Ms Market Offers the U.S. Government Free Money for Ten Years...
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Double Dip Watch: Macro Forecasting Department

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Ryan Avent:

America's economy: Is that all there is?: "Two factors appear to be driving the mad dash to safety: deteriorating conditions for peripheral euro-zone debt and euro-zone banks, and concerns about the durability of advanced-economy recoveries. In America, the latter factor is probably the dominant one. Bad results on consumer spending and industrial production have come on top of last week's miserable GDP report. There is a growing realisation that the Federal government will represent a small drag on output in 2011, a bigger drag in 2012, and potentially a very big drag in 2013. Hopes for a meaningful fiscal stimulus have been all but dashed.

The American economy isn't entirely without hope, however. The odds of a double-dip recession are higher now than they were last week, but there are still some underlying trends that could be supportive of a stronger second half. It looks as though the outlook for car sales might well be brighter in August. And housing markets have been firming for months, setting the stage for a rebound in prices and residential investment. Initial jobless claims have also been hinting that labour markets might be strengthening slightly from the second quarter…


The labor market might be slightly stronger than the second quarter, but the UI claims still say that it is worse than the first quarter, which was not great. The stage may be set for a rebound in residential construction, but the actors are still missing. And car sales are a crapshoot. I don't see where Ryan's (relative) optimism comes from.

But then he turns gloomdoggler:

My concern is that these potential positives may get swamped by a short-term loss of confidence, associated with debt-limit drama, euro crisis, and a major swoon in markets. That may well be enough to get households and businesses to squeeze their wallets a little tighter…. The Fed could prevent this from happening, I think, by giving markets and the economy something to feel good about at its August meeting…. The Fed is unlikely to do that, however…. [T]here's a real possibility that the Fed will stand idly by while a bloody month in markets sandbags consumer confidence and cuts off the possibility of an August turnaround. By the time we get to the traditional Announcement of New QE at the late-August Jackson Hole summit, it may be too late to prevent a return to contraction.

If the American economy falls back into recession, there will be people out there arguing that there was nothing to be done about it, that recoveries after financial crises are always long, and shallow, and vulnerable. Those people will be wrong. This is a preventable outcome, and if advanced economy institutions fail to prevent it that's just inexcusable.

Barack Obama could still engage in his own quantitative easing: he could start up the mint and start stamping out the high-denomination platinum coins, after all. Tim Geithner could throw every remaining dollar of TARP money into taking risk onto the Treasury's balance sheet to goose those who want to hold risk to find other investments that would boost employment. Or Geithner could simply say he wants to see a weaker dollar--although it is rude to try to ignite a recovery by stealing demand from your trading partners. Bernanke should act--and probably won't. Congress won't act--and surely should. But they are not the only players in this game.