1) Jim Hamilton: Yes the future deficits are worrisome: [A]t the moment we're observing an amazing willingness of investors and foreign central banks to lend to the U.S. Treasury... 2-year notes paying the lowest yield on record.... So if the government were to borrow another dollar today, invest in anything with a positive rate of return, and repay the sum in two years, it would indeed be a great deal.
Those remarkably low yields at the moment in my mind are a result of a flight to safety... people are afraid to hold anything other than treasuries... not so much a market vote in favor of the U.S. Treasury as it is a market vote against everything else. But the question before us is, what will the situation be another two years down the road.... Krugman's position is that we should trust the term structure of interest rates to give us the answer. If markets anticipate an explosion of short-term interest rates a few years down the road, why is anyone today buying the longer term debt at such low yields?...
The rational expectations approach isn’t just an economic theory: it is an austere theory of human behavior. It assumes that consumers and businessmen are ultra-rational, and that they are endowed with complete knowledge of how the world operates. In one famous adaptation of this idea, Robert Barro, who is now at Harvard, argued that increases in government spending had little or no impact on GDP: they merely prompted people to save more because they know that, ultimately, the increases in spending would have to be financed by higher taxes. Samuelson expressed skepticism about this idea, noting that during the Reagan era there had been enormous budget deficits but no concomitant rise in private saving.
“I’m about as rational a person as you could get, but did I set up a sinking fund to pay off my taxes? No. Was I lazy and irrational? No...At bottom, I’m in the Herbert Simon camp of limited rationality. People are rational, but you are always doing things in a hurry and with limited information. The last thing you can do is a big optimization problem down to five decimal places.”
The current conventional wisdom – broadly echoed by the news media and the blogosphere – is that comprehensive, economy-wide CO2 cap-and-trade legislation is dead in the current U.S. Congress, and perhaps for the next several years. Watch out for conventional wisdoms! They inevitably appear to be the collective judgment of numerous well-informed observers and sources, but frequently they are little more than the massive repetition of a few sample points of opinion across the echo-chamber of the professional news media and the blogosphere. Keep in mind that the conventional wisdom as recently as June of 2009 had it that – with the Waxman-Markey bill having been passed triumphantly by the House of Representatives – Senate action would follow; the only question raised by many commentators was whether the final legislation could be sent to the President for his signature by the time of the Copenhagen climate talks in December. My, how the conventional wisdom has changed! But over the past nine months, the politics have not fundamentally changed. In June of 2009, passage of meaningful climate legislation in the Senate was already unlikely, because of the terrible economic recession in which the country found itself, and – of even greater political salience – lingering high rates of unemployment. And with the lack of Republican support for the stimulus bill, the relatively small (partisan) margin by which the House passed Waxman-Markey, the then-upcoming challenges of health care and financial regulatory reform dominating the legislative calendar, and concerns voiced about climate legislation by moderate Senate Democrats, success in the Senate was always a long-shot.
Warren Mosler has an interesting and provocative remedy for Europe’s current fiscal woes: the European Central Bank should simply print 1 trillion euros, and hand it out, on a pro-rated basis, to all the Eurozone states. This is a per-capita payment: it would be based on population, not on GDP, with the highest-population countries getting the most money. Mosler reckons that spending would be unaffected, because the Eurozone countries are already up against their Maastricht limits, and that therefore inflation wouldn’t be affected either. More importantly, he says, the Eurozone debt ratios would come down, by say 5 percent of GDP across the board.
The interesting thing is that given recent weakness in the euro, something along these lines — if not quite as explicit — seems to be already priced in, to some degree. I don’t think anybody in Europe is particularly worried about inflation right now; if anything, deflation is more of a problem, especially in the PIIGS. The big question, of course, is whether and how anybody at the ECB would ever let something like this happen, given its much-vaunted independence. Deflation worries might have to pick up quite a lot before it happens, and even then it’ll be a very tough sell among the European central-banking crowd.
Kicked the can down the road is what was done, by the powers that be in Autuman in New York 08. Yves [Smith]: “The banks made legal representations and warranties regarding the loans they sold. If the loans fell short of the contractually agreed upon standards, the seller has to make good in some form . . . .” I’ve been waiting for this shoe to drop for some time. And it is telling that it is the outer ring parties to all this who are turning to the courts; the GSEs, the re-insurers, and the like. It has been clear that the strategy of the inner ring crumbs of the oligarchy from Autumn 07 on has been for the Guvmint to buy the toxic bonds or other obligations from them at near face, or in Plan A’ to guarantee their present holders against all losses below small first-hit threshhold. “Y’know, like the RTC; cause we’re systemically necessary.” [Except the RTC took the assets of closed concerns but let's not let the facts confuse the narrative.] So the inner ring crumbs to the subcrime spree have been holding out for the government to step up and take the loss for them, that is the other 99% of the citizenry. If necessary, they are prepared to hold out for years, telling that Beltway coterie to kick the can another ten yards at a time, while paying out to swap weasals and stoats victorious at the elections until some quisling crew can be got into office who will mash a thumbprint on this design, natch.
Why did the Guvmint kick the can? Panic? The more apt question is, Why is the Guvmint still kicking the can? My view, stated previously in these illustrious pixels, is that Bernanke, Summers, Geither, Emanuel, Rubin, et. al. are delusional. They don’t think we had a crash but a panic. They are convinced that ‘values’ aren’t reflected in current ‘prices,’ and that the latter will bounce back as soon as ’stability’ returns. And at that point, the Guvmint won’t have to take the toxic waste from the oligarchs because the plutonium will be magically morphed back into gold. Nobody has told these well-placed, egocentric mooks that the ASBs were ALWAYS plutonioum, just with a little gold paint splotched on them by JPM and GS and Merrill or just with straw pasted on by Countrifried and Indyfai and WhoKnu. These sub-geniuses in halls of power didn’t bother to read the instuctions on the Japanese model kit for Bolstering Bailous they’ve assembled upon our amber waves of grain. Those instructions read, “Squeeze hard so that the pieces hold together until the Old Reality Glue sets, time to cure on the order of ten myriads.” I.e. shortly after Hell freezes over first: twenty years and counting and the Japnese Model hasn’t produced any recovery for their real economy...
Barack Obama... wants enough government spending to offset the timid spending of consumers and businesses. Otherwise, the jobs and wage recession could drag on for years. On the other hand, he doesn't want to set off more alarm bells about the budget deficit.... So what does he do? A little bit more stimulus spending, but stimulus spending... coming out of savings from money already authorized to be spent on the bank bailout....
No president in modern times walks a tightrope as exquisitely as this one. His balance is a thing of beauty. But when it comes to this economy right now -- an economy fundamentally out of balance -- we need a federal government that moves boldly and swiftly to counter-balance the huge recessionary forces still at large.
States and cities, for example, are estimated to be $350 billion hole this year and next. They can't run deficits so they're wildly cutting spending, cutting jobs, cutting contracts, and raising taxes and fees. That's a huge anti-stimulus package roughly as big as the remaining direct spending in the old federal stimulus package. Which means, Obama's "new" stimulus... is not nearly enough...
7) VIDEO OF THE DAY: Cohen and DeLong (2010), The End of Influence: When Other Countries Have the Money, at the Center for American Progress:
8) GRAPH OF THE DAY: Greece, Ireland, and Portugal are not a threat to the euro. (Italy and Spain, however...):
9) BEST NON-ECONOMICS THING I HAVE READ TODAY: Matthew Yglesias: Tears in Rain:
Google’s already brought us the Nexus One, and apparently DARPA is working on the Nexus 6: "The Pentagon’s mad science arm may have come up with its most radical project yet. Darpa is looking to re-write the laws of evolution to the military’s advantage, creating 'synthetic organisms' that can live forever — or can be killed with the flick of a molecular switch."... Joking aside, it would be nice to live in a world where a larger share of cutting-edge US government biological research was being undertaken for medical purposes—to help people, in other words—rather than to find new and better ways to kill people.
At any rate, here’s a bioweapon who’s sad that his makers have turned off his molecular switch:
10) HOISTED FROM THE ARCHIVES: Brad DeLong's Thought of the Day (from November 7, 2009: never posted):
There was a sense of urgency a year ago: a belief on the part of all of the policymkers entering the Obama administration that there was great uncertainty and so that they should try a great many things--quantitative easing, inflation targeting, banking-sector recapitalization, RFCs, federal assumption of tail risk, fiscal expansion. The fear was that any one of these might not work or might not work well, and that we would then be left with double-digit unemployment for years.
Now we are looking at a 50-50 chance of double-digit unemployment for years.