Archive for August 2011
The usual accelerators of recession are absent—but so are the brakes
Aug 27th 2011 | WASHINGTON, DC | from the print edition
HOURS after an earthquake struck America’s east coast on August 23rd, office workers were still milling around the streets of Washington, DC and New York (above), nervously waiting for aftershocks. A similar watch over the economy is now under way. The earthquake that ripped through the American economy from 2007 to 2009 is still generating tremors. The latest may be the strongest yet. Since late July stockmarkets in America and round the world have nosedived, fearful that America is falling back into recession and that Europe’s debt crisis will drag down its banks.
America’s economy is certainly weak. It grew at an annualised rate of just 0.4% in the first quarter and 1.3% in the second. Future revisions may push both numbers into negative territory: the economy would have already double-dipped.
By Greg Ip, Published: August 19
When John McCain was running for the Republican presidential nomination nearly 12 years ago, he declared that Alan Greenspan was so critical to the economy that, if the then-Federal Reserve chairman died, he’d put sunglasses on the body, prop him up and hope no one noticed.
It’s safe to say that GOP opinions of the Fed have slipped a bit since. Texas Gov. Rick Perry, a newly declared candidate for president, said it would be “treasonous” for Greenspan’s successor, Ben Bernanke, to “print more money between now and the election” in an effort to boost the economy. Other candidates have been equally damning if slightly less extreme in their statements. Rep. Michele Bachmann of Minnesota has accused the Fed of “debasing the currency,” while Rep. Ron Paul of Texas has written a bestseller called “End the Fed.” The party’s economic standard-bearer in the House, Paul Ryan of Wisconsin, repeatedly charges the Fed with “bailing out” what he considers President Obama’s reckless fiscal policy and wants the institution stripped of its mandate to promote employment.
Yet another bipartisan panel gets ready to tackle the deficit
Aug 20th 2011 | WASHINGTON, DC | from the print edition
[Greg Ip] IN THE past nine months no fewer than three congressional taskforces have tried, and failed, to bridge the differences between Republicans and Democrats on taming the budget deficit. Now comes the turn of a new joint select committee, or “supercommittee”, as it has been dubbed. Created by the August 2nd agreement that raised the national debt ceiling and cut $917 billion from spending in the coming decade, the new panel is charged with finding another $1.5 trillion to slash from the deficit over the next ten years.
The 12 members selected, drawn equally from both parties and both chambers, do not inspire confidence. One Democratic member heads her party’s Senate re-election campaign; one of the Republicans once headed the Club for Growth, a virulently anti-tax group. Four of the 12 sat on the bipartisan commission led by Erskine Bowles and Alan Simpson, and all four opposed its “grand bargain” of sweeping spending cuts and revenue-raising tax reform. None of the members is part of the “gang of six” senators who proposed a plan similar to the Bowles-Simpson commission and, like that commission, got nowhere.
Read the entire article here.
Aug 15th 2011, 9:26 by G.I. | LONDON
TO AN American visiting London, one of the more striking aspects of last week’s riots was how few people died. Not including the police shooting death that touched off the original disturbance, five deaths have been attributed to the riots and looting. By contrast, 53 people died in the rioting that followed the acquittal of police officers in the beating of Rodney King in Los Angeles in 1992.
At least part, if not most, of the difference is down to the fact that Americans are armed to the teeth: the criminals, the cops and the shopkeepers all have guns, whereas Britain has one of the lowest rates of gun ownership in the world. Read the rest of this entry »
Aug 12th 2011, 19:36 by G.I. | LONDON
MY COLLEAGUE makes a good case that Europe is on the verge of a double dip. What about America? Its odds of recession have risen in the last month but I’d still put them below 50%. Yes, stock and bond markets have discounted the worst, but the hard data has actually gotten better. First, there was the positive employment report last Friday, largely drowned out by Standard & Poor’s downgrade of America’s credit rating. And we now have three consecutive weeks of relatively low initial unemployment insurance claims, hinting that the labour market’s improvement continued into early August.
Finally, this morning we learned that retail sales performed relatively well in July. The 0.5% increase was in line with consensus estimates, but the composition of growth was better than expected: less came from autos and gasoline and more from home electronics, furniture and apparel. Morgan Stanley boosted its estimate of third quarter growth to 3%, annualised. Weekly chain-store sales reports have remained firm into early August, though they’re unreliable.
The retail sales news is particularly important because it’s consistent with the theory that the spring surge in petrol prices was a major cause of the economic slowdown earlier this year. Petrol has since dropped back, to $3.67 per gallon as of August 8th, from a peak of $4 and the most recent slide in crude prices should nudge it down further.
Beyond this positive data, an argument against recession is that the current composition of economic activity doesn’t look right. Read the rest of this entry »
With developed economies in dire straits, central bankers have taken the tiller. Not all of them are happy about that.
Aug 13th 2011 | from the print edition
COMETH the hour, cometh the central bankers. On August 8th the European Central Bank (ECB) began buying Italian and Spanish bonds in an effort to stop the sovereign-debt crisis from crippling two of the continent’s largest economies. And a day later America’s Federal Reserve made an unprecedented commitment to keeping interest rates at more or less zero for two more years to keep a stalling economy out of recession.
In both cases the dramatic steps were taken in the face of political failures to get to the heart of the problems at hand. The fact that they took both banks well outside their normal zones of operation was underscored by the internal dissent both moves faced, dissent rarely seen in the consensus-driven world of central banking.
The initial market reaction was positive, at least on one side of the Atlantic. Yields on Italian and Spanish bonds fell sharply relative to Germany’s. In America Treasury yields fell and stocks rose—but not for long, as equity markets fell again on August 10th. No one should see this as a fundamental turnaround. The ECB’s earlier bond-buying hasn’t saved smaller countries from punitively high government-bond yields; the Fed’s previous interventions haven’t spurred a robust recovery. The big issues of America’s stagnant economy and Europe’s debt crisis remain in the hands of elected politicians who still seem inadequate to the task. But at least central banks have shown themselves ready and able to act.
The entire article is linked here.
The messenger may be flawed, but the United States should take heed of the message
Aug 13th 2011 | from the print edition
IT WAS a humbling moment for America, and the decision by Standard & Poor’s to strip the country of its triple-A credit rating on August 5th came at a particularly sensitive time. Furious Obama administration officials immediately attacked the ratings agency—and the criticisms increased on August 8th, the first trading day following S&P’s announcement, when the Dow Jones Industrial Average plummeted by 5.5%.
Aug 11th 2011, 12:22 by G.I. | LONDON
FOR most of the post-war period, macroeconomic stabilisation policy was an endogenous driver of stocks. If the market fell enough, investors would conclude that fiscal and monetary policy would, eventually, respond, if not to stocks themselves then to the darkening outlook for the economy that a declining market foretold. Conversely, if stocks rose enough, they’d anticipate that the authorities would eventually take their punch bowl away for fear of inflation.
Endogenous policy had two important, distinct impacts. Read the rest of this entry »
Aug 6th 2011, 4:44 by G.I. | WASHINGTON
Standard & Poor’s decision to downgrade America’s credit rating on Friday is momentous, but not, I suspect, for the reasons most people will cite. Many worried that interest rates would skyrocket and the markets sell off. This seems unlikely. The news won’t be a surprise and S&P was kind enough to dampen any impact by waiting until after the markets closed. There are very few investors who will be compelled to sell Treasury debt because it’s rated AA+ instead of AAA. Banks will not have to hold more capital against their Treasury holdings, regulators confirmed.
Another popular interpretation is that this is a wake-up call about our runaway debt. And indeed, S&P, in its decision, did cite the inadequacy of the debt deal agreed to by Congress and Barack Obama this past week:
[T}he fiscal consolidation plan that Congress and the Administration agreed to this week falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade.
Not surprisingly, Republicans seized on this as evidence that their strategy and views have been vindicated. The office of John Boehner, speaker of the House of Representatives, called it the “latest consequence of the out-of-control spending that has taken place inWashingtonfor decades.”
But this interpretation is incomplete and misleading. As S&P’s announcement makes clear, the inadequacy of the deal was only one motivation. As important (to me, even more important) was the the reckless and divisive battle that preceded it: Read the rest of this entry »
America has avoided default, but political dysfunction is threatening its chances of economic recovery
Aug 6th 2011 | WASHINGTON, DC | from the print edition
[Greg Ip & our U.S. political correspondent]
THE deficit-reduction deal that finally raised America’s debt ceiling and staved off the threat of default seemed to make no one happy. “A sugar-coated Satan sandwich,” one Democratic congressman called it. Republican candidates for president lined up to denounce it.
But even less popular than the deal itself was the process that led up to it: months of partisan wrangling, broken deals and brinkmanship, with the threat of default hanging over an economy struggling to grow. “Our economy didn’t need Washington to come along with a manufactured crisis to make things worse,” Barack Obama noted as he signed the deal into law on August 2nd—the day the Treasury had warned that it would run out of cash to meet its obligations.
This is far from a lasting solution to America’s climbing debt. Neither Republicans nor Democrats were forced to slaughter their sacred cows. Republicans kept higher taxes off the table, and Democrats did the same with the biggest entitlements: Medicaid (the federal-state health programme for the poor), Social Security (pensions) and most of Medicare, the federal health programme for the elderly. The deal also threatens to tighten fiscal policy further in 2012, when the recovery is still struggling to establish itself.
It marks, too, another deeply worrying change. The willingness of one party to use the threat of default, if not on government bonds then on other federal obligations such as pensions and pay-cheques, marked a dangerous escalation in the partisan rancour that has come to bedevil policymaking. It is not just big, controversial things like tax reform and climate change that fall victim to gridlock, but smaller, routine matters where disagreements are often slight. Since 2007 the Federal Aviation Administration has operated on no less than 20 short-term funding authorisations; the latest finally ran out on July 22nd because of a congressional dispute, forcing the layoff of thousands of workers and a halt to airport building projects (see article). Many regulatory positions remain vacant because Senate Republicans are blocking appointments to them. Free-trade agreements with Colombia, South Korea and Panama, supported by both parties, have been stalled because the Democrats want ratification linked to renewal of a worker-training programme and Republicans do not.