”.

Brace yourself for the Christina Romer Rolling Stone cover and a cameo by Nouriel Roubini.

Also on Comedy Central in recent days was another well-known economist, Nobel Laureate Paul Krugman, who appeared on The Colbert Report as detailed in this item at the Huffington Post. Once again you’ll hear how our problems are all about the lack of demand – as in the Great Depression, how we arrived at this point is largely immaterial and, to economists, the only way our problems can be solved is if we somehow boost demand.

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Lower Your Home Price Expectations

It is not at all clear why economists continue to be asked about the future because, after the last few years, they’ve proven their prognostication skills are quite poor, the latest example being an only slightly less rosy view of the nation’s housing market, one that is being steadily revised lower as more data from the real world trickles in.

From Macromarkets latest monthly Home Price Expectations Survey come more downward revisions to a chart that, to a non-economist,  still looks to be far too optimistic.

There is a related report in the free section of the Wall Street Journal, the key take-away being that “56% of the 106 economists and other analysts surveyed expect home prices to decline this year. That is up from 40% a month ago”. Of course, after that, steady increases are expected – up 1.3 percent in 2011, up 2.7 percent in 2012, up 3.5 percent in 2013, and up 3.8 percent in 2014 for a cumulative gain of 10.5 percent.

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