Monthly Archives: August 2010

The exceptionally strong German GDP figures for 2010 Q2 have triggered a lot of commentary on whether Germany has coped better with the recent recession than other countries, especially the US. Read more

The much awaited speech by Ben Bernanke at Jackson Hole was largely a holding operation. He did not deviate much, if at all, from the tone of the statement issued after the August meeting of the FOMC, which is understandable given that his policy committee contains several members who do not want the Fed chairman to offer any strong hints about further policy easing at this stage.  Read more

Ben Bernanke’s speech at Jackson Hole on Friday will reportedly discuss the pros and cons of further monetary easing in the US. This debate has suddenly taken on a new sense of urgency, because the weakening in US economic data seems to have accelerated quite markedly during August.  Read more

I am becoming increasingly concerned about the extent of the slowdown which is now underway in the US economy, a trend which has not yet been fully recognised by the Federal Reserve. Read more

The battle to avoid deflation in the developed world could prove to be a long one, with twists and turns which could last for many years. In July, the core CPI data in the eurozone were somewhat firmer than expected, as were the core PPI data in the US. This has led some economists to suggest that underlying price pressures are beginning to rise again, and that the deflation scare is over. Would that that were true. Some interesting new evidence from the IMF suggests that while outright deflation might be avoided, at least for a time, the developed economies could soon get stuck in a kind of limbo land, with inflation remaining unhealthily close to zero for a very long period. Read more

Weird, wild, wonderful – that is how the official US PGA website describes the end of the fourth major golf championship of the year, won by the German Martin Kaymer on Sunday. Kaymer was impeccable, in his play and his behaviour, in winning one of the most remarkable championships in golf history. But what everyone will remember will be a decision by the rules officials which prevented American Dustin Johnson from qualifying for a play-off for the title with Kaymer and fellow American Bubba Watson. Johnson took the decision like the true sportsman he is, but most American golf fans believe he was robbed of his tilt at the title. They are wrong. The rules were clear, and were correctly applied. Once again, golf has taught us more about how to live our lives than just about how to play a daft game in a field. Read more

If the eurozone were a genuine single economy, like the US, then the buoyant second quarter GDP figures, published today, would be a cause for unbridled celebrations. The increase of 1.0 per cent in GDP in Q2 was nearly double the growth rate in the US and, if maintained, it would be more than enough to bring down the unemployment rate in Europe. Yet much of the market reaction has focused not on the fact that the eurozone as a whole enjoyed a fantastic quarter, but on the widening gaps which are developing between the healthy German economy and the ailing economies on the periphery of the bloc, and which leave the troubles of the euro far from resolved. Read more

The shift in market prices since the Fed meeting on Tuesday has been very minor in the great scheme of things, but it has obviously got some people worried that it is the start of a much bigger move in the coming weeks.  Read more

The Fed decision announced last night seems to have disappointed markets, yet it will surely come to be seen as a clear win for the doves. Prior to yesterday, the default option at the Fed was to allow the size of its balance sheet to decline whenever its holdings of mortgage debt matured. Although this would not have led to much shrinkage of the balance sheet in the near future, it signalled that the Fed was looking for opportunities to reverse its policy of unconventional easing. That bias has now been removed, though not yet reversed. Read more

Edmund Phelps wrote an op ed piece in the New York Times on August 6 arguing that much of the recent rise in US unemployment (and, by implication, global unemployment) has been structural in nature, and therefore will not be amenable to correction simply by boosting aggregate demand. I predict that we are going to hear a lot more about structural unemployment in the near future, and the work of Phelps (who won the Nobel Prize in 2006 for his lifelong dedication to employment and innovation theory) is a good place to start. Basically, he says that we will only get unemployment back down to pre-recession levels if we think much more radically about supply-side labour market solutions than we have done to date. Read more

The financial markets have now discounted some form of Fed easing at tomorrow’s FOMC meeting, and it seems to me unlikely that policy makers will allow these expectations to be completely dashed. If that were to happen, the setback to both bond and equity markets could be quite large, and the Fed will not want to risk this with economic data tending to weaken in recent weeks.  Read more

The US monthly employment data for July were not far off economists’ expectations, but they suggest that the labour market is now showing precious little improvement, and the initial reaction of markets was one of disappointment. The number of private sector jobs in the economy rose by just 71,000, which would normally be insufficient to keep unemployment from rising. However, the unemployment rate remained unchanged at 9.5 per cent, largely because the potential labour force is now falling as workers become discouraged about their prospects of finding work. All in all, this is a fairly gloomy picture for those seeking work in the US. Read more

The Federal Open Market Committee meeting next Tuesday promises to be the most interesting for about 12 months, since the outcome is far from certain.

The recent slowdown in the US economy seems to have caused some members of the committee to soften their stance on monetary policy, and the markets have begun to speculate about a possible easing in policy. If this comes, it is likely to be very slight, since I doubt that the Fed has seen enough evidence yet to convince them that the economy is slowing in a dangerous way.

However, some members of the committee seem to be getting increasingly worried that the US may be about to fall into a deflationary trap, like the one which has affected Japan in the last decade. James Bullard, the president of the St Louis Fed, released a very interesting paper last week which analyses the Japanese precedent in some detail. Although he does not consider this the most likely development in the US, he does think that it is sufficiently probable to require contingency planning, in much the same way as the government might prepare for a terrorist attack which it hopes and expects will not happen. Read more

The financial markets have been acting very serenely in the face of continuing evidence that the US economy is slowing markedly during the third quarter. Read more

The ISM Survey of the US manufacturing sector (published on Monday) offers the first reliable glimpse of activity in the US economy in the third quarter of the year. It is not encouraging. Read more

The second quarter GDP figures for the US were published last Friday. The financial markets do not usually get very agitated about these figures, because the official quarterly data lag the many sources of more timely information on the economy. But this is an unusually sensitive time for the US economy. Read more