links for 2008-03-06

• The Times' Joe McCarthy - LA Times
• Fed's Beige Book: "Generally downbeat" - Calculated Risk
• Are Real Interest Rates Negative? - PGL
• Service Sector Rebounds, But Still Contracting - WSJ Economics Blog
• "Brain Reading" Device Predicts What People See - National Geographic
• O tempora, o mores - Willem Buiter
• Go with your gut -- intuition is more than just a hunch - EurekAlert
• R&D: Missing the wrong targets? - Vox EU
• China's amazing January reserve growth - Brad Setser
• What the Unemployment Rate Misses - Andrew Samwick
• Unemployment and the Unemployment Rate - Twenty-Cent Paradigms
• The Last War, or the One Before? - Twenty-Cent Paradigms
• The Age of DeLongian Confusion - Economic Investigations
• Norway's moon shot - Andrew Leonard
• A wish list for economic statistics? - Economics Unbound
• In Europe, Central Banking Is Different - New York Times
• Fed Says Real Estate and Retailing Are Soft - New York Times
• Financial Mess Doesn't Worry All Central Banks - John M. Berry
• No Shirt, No Shoes, No Service - Crooked Timber

Comments

[hari]

Brad Setzer is raising a difficult question about China's surpluses, along with Saudi Arabia, and its impact on Feds rate making decisions. Either China has corned the bond market or Fed has no leverage left because it must deficit finance the cost of gov operations.

It seems Fed decisions are more or less behind the curve and getting worse - could it be that political influence of WH is now in drivers seat? Dollar depriciation is the law of the land...now and forward...

[anne]

Joseph Stiglitz has described the problem simply. We have an Administration that chose a dramatic increase in military spending including spending for war and occupation and at the same time repeately cut taxes especially for the wealthiest through a period of increasing income and wealth inequality. So, military spending has increased, taxes have been cut, social spending has grown more slowly than the economy but there are not enough cut possible in social spending to possibly make up for the military spending increases. The result is a structural budget deficit that is financed by borrowing.

We increase military spending and cut taxes and borrow, and the Federal Reserve has allowed for the borrowing having no other choice.

[esb]

hari:

OPEC President Khelil, in a press event oultining the oil producers' unwillingness to accomodate US requests for additional output, flat out accused Benjamin Bernanke for "mismanagement of the US economy."

One can only imagine what is said when the cameras are off.

The USA can no longer expect producers of necessities to continue to sell them for a fixed level of depreciating paper.

The monetary con has been busted, and the incumbent architect thereof (Senorito Bernanke) is now being trashed in public, as he should be.

Is my absolute and utter contempt for the man showing?

I certainly hope so.

Prepare yourselves for a "gap trade" in the dollar when one of the CBs to which Setser refers (over at regmonitor)
decides to exit the game.

It is not a matter of if but when.

[anne]

http://www.epi.org/printer.cfm?id=2917&content_type=1&nice_name=webfeatures_snapshots_20080305

March 5, 2008

Teacher Pay Disadvantage Soars
By Lawrence Mishel

In 2006, public school teachers earned 15.1% lower weekly earnings than other employees with comparable education credentials and experience earned. In 1996, this wage disadvantage was only 4.3%. Although the wage disadvantage for both male and female teachers has grown substantially over the last 10 years, in 2006 the gap was far larger among males (25.5%) than females (10.5%).

What happened? The earnings gains that benefited college-educated (and other) workers during the late 1990s appear to have bypassed teachers. Moreover, in recent years, real wages have stagnated for the average college graduate, and teachers appeared to have fared even worse.

This erosion of teacher pay relative to those of other opportunities affects the trends in teacher quality that are so critical to improving education outcomes. If the goal is to improve the quality of the typical teacher, then raising teacher compensation is a critical component in any strategy to recruit and retain a higher-quality teacher workforce.

[anne]

The difference between the gaps in pay for men and women in teaching is an indication that wages for women in general still lag men significantly, but there is increasingly little reason for men to teach as relative wages lag those in other occupation. Complaints about teachers' unions, which are heard everywhere, are disgracefully wrong as the field is shown increasingly little regard even as the field is remarkably feminine.

[hari]

@ esb -

No matter what we ( as professionals) think of Feds action and/or reaction, fact remains CBs can't afford meltdown of dollar denominated fixed assests. They're now, as buyers of last resort, only actors left in the fixed market.

Brad believes China can withstand it, I don't think he understands what's about to be decided this week by the NPC in Beijing - inflation is considered by them as a priority to contain...and bring down to 4.5% ( it's over 7.5% now or so).

BTW - China is moving in direction of creating mega-ministries in order to control policy framework and its implementation. Younger technocrats are being promoted to facilitate better understanding of hi fi markets and currency manipulations by CBs (China included, of course!).

says...

anne has said in the past, in response to some of my comments, that the U.S. has never, will never, can never, default on Treasury Bonds. I believe one of the quotes was that the idea was "unthinkable". (This in arguments about the stability and fiscal security of the Social Security Trust Fund.) And while, technically this is true, since they are denominated in the currency that the Treasury prints, and the Treasury can just print it's way out of debt, it still begs the question: What happens if the Treasury goes to sell bonds to refinance the existing debt, or to issue new debt, and no one buys?

If China, Saudi Arabia, or both move to curb their own inflation, which is raging out of control in both countries, there simply isn't enough demand in the rest of the world for the U.S. debt that must be serviced. The only reaction possible to the Treasury will be to print more dollars to pay off T-bills as they mature. Econ 101, "Inflation is a purely monetary phenomenon." If anyone thinks that we've seen recent spikes in Core and Headline inflation, just wait.

[The Baron]

Stupid Typekey timed me out. That was me.

[hari]

You raise the fundamental issue - who will come to aid of a depreciated dollar? Stagflation?

China/NPC is also discussing appreciating the Yuan in order to contain imported inflation also. It'll be interesting to see at what rate.

[esb]

What the "mandarins" of the PRC are actually agonizing over is whether to use this unique opportunity of supreme weakness in the US financial system to assert their ultimate geostrategic interest of denying the US Pacific Fleet "hegemony" in the Taiwan Strait or even in the Southern Western Pacific at large, enabling the absorption of Taiwan sans interference.

Their one and only effective move is to deliver the financial knockout punch of an exit from US paper support this year (Q3?) and eat the financial consequences.

What emerges from the "ruins" surrounding a busted US financial system will be a relatively far stronger China in the Western Pacific, perhaps sufficiently strong to implement an "anschluss" with respect to Taiwan.

Failure to understand the differences in political thinking between the Judeo-Christian Anglo-Saxon modality (in which next quarters's economic well being trumps all) and that of another entirely different culture can be and often is fatal,

as we should have learned recently in Iraq.

I am certain that many of us to this day do not understand why Iraqis are shooting at us rather than doing "the western thing" of borrowing, consuming and producing.

I submit that if the PRC elects to fire the economic weapon, this time we will indeed learn the lesson.

[anne]

Repudiating American Treasuries is almost certainly unconstitutional because of the 14th Amendment; almost certainly because there would be a Supreme Court test should there be an attempt which would in the course of the test make the attempt moot in any event because of market reaction.

There could however be an increase in inflation, which woul be of little consequence for investors holding laddered, relatively constant duration, portfolios, let alone holding inflation protected securities. This is a remote issue as long term interest rates suggest.

What could be dangerous however is moderate or even low inflation that is accentuated in selected sectors such as food.

[anne]

China has long been adept at countering sectoral inflation, and I would expect the same though again food prices are a special issue in China as elsewhere. Agricultural productivity is high and production variable enough in China that I would expect the problem to be handled in subsidizing energy costs for agricultural production and distribution.

Here worries could be costs for food, energy, education, health care, possibly rents; but the more important worry is wealth reduction and limited income growth. Whether there will be a recession, or already is, I do not know, but returning to ample growth will I think be slow in coming.

[anne]

I know the idea seems impossible currently, but rather than finding reasons to worry about China I would really like to find reasons to appreciate the Chinese which were we reasonable would not be difficult. We are not however currently reasonable.

[esb]

I appreciate the Chinese (and most particularly the descendants of the high plains ethnic groups [the 'daughters and sons of the plateau'] who have not received the respect to which they are justly entitled) as well as traditional (and to a lesser extent) contemporary Chinese culture.

Hell, my home is literally buried under ethnographic Chinese art and my "significant other" speaks Mandarin (fluently but not flawlessly) in addition to Ilocano and Tagalog.

And in fact, it is my belief that the PRC will easily outmaneuver the USA both financially and strategically in the period just ahead (2010-2030) in a manner that Japan did not two decades ago.

My real point in all of this is simply that by attempting to run another insane dissaving cycle (which I believe cannot be engineered in any event) our FOMC plays into the hands of a actor which (properly, from its perspective) wishes to supplant the USA as the dominant power on the planet.

She who ends up with the factories wins,

something that we should have learned in 1946, but apparently did not.

We do not seem to learn any of the important lessons,

but we are going to learn more than one this time.

[anne]

Agreed, and nice.

What I would like is a suggestion of Chinese literature, which I have had no exposure to beyond childrens' stories. Please do suggest any works you may have in mind, or I will ask about in coming days. As for Chinese art, "wow."

[anne]

Personal wealth is declining, income at best growing minimally, corporate saving is fine, there is a structural government deficit that will not soon be changed. We will continue to borrow internationally. There is no near term resolution.

[anne]

Ilocano is a new language for me, interesting.

[anne]

"I appreciate the Chinese (and most particularly the descendants of the high plains ethnic groups [the 'daughters and sons of the plateau'] who have not received the respect to which they are justly entitled) as well as traditional (and to a lesser extent) contemporary Chinese culture."

Again, always suggest reading when possible especially on cultural history.

[Euro]

NYT..."The European bank, by contrast, is skeptical of the notion that inflation automatically falls when growth cools, and it has a mandate, inherited from the German central bank, to keep prices stable above all else."

European inflation is therefore likely to stay consistently lower than US inflation. Purchasing power parity suggests that the dollar will continue to fall versus the Euro (in a zig zag fashion) over long periods of time. One tool may not be enough to effectively meet two mandates. The long run Phillips curve is vertical, but the Fed is periodically required to concentrate on short term fluctuations. These periodic interventions cumulatively increase the inflation rate over the long term. Americans don't have as much reason as Europeans do to have confidence in the local monetary unit as a stable long term store of value.

[ddt]

ok, now this is really a national embarrassment. Brodie is going to get fired.

Both Clinton and Obama reassured Canada on trade: reports
http://afp.google.com/article/ALeqM5g9rwO9WjyXz5a-SfrETivAeTEnnw

"Last month, Harper's chief of staff, Ian Brodie, purportedly made impromptu remarks to journalists about Clinton's US presidential bid, said Canadian reports.
The offhand comments apparently sought to downplay the potential impact on Canada of Clinton and Obama's attacks on the North American Free Trade Agreement (NAFTA) during stops in the US state of Ohio.
Brodie told reporters that the Clinton campaign had called the Canadian embassy in Washington to tell officials to take her anti-NAFTA rhetoric "with a grain of salt," said local media."