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December 16, 2011

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Paul Krugman: G.O.P. Monetary Madness

Posted: 16 Dec 2011 12:34 AM PST

Ron Paul's hard-money doctrine has taken over the GOP:

G.O.P. Monetary Madness, by Paul Krugman, Commentary, NY Times: Apparently the desperate search of Republicans for someone they can nominate not named Willard M. Romney continues. New polls suggest that in Iowa, at least, we have already passed peak Gingrich. Next up: Representative Ron Paul. ...
Mr. Paul identifies himself as a believer in "Austrian" economics... Austrians see "fiat money," money that is just printed without being backed by gold, as the root of all economic evil, which means that they fiercely oppose the kind of monetary expansion Friedman claimed could have prevented the Great Depression — and which was actually carried out by Ben Bernanke this time around. ...
After Lehman Brothers fell, the Fed began lending large sums to banks as well as buying a wide range of other assets, in a (successful) attempt to stabilize financial markets... In the fall of 2010, the Fed began another round of purchases, in a less successful attempt to boost economic growth. The combined effect of these actions was that the monetary base more than tripled in size.
Austrians, and for that matter many right-leaning economists, were sure about what would happen as a result: There would be devastating inflation. One popular Austrian commentator who has advised Mr. Paul, Peter Schiff, even warned (on Glenn Beck's TV show) of the possibility of Zimbabwe-style hyperinflation in the near future.
So here we are, three years later. How's it going? Inflation has ... risen ... an average annual ... rate of only 1.5 percent. Who could have predicted that printing so much money would cause so little inflation? Well, I could. And did. And so did others who understood the Keynesian economics Mr. Paul reviles. But Mr. Paul's supporters continue to claim, somehow, that he has been right about everything.
Still, while the original proponents of the doctrine won't ever admit that they were wrong ... you might think that having been so completely off-base about something so central to their belief system would have caused the Austrians to lose popularity, even within the G.O.P. ...
What has happened instead, however, is that hard-money doctrine and paranoia about inflation have taken over the party, even as the predicted inflation keeps failing to materialize. ...
Now, it's still very unlikely that Ron Paul will become president. But ... his economic doctrine has, in effect, become the official G.O.P. line, despite having been proved utterly wrong by events. And what will happen if that doctrine actually ends up being put into action? Great Depression, here we come.

Links for 2011-12-16

Posted: 16 Dec 2011 12:06 AM PST

Fed Watch: ECB Still Not the White Knight

Posted: 15 Dec 2011 04:59 PM PST

Tim Duy:

ECB Still Not the White Knight, by Tim Duy: The Wall Street Journal has the story on today's speech by ECB President Mario Draghi:

The ECB's purchases of government bonds are "neither eternal, nor infinite," Mr. Draghi said in a speech in Berlin, stressing it would take "a lot" more than monetary-policy measures to restore market confidence in the euro zone.

Asked whether the ECB should copy the U.K. and U.S. in printing money to buy government bonds, a policy known as quantitative easing, Mr. Draghi said: "I don't see any evidence that quantitative easing leads to stellar economic performance" in those economies. EU treaties forbid monetary financing of government debt, he added.

This suggests Draghi believes quantitative easing should only be used if it delivers "stellar" economic performance. This is depressing, not to mention severely misguided. The appropriate metric should not be achieving a "stellar" economy, but what would have occurred in the absence of QE. Hopefully, he will recognize this distinction should (when) the situation deteriorate further.

The combination of fiscal consolidation and ECB intransigence promises to keep the European crisis in the headlines for a long, long time.

"Fragile and Unbalanced"

Posted: 15 Dec 2011 01:27 PM PST

Nouriel Roubini:

Fragile and Unbalanced in 2012, by Nouriel Roubini, Commentary, Project Syndicate: The outlook for the global economy in 2012 is clear, but it isn't pretty: recession in Europe, anemic growth at best in the United States, and a sharp slowdown in China and in most emerging-market economies. Asian economies are exposed to China. Latin America is exposed to lower commodity prices (as both China and the advanced economies slow). Central and Eastern Europe are exposed to the eurozone. And turmoil in the Middle East is causing serious economic risks – both there and elsewhere – as geopolitical risk remains high and thus high oil prices will constrain global growth. ...
Restoring robust growth is difficult enough without the ever-present specter of deleveraging and a severe shortage of policy ammunition. But that is the challenge that a fragile and unbalanced global economy faces in 2012. To paraphrase Bette Davis in All About Eve, "Fasten your seatbelts, it's going to be a bumpy year!"

Just bumps, or crashes too? That depends critically on whether the Europeans resolve the crisis they face, and how they go about it if they do.

New Claims for Unemployment Insurance Fall

Posted: 15 Dec 2011 09:11 AM PST

With today's decent number for unemployment claims -- claims fell to 366,000 and are finally below the breakeven point for job creation -- it's worth thinking about how long it might take for employment to recover. Calculated Risk calculates how long it will take to reach 8% by November 2012 under various scenarios:

I think the participation rate will be in the 64.0% to 64.5% range next November. That would mean the economy would need to add somewhere between 167,000 and 260,000 jobs per month. The bottom end of that range seems possible with sluggish growth, but the top end is less likely.
This is very sensitive to the participation rate. If the economy adds 167,000 jobs per month next year, and the participation rate increases to 64.5%, the unemployment rate would be at 8.7%. So 8% is possible, but it seems unlikely unless growth picks up.

And even at the optimistic rate of job creation, we'd only be at 8% a year from now.

Note also that the claims number is clouded by uncertainty over seasonal adjustment procedures, so it's not certain that we are getting an accurate read on progress on employment. But even if it is accurate, even if we are finally headed back up the hill, as these graphs show there's still a long, long climb ahead of us:

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