Bill Gross is skeptical of QE2. What does he want us to do?

Krugman on the Catfood Commission.

Update: It’s here. And it really is that bad. The idea that co-chairs of a commission whose charge is fiscal sustainability should take it upon themselves to (a) declare that federal revenue must not exceed 21 percent of GDP -- that’s right, putting a cap on receipts and (b) call for reducing the top rate from 35 to 23 is just awesome.

This is how history will judge Obama. I can't believe he will go there. If so he will really demoralize his base. Hopefully the economy will recover by 2012 and the independents will come back as the Republicans implode. But Boehner seem smarter than Gringrich.

Leonhardt on gold buggery

This new Coen brothers film trailer gave me the chills!

Yglesias asks:

Now that the campaign’s been over for a while can we all step back and ponder how nutty it was for Meg Whitman to spend $140 million on a failed bid to become Governor of California?

Gretchen Morgenson writes about an analyst who saw the housing bubble and is now seeing the economy turning the corner by August 2011 based on his analysis of small business.

Krugman writes about how sticky prices are the prices to worry about, not volatile price.

He blogs about it here too.

Greg Ip on Sebastian Mallaby - that great fawner of hedge fund managers:

Like Mr Mallaby I regret the retreat from financial globalisation, but if it substitutes for naked protectionism, I can live with it. One thing other countries should not do is ask America to leave unused one of the few effective policy tools it has left to stimulate the domestic economy. The world needs higher unemployment and deflation in America like a hole in the head.

(via DeLong)

I was talked into seeing the new Clint Eastwood/Matt Damon movie Hereafter* even though communing with the dead isn't my cup of tea. (However I do love the Mexican holiday Day of the Dead which sounds like a zombie horror flick**) I do like Eastwood and Damon however and was willing to give it a go even if burblings from the beyond bore me.

Damon's character is psychic and can communicate with people's dead loved ones, but it is upsetting for him. To calm himself down at night he listens to audio recordings of Charles Dickens' works, which I thought was interesting. There can be something soothing to an articulate old-timey British accent for an American for some reason.

The video is a recording of the new Chicago-based band the Secret Colours whose influences are Blur, The Jesus and Mary Chain, Stone Roses, Charlatans UK and the '67 London UFO scene. I'm looking forward to seeing them in concert.

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* Saddest movie ever made is Atom Egoyan's The Sweet Hereafter. I like to give "hippie peaceniks" a hard time but this scene about hippies is great.
**Maybe because there is one. AMC's new program The Walking Dead is pretty good zombie fun.

Krugman versus PIMCO's El-Erian

Job Losses Outweigh Obama’s Successes by David Leonhardt

Michael Tomansky on Juan Williams.

Because what sort of non-conservative - one perceives Williams to be some degree of liberal; he'd probably protest that he's just a reporter; in either case, he's not a conservative - agreed to be an in-house flunky at Fox? I'm sure they offered him nice money, and money is money, and I can't say with certainty that I'd have turned it down if Rupert had waved it under my nose.

But if you're any kind of liberal at all, even in the softest and most non-political possible sense, it's basically an indefensible thing to do. Fox News wants liberalism to perish from the face of the earth. Going on their air on a regular basis and lending your name and reputation to their ideological razzle-dazzle is like agreeing to be the regular kulak guest columnist at Pravda in 1929. For "balance".

I disagree. That analogy is wrong. Plus Williams was better than Colmes. Colmes is/was horrible.

Krugman on Austerity in the UK

Indeed, there has been a noticeable change in the rhetoric of the government of Prime Minister David Cameron over the past few weeks -- a shift from hope to fear. In his speech announcing the budget plan, George Osborne, the chancellor of the Exchequer, seemed to have given up on the confidence fairy -- that is, on claims that the plan would have positive effects on employment and growth.

Instead, it was all about the apocalypse looming if Britain failed to go down this route. Never mind that British debt as a percentage of national income is actually below its historical average; never mind that British interest rates stayed low even as the nation’s budget deficit soared, reflecting the belief of investors that the country can and will get its finances under control. Britain, declared Mr. Osborne, was on the "brink of bankruptcy"

What happens now? Maybe Britain will get lucky, and something will come along to rescue the economy. But the best guess is that Britain in 2011 will look like Britain in 1931, or the United States in 1937, or Japan in 1997. That is, premature fiscal austerity will lead to a renewed economic slump. As always, those who refuse to learn from the past are doomed to repeat it.

Dean Baker's entire post on the "currency wars" is excellent, so I'll repost the entired thing.

The NYT had a piece on the recent decline in the value of the dollar and effort by other countries to offset its impact. The article noted in particular developing country efforts to reduce capital inflows that are raising the value of their currency.

It would have been worth noting that in standard economic theory, developing countries are supposed to be borrowers. The logic is that capital is relatively scarce in the developing countries, which means that it gets a higher return. Capital therefore should flow from relatively to slow growing rich countries to more rapidly growing developing countries.

This was the direction of flows until the East Asian financial crisis in 1997. The harsh conditions that the IMF imposed on the East Asian countries led developing countries throughout the world to focus on building up reserves so that they would not have to deal with the IMF. This reversal coincided with the "high dollar" policy touted by then Treasury Secretary Robert Rubin. It helped to lay the basis for the imbalances associated with the stock and housing bubbles.

To a large extent, the decline in the value of the dollar would effectively reverse the distortions to the world economy resulting from the IMF-Rubin policy of the late 90s. It is also worth noting the recent decline in the dollar is largely just reversing its run-up as a result of the financial crisis in 2008. Money flowed into the U.S. as a safe haven, pushing the dollar well above its pre-crisis levels. It is now falling back toward the level it was at before the crisis.

What would you call the reasonable reaction of China and others to the harsh conditions imposed by the IMF in the wake of the 1997 crisis? It would be the opposite of morale hazard. Once can be too indulgent and too harsh or strict.

This New York Times piece argues that England's current austerity measures are partly due to memories of the IMF bailing them out in the 1970s.

Of Turning Japanese

A scary chart from Mary Daly, vice president of the Federal Reserve Bank of San Francisco. (via Krugman, via Mark Thoma)

Brad DeLong doesn't believe the QE2 will be enough. (sorry no link) Dean Baker argues that we are already - as they used to say in Vietnam - in the shit. (sorry no link) If we cross past zero, it won't mark anything new just that we are continuing our descent of disinflation. The point when we entered a Keynesian situation is where we crossed the rubicon.

What is needed is a larger QE and more fiscal stimulus.

Democrats, the election, the stimulus and Keynes by Sewell Chan

But that seems unlikely, as long as the recovery plods along slowly. "It would be a mistake to attribute the distancing from Obama’s stimulus entirely to political caution or opportunism," said Robert S. Weisbrot, a historian at Colby College. "As much as those factors may be important, it is dismaying how little evidence there is to show for it. Maybe we need even more, but surely $800 billion should have counted for something"

Krugman blogs

During the pre-crisis period, spending grew slightly faster than GDP --that’s Medicare plus the Bush wars -- while revenue grew more slowly, presumably reflecting tax cuts.

What happened after the crisis? Spending continued to grow at roughly the same rate -- a bulge in safety net programs, offset by budget-slashing at the state and local level. GDP stalled -- which is why the ratio of spending to GDP rose. And revenue plunged, leading to big deficits.

But I’m sure that the usual suspects will find ways to keep believing that it’s all about runaway spending.

What the usually good Sewell Chan fails to report is that the much of the stimulus was ineffective tax cuts and that much of the rest was canceled out or negated by the anti-stimulus of the 50 state governments and the stalling of GDP growth. Currently the economy is growing too slow to create enough jobs and aggregate demand which is why we'll see more action from the Fed.

Obama Fed nominee Peter Diamond wins Noble Prize for Economics

It is believed that Senate Republicans will ultimately not try a filibuster to block Professor Diamond now that he has been renominated. (His nomination was said to have been initially blocked in retaliation for a refusal by Democrats to give a full 14-year term to Randall S. Kroszner, who served on the Fed board from 2006 to 2009.)

If confirmed, Professor Diamond would complete a 14-year term that expires on Feb. 1, 2014.

HTML 5 code raises concerns over privacy risks

Success Has Many Fathers

Keith Phipps, Tasha Robinson, and Scott Tobias discuss The Social Network

 Krugman blogs:

The usually well-informed Ezra Klein says something odd this morning:

In 2007 and 2008 we had a major financial crisis. That led to a wrenching recession. But what killed the recovery was the European debt crisis. It was proof that there wasn’t just one risk that the system hadn’t properly accounted for, but many risks. And in a fragile global economy, the impact of any negative event was going to be magnified.

I don’t know where Ezra got that, but it’s just not right. It’s not as if we had a solid recovery, then Greece came along. We never had the basics for self-sustaining recovery in place: aside from the stimulus and inventory bounce, demand remained weak. And financial jitters from the eurozone crisis had nothing to do with the US slowdown; growth is flagging because both the stimulus and inventory effects are fading.

I think it's an open question. Bernanke said the same thing in his June testimony. My guess is that it's all of the above: the stimulus and inventory effects are fading and the European sovereign debt crisis happened. I'm not sure but I would guess that it pushed up the dollar and made businesses and consumers more cautious. No doubt it helped the austerians rhetorically. They could now point to Greece as example of what could happen to a country that wracks up too much debt.

Update: Ezra Klein repsonds

But a lot of the economists, business types and policymakers I've talked to have pinned the European debt crisis as a moment when whatever confidence various players had in the recovery collapsed. It was a whole new world moment: We hadn't just gone through one horrible, unlikely event and now we were recovering, and people should plan for a slow return to normal. The debt crisis was emphasized that there are a lot of risks out there and the world economy is vulnerable to them. The danger for businesses looking to invest wasn't just that demand could come back slowly but that everything could totally fall apart.

My guess is Krugman would dismiss that as rationalization. If government had responded to the crisis correctly and the economy was gaining more jobs and people were buying more things, businesses would be investing to meet the demand. And I agree with that. But in the absence of the correct government response, there's certainly a range of possible ways the private sector could've reacted, and I think it's plausible that their extreme caution is partly a response to seeing the world economy as vulnerable to all sorts of unpredictable shocks, which is leading them to wait for much more solid evidence of recovery than might otherwise be the case.

On the other hand, Krugman has a Nobel, and I, well, don't.

Along with the deleveraging in the economy and not enough aggregate demand, I would guess another problem is "over"-demand for safe assets because people are nervous, in part because of the lack of aggregate demand. The European sovereign debt crisis would have added to this nervousness, unlike, say, Obama's tax and regulatory policies.  But as Klein says, I don't have a Noble either.

From Dsquared:

Day of the Triffins

I am mildly surprised that Paul Krugman hasn't used this as a title for a blog post about the US$/yuan exchange rate yet. I donate it as open source to the community.

That is all.

Via Wikiepdia:

Triffin dilemma
The Day of the Triffids

(via DeLong)