Tim Duy — A Trap of My Own Making

Steve Waldman at interfluidity catches me in a trap of my own making.

Tim Duy's Fed Watch
A Trap of My Own Making
Tim Duy

See the comment I left there as tjfxh.

Tim Duy on the real reason TPC option was killed in the crib

Apparently fiscal and monetary cooperation is alive and well - the US Treasury and the Federal Reserve conspired to kill the platnium coin idea. In retrospect, we should have seen this coming. As the debate continued, it became increasingly evident that the platinum coin threatened the conventional wisdom in very deep and profound ways. It was a threat that could not be endured by Washington.

This realization hit me this morning, working on my last piece. Begin with the effectiveness of monetary policy at the zero bound. Or, more accurately, the lack of effectiveness as the Federal Reserve is swapping one zero-interest asset for another. Rarely do we take this to its logical conclusion for fiscal policy: If there is no difference between cash and Treasury bonds, why should we issue bonds at all? Why not simply issue cash? In other words, at the zero bound, what is the argument against monetizing deficit spending?

Tim Duy's Fed Watch
On The Disruptiveness of the Platinum Coin
Tim Duy

Hitting too close to home. TPTB had to step in and end it. Definitely read this one in its entirety.

Tim Duy — QE3?

Read it at Tim Duy's Fed Watch
QE3 or Not?

by Tim Duy

Most interesting paragraphs to me:

It's no secret some Fed officials have been looking into additional purchases of mortgage-backed assets to support the economy via the housing market.  And once they started talking about it, market participants began to assume it was imminent.  Moreover, the idea of additional easing popped up in the most recent minutes:A number of members indicated that current and prospective economic conditions could well warrant additional policy accommodation, but they believed that any additional actions would be more effective if accompanied by enhanced communication about the Committee's longer-run economic goals and policy framework.

So now we have a timeline - first, enhanced communication.  Second, additional easing....

•••••• 

Could the Fed credibly commit to a higher inflation target and make actionable such a commitment?  I think they can, but would need to announce they are making some permanent additions to the money stock and ease the expectation that the balance sheet expansion will be fully unwound at the first possible moment.  In other words, to convince the public that you intend to raise the level of the price path relative to the existing path, you need to be willing to allow for the permanent increase in the money supply that would allow that to happen.  Barring that, they can target the dollar directly and do what they won't do - buy foreign currency or foreign debt.  But this is now a more academic than practical discussion.  The Fed has a target.  Period.  End of story. [emphasis added]

Tim Duy — Intractable output gap

But that still is not a story that rapidly returns the economy to potential output. Which brings me back to a familiar place - putting aside the threats to the economy, it is easy to see a positive growth path for the economy, but more difficult to see a rapid closure of the output gap.

Read it at Tim Duy's Fed Watch
A Few Quick Charts on Consumer Spending
by Tim Duy

Tim Duy on the EZ debacle; impending global recession

Bottom Line:  I still don't see where this ends well.  Play the news cycle if you are so inclined, but keep one eye on the key issue.  Is Europe working to resolve their fundamental internal imbalances with anything other than deflation?  As long as the answer continues to be "no," be afraid.  Be very afraid.

Read it at Tim Duy's Fed Watch
Europe Still Heading For Collapse

by Tim Duy

Bottom Line:  The global economy is hitting turbulence, just as the US data turns more sanguine.  Can this decoupling be sustained as Europe sinks deeper into recession?  I would like to think so, but remain very cautious that the US can escape without some significant cuts and bruises.  So far, the Fed remains in a holding position.  I expect them to stay there until more significant signs of economic distress emerge.

Global Growth Struggles, Fed Stands Still

Duy points out that the fly in the ointment here is some shock that impacts the US, like the impending failure of a US TBTF institution, forcing the Fed's hand.

Tim Duy — EZ agreement is about unity on fiscal austerity, not fiscal union

When all is said and done, I am still amazed that the outcome of this summit is being described as a move toward fiscal union. It is not that - it is commitment to unified fiscal austerity, nothing more....

In short, I think Europe is rushing full speed to a Japanese outcome, with slow growth coupled with an appreciating currency. And it is that promise of slow growth and a strong currency will be what eventually tears the Eurozone apart. And this is truly sad given that deficits are not really the problem to begin with.

Why will the Eurozone fail? Because we still see nothing that addresses the internal imbalances between the core (largely Germany), and the periphery. That is the result of failing to commit to a real fiscal union. Such a union would include automatic internal fiscal transfers that are essential to maintaining regional economic stability. For example, economic distress in a US state results in an automatic relative transfer of resources via decreased tax revenue from and increased transfer payments to that state. Lacking such a mechanism, a slow growth, hard money regime will increasingly ratchet up the levels of economic distress in the periphery. And eventually the costs of staying in the Euro will exceed the costs of exit....

Bottom Line: I remain a Europessimist. The ECB is moving aggressively to preventing an imminent financial collapse. That should be seen as good news. But there remain unresolved deeper issues. At the core of those issues is the inability to see Europe as one large, fiscal unified economy rather than a combination of separate, fiscally austere economies. And in that remains the long-term vulnerability of the Euro experiment.

Read the whole post at Tim Duy's Fed Watch

A Mixed Bag From Europe

by Tim Duy

Joined at the hip

Bottom Line:  Don't take US resilience for granted this time around - Europe is getting ugly, and it is far too late to prevent severe recession.  The best policymakers can hope for at this point is too avoid a depression.

Read the whole post (short) at Tim Duy's Fed Watch
Can the US Decouple From the Eurozone?

If the US and EZ go down, can the rest of the world be far behind?

Tim Duy on a double-dip

A major credit event in Europe looks inevitable. Would a European meltdown endanger the US recovery? We are looking at two channels, trade and financial. I tend to discount the trade channel. As a general rule, I think the propagation of such shocks is too weak to alter the fundamental cyclical forces underlying the US economy. The potential for financial shocks, however, keeps me up at night - this is the key to the US recession story. There is a nontrivial chance that credit event in Europe triggers a credit event in the US.

Read the whole post, On That Double-Dip at Tim Duy's Fed Watch

This has been my thinking for some time. Real economy is recovering — very slowly, but the financial system is still badly impaired. Any significant shock can tip things over the cliff, and the deteriorating situation in Euroland looks like another Credit Anstalt moment just waiting to happen. My money is on another shock, followed by the second leg down in Great Depression II. The crisis in Euroland could provoke it, but there are a number of other things hanging by a thread ready to break, too.

Tim Duy: "No way to put lipstick on this pig"

Tim Duy at Fed Watch is perplexed:

The employment report polishes off what was already a depressing week. The turn of events in the budget negotiations was deeply distressing. It just seemed like it should be impossible to imagine that budget cutting is the order of the day when unemployment is over 9%, 10-year Treasuries hover near 3%, and a Democrat is in the White House. Yet possible it is.

The extent to which our leadership seems determined to follow in the path of the Japanese is absolutely stunning. My impression of the last two decades is that Japanese policymakers were never able to keep their eyes on the weak economy, instead always eager to turn their attention back to "normalizing" policy – raising interest rates, raising taxes, cutting spending. Our leadership suffers from the same obsession.

The employment report should be a wake up call. A slap in the face. A bucket of cold water poured over your head. But it won’t. I suspect it will be seen as further evidence that stimulus is pointless, that austerity is the only solution.

By trying to avoid becoming the next Greece, the US is becoming the next Japan.

"Because we think we may be the next Greece, we are turning ourselves into the next Japan."

Tim Duy at Fed Watch:

Bottom Line: Both monetary and fiscal policy suffer from the same impediment – the numbers needed to be effective, in both the size of the Fed’ balance sheet and the magnitude of the federal deficit, are so big that policymakers view them as potentially destabilizing, while the magnitude to which they might be willing to commit would leave them open to criticism that their policies are failures. The obvious fallback position is to embrace the devil you know, which in this case is an economy simply limping along.

Fed on the Sidelines

Warren Mosler:

Because we think we may be the next Greece, we are turning ourselves into the next Japan.

CNBC Mention

Tim Duy — Unemployment or Currency Crisis

Tim Duy of Fed Watch is a very savvy guy. He has a must-read post on the current thinking at the top, which is how to navigate between high unemployment and, no, not inflation, as many think, but currency depreciation leading to a currency crisis. Current thinking seems to be that unemployment has to be suffered in order to avoid a possible currency crisis.

More on Geithner, Deficit Reduction, and Expenditure Switching

Tim Duy is getting pessimistic

"It is beginning to look like the economy is circling the drain."

Read Tim's full analysis of monetary policy at Fed Watch: Circling the Drain

Tim Duy: Fed Unlikely to Tighten

Tim Duy of Fed Watch doesn't think that Bernanke's Fed will be tightening anytime soon, in spite of what some members of the FOMC may be signaling:

The Good, The Bad, and the Fed

"Likewise, the employment to population ratio shows no indication of rebounding to prerecession levels anytime soon. At this rate of recovery, I am generally worried that the next decade will prove to be once again “jobless,” that nonfarm payrolls will once again remain stagnant by the time we are near the trough of the next recession. Maybe this is what inevitably becomes of aging economies.

"The palpable weakness of the labor market reveals itself in stagnant wage growth. Average hourly earnings gained just a penny in February, and nothing in March. Workers might be feeling the effect of headline inflation, but apparently have absolutely no power to respond with anything but belt tightening. The lack of wage growth is simply the biggest hole in the inflation story, as it suggests that underlying inflation inertia is practically nonexistent. That this is not obvious to all monetary policymakers is somewhat shocking.

******

"Finally, we need to consider the likely position of Federal Reserve Chairman Ben Bernanke. It is difficult to believe that an academic so knowledgeable about the history of the Great Depression would be eager to repeat the mistakes of 1937. Nor would he be likely to confuse a change in relative prices with an outbreak of accelerating inflation. Nor would he fail to recognize the importance of wages in setting in motion accelerating inflation. Nor would he ignore the depth of the labor market hole. And, I would hope, that he is already beginning to see the possibility of another jobless decade unless we can quickly and definitively surpass the previous employment peak (never too early to think about the outcome of the next recession, even while riding the current wave upward). All of which suggests he will not be leading the charge toward tightening anytime soon.