quick macro update

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Market functioning has finally returned, helped by the Fed slowly getting around to where it should have been even before all this started- lending unsecured to its banks, setting its target rate and letting quantity adjust to demand. It’s not technically lending unsecured, but instead went through a process of accepting more and varied collateral from the banks until the result was much the same as lending unsecured.

A couple of years back (has it been that long?) when CPI and inflation expectations were rising, the Fed said it was going to restore market function first, and then work on inflation. It’s taken them this long to restore market functioning (eventually implementing in some form the proposals I put forth back then regarding market functioning) and with the inflation threat subdued by the wide output gap it looks like they are on hold for a while, though they would probably like to move to a ‘more normal’ stance when it feels safe to do so. That would mean a smaller portfolio (not that it actually matters) and a modest ‘real rate of interest’ as a fed funds target is also based on their notion of how things work.

It is more obvious now that the automatic fiscal stabilizers did turn the tide around year end, as the great Mike Masters inventory liquidation came to an end, and the Obamaboom began. The ‘stimulus package’ wasn’t much, and wasn’t optimal for public purpose, but it wasn’t ‘nothing,’ and has been helping aggregate demand some as well, and will continue to do so. It has restored non govt incomes and savings of financial assets to at least ‘muddle through’ levels of modest GDP growth, and we are now also in the early stages of a housing recovery, but not enough to keep productivity gains from continuing to keep unemployment and excess capacity at elevated levels.

This also happens to be a good equity environment- enough demand for some top line growth, bottom line growth helped by downward pressures on compensation, and interest rates helping valuations as well. There will probably be ups and downs from here, but not the downs of last year.

There also doesn’t seem to be much public outrage over the unemployment rate, with GDP heading into positive territory. Expectations of what government can do are apparently low enough such that jobs being lost at a slower rate has been sufficient to increase public support of government policies.

The largest macro risk remains a government that doesn’t understand the monetary system and is therefore unlikely to make the appropriate fiscal adjustments should aggregate demand suddenly head south for any reason.

And here’s a new one, just when I thought I’d heard it all:

‘Black Swan’ Author Taleb Wants His Vote for Barack Obama Back

By Joe Schneider

Sept. 16 (Bloomberg)— U.S. PresidentBarack Obama has failed to appoint advisers and regulators who understand the complexity of financial systems,Nassim Taleb, author of “The Black Swan,” told a group of business people in Toronto.

“I want my vote back,” Taleb, who said he voted for Obama, told the group.

The U.S. has three times the debt, relative to the country’s economic output, or gross domestic product, as it had in the 1980s, Taleb said. He blamed rising overconfidence around the world. U.S. Federal Reserve Chairman Ben Bernanke, who was appointed to a second term last month by Obama, contributed to that misperception, Taleb said.

“Bernanke thought the system was getting stable,” Taleb said, when it was on the verge of collapse last year.

Debt is a direct measure of overconfidence, he said. The national debt, according to the U.S. Debt Clock Web site, is at $11.8 trillion.

The nation must reduce its debt level and avoid “the moral sin” of converting private debt to public debt, he said.

“This is what I’m worried about,” Taleb said. “But no one has the guts to say let’s bite the bullet.”

As the founder of New York-based Empirica LLC, a hedge-fund firm he ran for six years before closing it in 2004, Taleb built a strategy based on options trading to protect investors from market declines while profiting from rallies. He now advises Universa Investments LP, a $6 billion fund that bets on extreme market moves.


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6 Responses to quick macro update

  1. warren mosler says:

    yes, looks like it. sovereign risk is being priced differently in different currencies for some reason. could be a tax reason, or a difference in investor preferences for some other reason such as pension fund rules, etc.


  2. knapp says:

    “Germany and Austria led governments and companies in Europe selling $21.7 billion of bonds in the U.S. currency this week to take advantage of the reduced cost of exchanging the proceeds back into euros.”

    Is the dollar bond issuance by Germany and Austria as innocuous as this headline suggests?


  3. warren mosler says:

    debt will be reduced as a function of the increased deficit spending, no matter how high or low actual spending is, to the penny, by identity, in fact.

    so spending might be down in spite of increased savings, not because of it. and it’s down because the savings desires still exceed actual savings even at the higher levels of deficits/savings.

    when spending picks up you’ll know savings desires have been met, at least for the moment.


  4. Jim Baird says:

    Knapp –

    Exactly. The point is, when consumers are as overleveraged as they are currently, any fiscal adjustment is going to be used mostly for savings and debt paydown – and that’s a feature, not a bug. The natural conclusion is just to increase the adjustment until savings desires are met and spending picks up. But since virtually everybody, including so-called “Keynesians” thinks that fiscal adjustments “cost” something that needs to be “paid back” instead of just being changed numbers in a spreadsheet, they get caught up in these absurd arguments about “bang for the buck” and “multipliers”…


  5. knapp says:



    I’d love to get your comments on today WSJ editorial “The Stimulus Didn’t Work”.

    My own two cents is that critics of the stimulus ignore or downplay the deflation-mitigation effects of increasing private sector savings and instead obsess over the multiplier.


  6. Jim Baird says:

    “U.S. President Barack Obama has failed to appoint advisers and regulators who understand the complexity of financial systems”

    Actually, the problem is that he has failed to appoint advisors who understand the simplicity of financial systems. They think they are more complex than they are…


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