Yotta Point

Reads for Dec 18

Economics & Finance

• Paul Krugman at NYT: Inflating Your Way to Prosperity; Slow Learners; Lake Wobegon, Europe; No, It's Not The Welfare State; Chronic Confusion
• Brad DeLong: "Expansionary" Austerity in Europe
• Economist: Are Persistent Trade Deficits a Bad Thing?
• Paul Bergin at the SF Federal Reserve: Asset Price Booms and Current Account Deficits
• Kash Mansori at The Street Light: House Prices and Current Account Deficits; More House Prices and Current Account Deficits
• Global Macro Monitor at The Big Picture: Italy Works 20% More Hours than Germany or France
• Uneasy Money: Deutsche Bank Gets It, Why Can’t Mrs. Merkel?
• Scott Sumer at The Money Illusion: Like deer caught in headlights (talking about the Fed)
• Washingtons Blog at The Big Picture: FBI Estimates 80% of Mortgage Fraud Involved Industry Insiders
• Calculated Risk: Research: New paper on the role of investors in the housing bubble
• Michael Olenick at Naked Capitalism: NAR’s Big Miss on Home Sales Underscores Lack of Transparency and Accuracy in Mortgage/Housing Data
• Tamara Keith at NPR's It's All Politics Blog: GOP Objects To 'Millionaires Surtax'; Millionaires We Found? Not So Much [via]
• Mark Thoma at Economist's View: Percentage Growth in Annual Wages and Salaries [also see]
• Alex Tabarrok at Marginal Revolution: Roman Empire More Equal than the United States
• Brad DeLong: Why Oh Why Can't We Have a Better Press Corps? No, High Unemployment Is Not Primarily The Result of "Generous" Unemployment Insurance Benefits
• Chad Stone at CBPP's Off The Charts Blog: It’s the Great Recession, Not the Great Vacation, That’s Responsible for High Unemployment
• Mike Konczal at Rortybomb: What is the Real Unemployment Rate and How Could We Tell?
• Macromania: Beveridge Curves for 36 U.S. Cities (Updated)
• Ben Walsh at Business Insider: A Bunch Of Academics Think They've Figured Out How To Tell If A Hedge Fund Will Outperform The Market
• Barry Ritholtz at The Big Picture: Interest Rates: 1831-2011; US Housing Prices Mirror Japan's Experience; Beware The Retail Hype; Retail Sales Disappoint on False Black Friday Reports
• Cardiff Garcia at FT Alphaville: The Decline of "Safe" Assets

To wrap up this section, here's an interesting comment by William Cohan in this FDL Book Salon on his book "Money and Power: How Goldman Sachs Came to Rule the World":

Goldman actually almost went out of business many times in its history; it is very good at getting into trouble — and also very good at getting out of trouble

...and he also notes:

actually i go through chapter and verse of the many frauds that Goldman has committed or participated in over the years

Should make for some interesting reading.

Energy & Environment, Food Security, Climate Change

Eurozone Government Debt and Current Account Deficits

Background

In my previous post - The Stormy Petrel of Eurozone Budget Deficits: Current Account Deficits - I examined this question:

Do pre-crisis current account balances, as opposed to pre-crisis fiscal balances, better predict crisis-period fiscal balances (quantitatively) for countries that are part of the European currency union (EMU)?

I showed that the answer was yes and discussed the implications in the context of the recently concluded EU summit. The analysis in the post focused on current account (CA) and fiscal balances in the 7 years preceding the start of the Great Recession (pre-crisis) and fiscal balances in the 2008-2010 (crisis) time period. Countries that joined the Euro currency union in 2007 or beyond were excluded from the analysis since they were not on the Euro long enough in advance of the financial crisis. The key finding was that the average CA balance/GDP by country for 2000-2007 is a much better quantitative predictor of the average fiscal balance/GDP for the same country in 2008-2010, than is the average fiscal balance/GDP of the country in 2000-2007. The EU "fiscal union" was largely a fiscal austerity pact, with inordinate emphasis on minimizing fiscal deficits and sovereign debt levels as a % of GDP, with little or no focus on the current account. However, as I discussed in the above post, pre-crisis fiscal balances are less effective in predicting future fiscal balances than are pre-crisis CA balances. Hence, I argued that a "fiscal union" that demands fiscal austerity as a way to ensure low fiscal deficits in the future, with no attention paid to CA balances, is unlikely to consistently prevent large future fiscal deficits.

In this post, I turn my attention to government debt - the other element of the EU pact. The question I ask here is:

Do pre-crisis current account balances/GDP, as opposed to pre-crisis government debt/GDP, better predict crisis-period debt/GDP or changes in debt/GDP (quantitatively) for countries that are part of the European currency union (EMU)?

The answer is mixed as I will explain below.

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Summary

In this post, I summarize the results of a simple analysis of the average current account (CA) and government debt, as a percentage of GDP, for nearly a dozen European countries that use the Euro as their currency [Section 1]. With the usual caveat that correlation does not always imply causation, the key findings can be summarized as follows:

1. The average debt/GDP change from 2000-2007 to 2008-2010 was ~12.2 percentage points, with a standard deviation of ~11.9 percentage points. If Ireland and Luxembourg are excluded as outliers, the average is 10.0 and standard deviation is 9.8 [Section 1].

2. The % change in average debt/GDP between 2000-2007 and 2008-2010 was ~ 35.2%, with a standard deviation of 47.3%. If Ireland and Luxembourg are excluded as outliers, the average is 14.9% and the standard deviation is 13.9% [Section 1].

3. Pre-crisis average debt/GDP was a fairly good predictor of the absolute value of post-crisis average debt/GDP (slightly greater than 1X) but was poor in predicting the % change to pre-crisis average debt/GDP due to the crisis [Section 2]. The reason for this behavior is unclear.

4. Pre-crisis average current account balance/GDP is a low to moderate predictor of the absolute value of post-crisis average debt/GDP as well as the % change to pre-crisis average debt/GDP due to the crisis [Section 3].

Hence, if we were interested in knowing the likely % change to average debt/GDP [pre- to post-crisis], the pre-crisis average CA balance/GDP was more likely to give us some insight on this than the pre-crisis average debt/GDP. If, on the other hand, we were interested in knowing the likely absolute average debt/GDP [post-crisis], the pre-crisis average debt/GDP hits the mark much more effectively on this than than the pre-crisis average CA balance/GDP. In the context of the recently concluded EU "fiscal union" summit, a focus purely on nominal debt/GDP levels will likely provide less insight on the mechanisms that might allow for net debt reduction. A focus on CA balances/GDP is more likely to be useful in understanding how to shape the % change in debt/GDP in the desired direction.

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1. Eurozone Countries - Assumptions & Data

The Stormy Petrel of Eurozone Budget Deficits: Current Account Deficits

[NOTE: The second part of this analysis is posted in the next post: Eurozone Government Debt and Current Account Deficits]

Background

In my previous post discussing the recent EU "fiscal union" summit, I said:

You'll notice that Spain and Ireland were running fiscal surpluses with acceptable debt/GDP in the years immediately preceding the financial crisis - yet these countries are amongst the worst affected by the meltdown and and in the crosshairs of the ECB and austerity hawks. Slovenia had run modest deficits ahead of the financial crisis and its debt to GDP ratio was low and declining ahead of the crisis - yet, Slovenia's bond yields have been in crisis territory recently and its debt situation is worsening as the economy teeters into recession. Undoubtedly, countries like Greece made their problems much worse with very high levels of deficits and debt prior to the crisis. That said, even Germany ran significant deficits and had high debt levels prior to the crisis - yet, Germany remains relatively unscathed because it has run massive current account surpluses thanks in part to the Eurozone periphery that ran massive trade deficits that benefited countries like Germany.

This is a point that has been made by many people before: rather than fiscal profligacy, the main root cause of the current European financial crisis can be traced back to large current account deficits run by many EU members following the establishment of the Euro as a common currency, culminating in a sudden stop (in the vicinity of the Great Recession) that pummeled the economic and fiscal health of those countries. A useful chart is available from Kash Mansori at The Street Light - along with his follow-up observations...

In their book "This Time is Different: Eight Centuries of Financial Folly", Carmen Reinhart and Kenneth Rogoff point out:

An even stronger regularity found in the literature on modern financial crises is that countries experiencing sudden large capital inflows are at high risk of experiencing a debt crisis [15]. The preliminary evidence here suggests that the same is true over a much broader sweep of history, with surges in capital inflows often preceding external debt crises at the country, regional, and global levels since 1800, if not before.

[I've discussed some of these issues in more detail in a couple of other prior posts: Capital Flow Bonanzas and Their Aftermath and Q&A with President Bill Clinton at the 2011 Clinton Global Initiative, Part 2 - The Financial Crisis in Europe]

Given the known impact of large net capital inflows and current account deficits on fiscal stability, here's a natural question that came to mind in the context of the Eurozone:

Do pre-crisis current account balances, as opposed to pre-crisis fiscal balances, better predict crisis-period fiscal balances (quantitatively) for countries that are part of the European currency union (EMU)?

This post focuses on that question. The answer, as it turns out, is yes and the implications of this are obviously significant in the context of the recently concluded EU summit.

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Summary

In this post, I summarize the results of a simple analysis of the average current account (CA) and fiscal balances, as a percentage of GDP, for nearly a dozen European countries that use the Euro as their currency [Section 1]. The analysis focused on CA and fiscal balances in the 7 years preceding the start of the Great Recession (pre-crisis) and fiscal balances in the 2008-2010 (crisis) time period. Countries that joined the Euro currency union in 2007 or beyond were excluded from the analysis since they were not on the Euro long enough in advance of the financial crisis. The key finding from this analysis is that the average CA balance/GDP by country for 2000-2007 [Section 3a, 3b] is a much better quantitative predictor of the average fiscal balance/GDP for the same country in 2008-2010, than is the average fiscal balance/GDP of the country in 2000-2007 [Section 2a, 2b].

The analysis was completed with and without Ireland in the mix. Ireland is a massive outlier in the data when it comes to fiscal deficits - likely due to the fact that the main issue in Ireland was large-scale private debt rather than sovereign debt, and sovereign debt ballooned only later because of the Irish government's huge borrowing to bail out private banks during the crisis. With the exclusion of Ireland, the positive correlation between average pre-crisis CA balance/GDP to crisis-era fiscal balance/GDP is very high and even more stark [Section 3c, 3d]. It is significantly higher than the correlation between average pre-crisis fiscal balance/GDP to crisis-era fiscal balance/GDP [Section 2c, 2d]. 

The findings here raise more questions about the effectiveness of the recently touted EU "fiscal union" which was largely a fiscal austerity pact, with inordinate emphasis on fiscal balances as opposed to CA balances. Specifically, the data shown here indicate that pre-crisis fiscal balances do not effectively predict fiscal balances during downturns/crises - they are less effective in doing so than pre-crisis CA balances. Hence, a "fiscal union" that demands fiscal austerity as a way to ensure low fiscal deficits in the future, with no attention paid to CA balances, is unlikely to consistently prevent large future fiscal deficits. Further, given the limited direct correlation between CA and fiscal balances over the same period of time [see "Baseline Charts" in Section 3], it is quite possible that countries might run fiscal surpluses along with large current account deficits over the same time period, and yet have little or no protection against future fiscal deficits during downturns [as shown in Section 3a-3d]. Finally, a misguided focus on short-term fiscal deficits and debt (as opposed to longer-term fiscal health) is more likely to drive deflationary results as well in the current environment - which could be another negative consequence of the recently announced EU "fiscal union".

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1. The Eurozone Countries

Reads for Dec 4/5

Economics & Finance

• Catherine Rampell at Economix: Rating the Credit Raters
• Rebecca Wilder at News N Economics: Malicious ECB Rate Hikes [also see her post from September: The European debt crisis in charts]
• Michael Darda of MKM Partners: Memo to the ECB - Money's Too Tight
• James Kirkup at The Telegraph (UK): Euro doomed from start, says Jacques Delors [Delors was a key architect of the Euro] (via Credit Writedowns)
• Kash Mansori at The Street Light: Italy and Japan
• Joe Weisenthal at Business Insider: Guess Which Country Has Debt Of Nearly 1000% Of GDP...; The Entire Sovereign Debt Crisis Can Be Understood By Looking At Sweden Vs. Finland
• David Cay Johnston at Reuters: The Taxpayers Burden and Closing Wall Street's Casino [absolutely fascinating chart showing bank failures, de-regulation & income inequality in the US since 1910 and another on fewer Federal financial prosecutions in 2000+ era]
• Hannah Shaw at CBPP's Off The Charts Blog: Exploring Income Inequality, Part 5: The Concentration of Income and Wealth
• Mish's Global Economic Trend Analysis: Banks Make $13 Billion on $7.7 Trillion in Secret Fed Loans; SEC Stands by Does Nothing
• Mike Konczal at Rortybomb: Comparing the Federal Reserve's Reaction to the Financial Crisis Versus the Unemployment Crisis [Wow!]
  • Konczal says: "To recap: Lehman Brothers goes worse than the Federal Reserve’s projection and the Fed goes to the most extreme lengths it can find to extend emergency lending. Every single unemployment number turns out to be worse than all of the Federal Reserve’s projections, and the Federal Reserve finds every excuse to look the other way. Only Charles Evans has the courage to say that we should let inflation go to 3% while unemployment is over 7% to catch up to trend growth. Amazing."
• Historinhas: The "hole theory of unemployment" (via)
• Bill McBride at Calculated Risk: Employment Summary, Part Time Workers, and Unemployed Over 26 Weeks
• Menzie Chinn at Econbrowser: The November Employment Situation
• Mark Thoma at Economist's View: Unemployment Falls, But Is It Good News?
• Brad DeLong: The Household Survey: A Note on the December 2, 2011 Report
• Barry Ritholtz at the Washington Post: Did Black Friday save the season? Beware the retail hype.
• Kenneth Rogoff: Is Modern Capitalism Sustainable? (via)
• Paul Krugman at NYT: British Debt History; Bleeding Britain; Explaining Business Investment; The Summer of Confidence; Memories of VSPs Past; Oh? ECD;  There is Something Not Rotten (in the State of Denmark);
• Noahpinion: Harrison & Kreps 1978: The power of irrational expectations (via)
• Vivek Wadhwa in the Washington Post: China opens doors of state-run companies to world's top talent
• Vivek Wadhwa in the Washington Post: Why silicon valley should fear India

On that last article....I agree with much of Wadhwa's observations about India based on my experience - in particular, these passages:

India’s information technology sector may have started by running call centers and maintaining old computer code for American companies. But, today, instead of starting more I.T. services companies, a new breed of Indian entrepreneurs are developing high-value technology products based on intellectual property.

[...]

But something is missing in India: The angel investors, venture capitalists, and, most critically, experienced mentors. This problem will fix itself as more companies achieve success and seasoned entrepreneurs decide to give back to the next generation. When that happens, Silicon Valley better watch out. It is in for some very real competition.

Energy & Environment, Food Security, Climate Change

Required and Excess Reserves of US Banks - Is It Time for a Policy Change by the Federal Reserve?

In his recently released book - "Back to Work: Why We Need Smart Government for a Strong Economy" - President Bill Clinton has evidently proposed a slew of ideas to boost job growth and the US economy. Although I've not read the book yet, he has been discussing many interesting ideas through this year, including at the 2011 Clinton Global Initiative (my discussions on the Q&A with President Bill Clinton at CGI 2011 are available here: Part 1, Part 2, Part 2A, Part 2B, Part 3). One of his ideas apparently ties to the reserve policy set by the US Federal Reserve according to Dave Johnson's review of the book in Alternet [the use of bold text is my emphasis throughout this post]:

...Clinton offers a three-part economic and jobs growth strategy:

(1) put as much of the $4 trillion now held in banks and corporate treasuries back into the economy as fast as we can; (2) concentrate on the areas most likely to produce good jobs that have a positive ripple effect, jobs in modern infrastructure building, high-end manufacturing, green technologies, and exported goods and services; and (3) do literally dozens of other things that, when combined, can make a real impact now and also increase our long-term economic growth.

The list is full of smaller policy ideas, like #3, the Federal Reserve has to give banks an incentive to lend. The Fed should charge banks for parking money, maybe .25% and/or require banks to pay their customers a minimum 1% interest on deposits...

Dave's fairly detailed review is worth reading in full but I'm inclined to disagree with his characterization of the latter idea as a "smaller policy idea". I'll use this post to explain why an idea like this could have a substantial impact on increasing lending and thereby boosting nominal GDP (NGDP). In fact, arguably pioneered by economist Scott Sumner who blogs at The Money Illusion, numerous economists across the political spectrum are advocating the need for NGDP targeting by the Fed (rather than prices or inflation), as a response to the large and persistent nominal and real output gap in the US economy. This becomes even more important given recent indications from historically reliable leading indicators that the U.S. could be headed into another recession.

Excess v. Required Reserves

To explore this topic more broadly, it's worth starting with the post "Cash Is Not The Problem" by Paul Krugman back in July 2011. Krugman discussed the massive cash balances that corporations have accumulated and briefly discussed the large amount of excess reserves held by depository institutions (banks), well above the level of required reserves:

Second, banks are also sitting on large amounts of cash that they aren’t lending...

At face value, Krugman has a point - banks are holding well over $1 Trillion in excess reserves. Given that we have a serious NGDP gap with anemic employment growth, it would seem appropriate for the Fed to drive banks to reduce their excess reserves via increased lending in order to stimulate faster economic growth, especially in a political environment where stimulative fiscal policy seems out of reach. However, the fact that banks have large and growing excess reserves does not automatically mean that loan growth is not occurring. To understand this better, we need to look at both excess reserves and required reserves.

I've included below a reserves chart from the St. Louis Federal Reserve Economic Database (FRED). Note that the scales for required reserves (left) and excess reserves (right) are completely different - by over an order of magnitude - meaning that excess reserves have been growing more than order of magnitude faster than required reserves since the start of the Great Recession. Excess reserves have grown from zero prior to the Great Recession to almost $1.5 T now, with the most rapid growth beginning in Fall 2008 when the Fed started aggressively intervening to prevent another Great Depression - via liquidity facilities, loans, asset purchases, etc. (QE1 and QE2 are good examples). The Fed also modified its policy on reserves starting in October 2008 and started paying 0.25% interest on reserve balances - the first time in its history.

India and Nehru

With widespread frustration in the US on the economic situation and dysfunctional government, and anger against Wall Street's big banks and government handouts to the banks, I thought a brief comment on India might be appropriate. India is the world's largest democracy and an emerging economic power in the world. Unlike in the US, which is a de jure two-party and often de facto single party political system with predictable results, India has a multi-party political system. While I am personally in favor of a multi-party system, it has its own challenges - one of which is that unless there is strong leadership that is focused more on public service than personal gain, it can be quite difficult to get things done. India has of course made enormous and impressive strides in the last two decades despite those challenges, especially in comparison to its neighboring state Pakistan - which was created after a violent partition from India in 1947 and has been in a state of turmoil since then. India's strides have nevertheless been made in an environment of extreme government corruption.

Throughout much of 2011, there has been a prominent movement in India against corruption at the highest levels of India's government, in significant part due to the leadership of Anna Hazare. With the ruling Congress party having more or less squandered its momentum from 2009 with key party or government officials being in the middle of massive corruption scandals, not much is now getting done in the Indian Parliament. It's also a period of soul-searching in India on the kind of leaders India really needs to take the country to the next level of achievement and well-being for its large population. In that context, I found some recent observations by Shashi Tharoor on the "quality of leadership" from India's independence era interesting and worth calling out. Tharoor is a Congress MP from the southern Indian state of Kerala, former Indian Minister of State for External Affairs and former UN Under-Secretary General for Communications and Public Information. Tharoor especially discussed Jawaharlal Nehru, India's storied and first Prime Minister, in an interview - see these videos. He also discussed with IBN what structural changes are needed in India's electoral system.

Perhaps the most interesting is this video where Tharoor talks about an article critical of Jawaharlal Nehru that appeared in November 1937 in the Modern Review (of Calcutta, now Kolkata). Here's historian Ramachandra Guha on the topic of that article [I've emphasized some portions in bold text]:

IN November 1937, the Modern Review of Calcutta carried a profile of the Congress President, Jawaharlal Nehru. The profile was not wholly flattering; it spoke, for example, of his "intolerance of others and a certain contempt for the weak and inefficient". It noted that his conceit was "already formidable", and worried that soon "Jawaharlal might fancy himself as a Caesar".

The essay was written under the pen-name of "Chanakya". There was much speculation as to who the author might have been. It was certainly a critic of the Congress President, possibly a critic of the Congress Party as well. Then it was revealed that the author was none other than Jawaharlal Nehru himself.

I had quite forgotten about Chanakya's mischief, till correspondents commenting on my column "A Horoscope for the Congress" reminded me of it (The Hindu — Sunday Magazine, March 13). The column had dealt with an anonymous article entitled "After Nehru ... ," published in the Economic Weekly of July 1958. This essay had forecast that, after Nehru, a once principled Congress party would become a captive of caste, communal and regional caucuses.

Speculating about the identity of an author who writes anonymously is an exercise composed equally of excitement and frustration. (Recall the months of frenzied speculation in the American press about the author of the novel Primary Colours.) My own guess was that the man who made this prescient forecast was either a Western political scientist or a serving civil servant, each of whom would have had to mask their name while advancing a controversial thesis. But then I got a mail from a friend in Dehra Dun, which read: "... an intriguing article. Knowing Nehru's penchant for writing anonymous provocative articles, do you think there is any chance that he could have written it?" And a reader from Kolkata (Calcutta) wrote in to say that he remembered reading the article when it had first appeared, and discussing with his friends — in the College Street Coffee House, no less — whether it was the Prime Minister who had written it.

That amazing trait of Nehru's is all the more interesting given how he ran the country despite his confessed fears of being an authoritarian. In his book, "India: The Years of Indira Gandhi", Yogendra Malik made these observations:

Making Public Private Partnerships Successful

One of the key themes from the Clinton Global Initiative (see my discussions on the Q&A with President Bill Clinton at the most recent CGI 2011 - Part 1, Part 2, Part 2A, Part 2B, Part 3) was the notion of leveraging public-private partnerships to drive solutions to large scale problems. For instance, in my discussion of shared value v. shareholder value in Part 3, I made some related observations [note that all of the bold text in this post is used for my own emphasis]:

A few other related observations from the above CGI panel discussions:

• Unilever CEO Paul Polman, in the discussion on redefining business as usual to drive sustainability, remarked that in today's social media environment, the people in Egypt were able to bring down their government in "17 days" and as consumers could bring Unilever down in "nanoseconds" if, as a company, they are not sensitive to their impacts on society
• Dow Chemical CEO Andrew Liveris, who has been vocal about the need for a manufacturing renaissance in the U.S., made several noteworthy comments:
  • The need for "inclusive democracy" through a "golden triangle" of public (government), private (business), and non-profit (NGO) partnership
  • A world view has finally arrived where we need to value the planet
  • It is challenging to run long cycle investments with a focus on public good when - you are measured on a quarter-by-quarter basis, some investors don't fully understand the notion of long-term value, and there is ten times more money going around the world (from an investment standpoint) than you can deal with
  • "Poor people are poor, not stupid", i.e., it takes a certain level of creativity to survive when one is poor

Liveris has previously stated that while he is a supporter of free markets, we should recognize that free markets don't naturally allow for strategic decisions at a country level and that public policy and government need to step in to address that - "I would not let free markets rule without also addressing what I want manufacturing to be 20 or 30 years from now". That is very much aligned with what I wrote about a year ago:

What I believe is sorely missing in the US today is any kind of broad strategic thinking or position on the type of manufacturing leadership that we believe the U.S. should continue to have in order to preserve our leadership and security over the next 50 years - and - a vision on how we should concomitantly engage with governments and private enterprises to make that strategy a reality. In the absence of a strategic long-term view and any substantive broad-based dialog with the U.S. business community (not in the vein of political talking points, but in the spirit of driving American leadership through enlightened policy and deep engagement), dreams of re-building US manufacturing leadership will remain out of reach.

The key motivation for public-private partnerships (PPPs or P3s) is that, often times, neither the public sector nor the private sector is able to completely shoulder the costs and responsibilities for solving serious large-scale problems - so, a PPP might therefore be a more effective solution path in those circumstances. Note that I use the term PPP to refer not just to the public and private sectors, but also non-governmental organizations (usually non-profits or NGOs) that are funded through public or private means.

PPPs are generally much more complicated to plan and execute than purely public sector or purely private sector projects. In the aftermath of the Great Recession, there has been increased skepticism in some circles about the effectiveness of PPPs in achieving their goals given that reckless private sector risk-taking on a large scale got socialized into public sector budgets. For example, Toby Sanger and Corina Crawley of the Canadian Centre for Policy Alternatives wrote:

Reads for Nov 25

Economics & Finance

• Brad DeLong: Department of "Huh?!": John Taylor and Milton Friedman's Monetary Policy Edition
• Global Macro Monitor at Credit Writedowns: Chart of the day - China's Credit Bubble
• Adrian Peralta-Alva at The Big Picture: Real Estate Bubbles and Weak Recoveries
• CBO Report: Estimated Impact of the American Recovery and reinvestment Act on Employment and Economic Output from July 2011 through September 2011 [also see here]
• Ken Houghton at Angry Bear: How Keynesian Policy Led Economic Growth In the New Deal Era: Three Simple Graphs
• James Hamilton at Econbrowser: Taxing the 1%
• James Hornet at CBPP's Off The Charts blog: Why Doing Nothing Would Reduce Deficits by $7.1 Trillion
• Catherine Rampell at Economix (NYT): Deficit Deals Weren’t Always So Antitax
• Catherine Rampell at Economix (NYT): How Other Countries Do Deficit Reduction
• David Glasner at Uneasy Money: Watching the CPI Can Get You into Deep Trouble
• Hyun Song Shin: Global Banking Glut and Loan Risk Premium [also see Kevin Drum]
• Dan Crawford at Angry Bear: EA Balance of Payments: the Current Account [also see this Deutsche Bank Research paper]

Let's wrap this section with this excellent paper "Why stricter rules threaten the eurozone" by Simon Tilford and Philip Whyte of the Center for European Reform (CER), via Paul Krugman. Can't say there is a lot that is new here, but the authors do a good job of explaining in a simple way some of the issues behind the European crisis. Here are some excerpts from their paper:

U.S. Economic Outlook - Recession or Growth?

[This post has been updated as of 1/21/12]

Is the United States headed into a recession or not? There has been quite a bit of debate on this topic over the last few months. Naturally, the lack of consensus on this topic is due to conflicting data and indicators. I'm going to make an attempt to answer this question using some historical information as a guide.

Summary

Predicting business cycle turning points and recessions in timely fashion is extraordinarily difficult. The difficulty is compounded by the fact that there is no straightforward quantitative measure defining a recession. Currently, there's a debate in the United States as to whether the U.S. economy is tipping into recession heading into 2012. Single indicators like GDP, retail sales, industrial production, nonfarm employment, etc., at face value appear to be in non-recessionary territory, thereby leading some economists to conclude that the U.S. has avoided a recession. The Conference Board's Index of Leading Economic Indicators (LEI) has also been on a upswing in recent months, leading the Conference Board to predict that the U.S. economy will improve, rather than decline, in the future. In contrast, the Economic Cycle Research Institute (ECRI) has been vocal in saying that it's slew of short-, medium- and long-leading indicators are signaling a definite recession in the U.S. Who is right?

In this post, I examine some historical data and conclude that the ECRI is most likely correct and that the U.S. is very likely headed into a recession. Single indicators are generally not good at forecasting recessions and could be revised substantially in the future (see Section 2 below). The LEI's track record has been poor overall (Section 3A). ECRI's track record, while not perfect in its timing, has overall been stellar (Section 3B) and makes me more confident that their recession call should be taken seriously.

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1. Predicting Recessions

Predicting recessions is no easy business. As The Conference Board observed in p. 16 of this report [I've emphasized sections in bolded text throughout this post]:

However, the fact is that peaks (or even troughs, for that matter) cannot always be recognized until months after they occur, especially during periods when the data are subject to significant revision. Therefore, a considerable amount of research has focused on finding a real-time turning point rule, which provides adequate warnings.

Unfortunately, it is imprudent to forecast a recession using a simple and inflexible rule. The U.S. economy is continually evolving, and is far too complex to be summarized by one economic series. Even official recession dates for the U.S. economy are determined by a committee of prominent economists that uses a multitude of indicators rather than a simple rule: “Why not replace all this agonizing over a multiplicity of measures with a simple formula—say, define a recession as two consecutive quarters of decline in GNP? Any single measure is sure to encounter special problems just when they matter the most.... We plan to stick with examining all of the data we can and making an informed judgment.” (Robert Hall, Chair, NBER Business Cycle Dating Committee.)

Predicting these turning points is a difficult task even for the best forecasters.

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2. Single Indicators and Recessions

A number of recent data points on the state of the U.S. economy - I'm going to refer to these loosely as "single indicators" - have been interpreted as being positive or better than expected. For example:

Reads for Nov 19

Economy, Unemployment, Finance

• Ed Harrison at Credit Writedowns: Deflationary Crisis Responses
• Ed Harrison at Credit Writedowns: Why questioning Italy’s solvency leads inevitably to monetisation
• Ed Harrison at Credit Writedowns: Chart of the day: Definitive guide to the European debt web
• Joe Weisenthal at Business Insider: DYLAN GRICE: Germany Is Making The Same Mistake That Allowed The Nazis To Come To Power [via PK]
• Ed Harrison at Credit Writedowns: Chart of the day: Indebtedness of all AAA sovereign credits
• Catherine Rampell at NYT Economix: Is Overregulation Driving U.S. Companies Offshore?
• Catherine Rampell at NYT Economix: Prosecutions for Bank Fraud Fall Sharply [a terrible legacy of the Bush and even worse, the Obama administrations]
• Ryan Chittum at Columbia Journalism Review's blog The Audit: More on the Myth of Income Equality
• Catherine Rampell at NYT Economix: United States of Hunger
• Amir Sufi, Atif Mian and Kamalesh Rao: Household Balance Sheets and the Weak Recovery [via CR]
• Atif Mian and Amir Sufi: What Explains High Unemployment? The Aggregate Demand Channel [via CR]
• Atif Mian, Kamalesh Rao and Amir Sufi: Household Balance Sheets, Consumption, and the Economic Slump [via CR]
• Mike Konczal at Rortybomb: On the Census' Mobility Report [very interesting, also includes other research on whether negative equity correlates with lower mobility]
• Mike Konczal at Rortybomb: Youth Unemployment in United States in Line With Arab Spring Countries
• Jake at Econompicdata: Leading Indicators...Full Steam Ahead - compare this to ECRI (whose track record is more credible than that of the LEI noted in the post above): U.S. Economy Tipping into Recession [also see this video]
• John Robertson at Macroblog: Job creation by small firms: Age matters
• Nick Rowe at Worthwhile Canadian Initiative: Why isn't NGDP Targeting a Lefty Thing? [also see this link which comments on various conservative economists supporting NGDP targeting]
• Scott Sumner at The Money Illusion: Reply to John Taylor [on NGDP targeting]
• Ran Duchin and Denis Sosyura in SSRN: Safer Ratios, Riskier Portfolios: Banks’ Response to Government Aid [via CW]

P.S. Don't miss this Jon Stewart video on MF Global and Jon Corzine

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