Saturday, March 29, 2008

Why Money?

Charles W. Baird looks at Menger and Alchian's explanations of the origin of money. There is not only the cost of exchange partners, but also the cost of acertaining goods' attributes.

The Perils of Base Money

Leland Yeager warned that the real danger of modern monetary policy is that money is not tied to any physical anchor. Read his article in the Review of Austrian Economics.

Wednesday, March 26, 2008

Tuesday, March 25, 2008

Is the Wealth Effect Oversold?

One reason economists are worried about falling housing prices is the wealth effect: that changes in the value of what households own affect their consumption spending. As house prices drop, household wealth falls, pulling consumption down.
Bill Wheaton, professor at the Massachusetts Institute of Technology, thinks the wealth effect is overdone. Certainly the loss of intermediate demand and employment from the 56% drop in homebuilding is not overdone.

Columbia's Economic Transformation

Do corporate tax rates matter?

Friday, March 21, 2008

The Leading IndicatorsAre Down

On Thursday, the Conference Board announced its index of Leading indicators fell three tens of a percent from January to February. It has fallen five straight months and is a percent and a half below its level six months ago. More evidence we are in a recession.

How Deep Will the Recession Be?

What The Fed Did Last Tuesday

Bill Gross, who manages more money in bonds than anyone else in the world, looks at the Federal Open Market Committee's decision last Tuesday to cut its target for the Federal funds rate by 75 basis points to 2.25%.

What The Fed Did Last Tuesday

Tuesday, March 18, 2008

What Is Good For Wichita Is Hemlock For Wall Street

The strong dollar and the commodity price boom undermine the value of financial assets (see below), but they help U.S. exports. Wall Street's poison is Wichita's tonic. With an export base of aircraft and natural resources, "[s]o many of the things our local economy depends on are doing ... well.”

If you click on KSN you will hear: "'We've been in an economic recession nationwide for probably six months, maybe longer,' said Dr. Malcolm Harris Sr. with Friends University. 'The data is finally catching up with us.'"

Why the Fed Should Raise the Federal Funds Rate Not Lower it Today

I know it is heresy, but the Federal Open Market Committee should raise short term rates today. We are in a dollar crisis. This dollar crisis is at the heart of the financial crisis. The threadbare currency is the street person who dropped in on the high society party and whom no one wants to acknowledge is present.

Reuven Brenner, a partner at Match Strategic Partners and a professor at McGill University, points out that "few are noticing the fact that, since 2002, trillions of dollars worth of business and U.S.-government debt value has evaporated. This happened because the Federal Reserve has neglected the dollar." As the dollar falls, the value of dollar denominated assets fall in euro and yen and pound and Aussie dollar terms. Little wonder foreign investors want to dump U.S. dollar mortgage backed securities which are at the eye of the storm.

Professor Brenner notes, "Alan Greenspan says that a measure of stability will be restored when house prices stabilize, which may be accurate. But why would capital flow into real estate denominated in dollars that are still expected to plunge?" The same is true of financial assets. He advocates a commodity anchor for the dollar, a position I have long advocated myself.

Given that we are unlikely to get a new monetary system, what should be done? We need a coordinated effort of the Federal Reserve with the other major central banks to support the dollar. To accomplish this with credibility, the Fed would need to show its commitment to fight inflation and to restore the exchange rate. That means raising the federal funds rate target. This would cause a political firestorm, but it would be the only way to calm the financial storm that is swamping the U.S. and limit the economic damage from it.

Monday, March 17, 2008

The Fed Has Cut the Discount Rate and Will Lend to Security Firms

The Fed has been busy. They cut the discount rate; they strong armed J.P. Morgan to buy Bear Stearns and Bear Stearns to sell themselves; and they lent J.P. Morgan $30 billion to make all this work. The repo market has seized up and that interferes with the Fed's ability to conduct monetary policy.

Hear more from the Wall Street Journal.

Friday, March 14, 2008

The Journal's poll of Economists Says We're in a Recession: Hear It Here

Questioning "Core Inflation"

Mark Gongloff and Scott Patterson in the Wall Street Journal proclaim, "Many economists and Federal Reserve officials like to dismiss energy and food prices when reading inflation statistics because the two sectors are volatile. But it is time to dismiss that practice." The inflation you and I suffer from when we pay higher prices is called "headline inflation." Economists hope to find the underlying trend by eliminating the prices that jump around the most. To achieve that goal they subtract food prices and energy prices from the consumer price index and another more comprehensive index called the personal consumption price deflator. When inflation is measured by these bowdlerized indices, it is labeled "core inflation."

The problem with core inflation is that it excludes prices that are sometimes leading indicators of future inflation.

Saturday, March 08, 2008

The Economists and the Pundits Are Starting to Agree that We are in a Recession

The front page of the Wichita Eagle tells us this morning that "Job losses point to recession," while the Wall Street Journal's lead story agrees: "Jobs Data Suggests U.S. In Recession."
Yesterday's employment report showed the third straight decline (after revisions) in payroll employment.

I have been saying for some time that the U.S. economy has been in recession since last spring or summer. That is what I told the
Wichita Eagle two months ago and have been saying in this blog. The data is starting to catch up with my analysis.

The rest of the profession is starting to come around. On January 27th, Lawrence Summers wrote in the Financial Times: "Markets and perceptions of the economic outlook change rapidly. Even two months ago most observers doubted predictions of a US recession, saw no need for a fiscal stimulus, and thought that inflation fears should constrain monetary policy. Now, ...[t]he debate about recession is ... about how deep and global its impact will be."

The one item good news emerged from yesterday's report: the unemployment rate fell for the second straight month. However it is subject to Harris's Second Law of Recession Watching: "every silver lining has a dark cloud over it when it comes to emerging news during a downturn. " The driver of this decline was a fall in the number looking for work, hardly evidence of reviving economic growth.

Wall Street follows the payroll employment data to the exclusion of the household survey which estimates the unemployment rate. The household survey data are very noisy and the government's benchmarking makes tracking it consistently over time difficult. This is a serious drawback since consistent time series are the lifeblood of business cycle analysis.

That said, the employment ratio provides a decent indicator of recessions with a slight lead. The message is remarkably clear: we are in one.

Monday, March 03, 2008

Central Banks: Divergent Responses

The Financial Times tells us that this will be a busy week. The purchasing managers survey (aka ISM) will come out Monday and employment on Friday. Inflation reports are due out in the Eurozone and Great Britain. The ECB is likely to raise rates to 4% while the Bank of England is likely to hold them steady at 5.25%. On Tuesday, the Reserve Bank of Australia "could increase interest rates from 7 to 7.5 per cent, while Canada is expected to cut rates by 25 basis points to 3.75 per cent."