Featured Find: Stabilizing into a Crisis

Joe reads Ezra Klein regularly. I read him sometimes. I find him unusually penetrating and accurate but rather boring and irrelevant most of the time (just my opinion); so while I don't hate reading him, I simply consider reading other writers to be better investments of my time. This time is different. This Ezra Klein piece is passionate, it resonates, and I think, it's accurate - it's perhaps one of the best descriptions of our (economic) time I've come across:

But the Dow Jones industrial average isn’t diving because spending has risen, deficits have grown or stimulus policy has changed. It’s diving because of forces Washington can’t control, and in many cases, doesn’t understand very well. How many members of Congress do you think could give a coherent account of what has happened to oil or steel prices over the past three years? Or what’s happening in the euro zone? Or to the yuan?

A dramatic gap has opened between the economy as Washington sees it — and wants to intervene in it — and the economy that exists. Whatever weak recovery we might have hoped for is being hindered by global commodity prices, consumer deleveraging, fears of flagging demand in emerging markets, earthquakes in Asia and much more. Globally, it’s been an almost uninterrupted run of crises and bad luck. Meanwhile, Washington just spent two months arguing over whether it would pay its bills or spark an unnecessary financial crisis. 

The whole article can be read in three minutes. I highly recommend it.

Why Youth Leads the Recovery

source: Justice DepartmentThis week's Featured Find, an excellent Atlantic article by Dan Peck examining the long-run social costs of persistent unemployment, contains an embedded series of glourified vlogs blasting the youth of the nation for being "Followers, Not Leaders" and entitled basterds.  Au contraire, stuffy old people, WE, the youth, will lead the economic recovery, for several reasons:

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Our Old, Misunderstood Friend: Inflation

Recently, Chris Carr wrote an article advocating allowing natural deflation instead of using expansive monetary policy from central banks to artificially maintain persistent inflation.  I disagree with several aspects of Mr. Carr’s analysis, including some of the data. For example he misrepresents the level of deflation in the economy since the financial crisis by only examining September of 2009 and ignoring that this deflation exists despite a huge monetary stimulus.  Most fundamentally, however, I believe that he dramatically underestimates how dangerous deflation can be, as even tiny amounts of deflation can increase trade deficits and consumption and leave the indebted particularly vulnerable.  Mr. Carr's proposal for less centralized money might apply to countries, like China, needing to boost domestic demand in the face of massive budget and trade surpluses, but it would amount to economic suicide for the United States which has record budget and trade deficits and far too much consumption in the economy.

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Deflation, Savings, and Where We Go Next

The Japanese media has recently been obsessed with defure, or deflation.  The September annualized rate of deflation for Japan was 2.24%, compared to September annualized deflation rates of 0.18% in the U.S. and 0.80% in China.  Canada, the U.K., Australia, and the European Union had very low rates of annualized inflation in September.  Why does the media panic about anomalous low-single-digit deflation while ignoring the well-documented effects of seventy-five years of chronic inflation?  The rationale for the panic is that deflation can lead to a liquidity crisis (government stimulus is rendered impotent) and/or a deflationary spiral (hyperdeflation); yet, blind to the lessons of history, inflation is considered a necessary evil, and the possibility of an inflationary spiral is underserved. 

First, an explanation of the relevant terms.  Originally, inflation meant an increase in the money supply, and deflation meant a decrease in the money supply.  However, modern understandings of the terms are more nuanced; now inflation and deflation are related more to purchasing power and price levels.  Because when there is more of something it becomes less valuable, inflation is now understood as a devaluation of currency.  Deflation is when a currency becomes more valuable.  Usually during economic booms, there is a robust rate of inflation as people move their collective wealth from cash-based resources into assets; there is more cash around, so people treat it with less respect and tend to spend frivolously.  During recessions, people tend to value security over potential profits, and attach more value to cash-in-hand; a dollar is worth more as a result.  Deflationary periods indicate increasing aversion to risk among the population, but not necessarily recession: in the late nineteenth century the U.S. experienced both persistent deflation in the absence of a central bank and high rates of economic growth.

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Let's Not Go Down this Path...

"Please cancel all my afternoon meetings."Throughout the infamous Lost Decade of the 1990's, the Japanese government tried to stimulate the economy by lowering the interest rate, federally subsidizing and mandating unwelcome contruction projects in rural areas, and creating new government busy work.  The results of this were as follows: (1) the interest rate was lowered repeatedly with no effect until it reached zero.  The Bank of Japan's hands were tied: it couldn't raise the interest rate without hurting the economy, so it effectively had used up all of its resources on that front and was rendered impotent; (2) rural areas were overwhelmed with gradiose tunnel systems and multi-purpose/non-purpose halls, which went unused and fell into decay.  In my city, Fukushima, the ruralist of the rural (When the Beverly Hillbillies was dubbed into Japanese, they gave the characters Fukushima accents to emphasize the fact that they were uneducated hicks.), there are several pedestrian tunnels built to go under one-way streets, as though people couldn't just use the crosswalks.  These go unused, and in general have become unofficial homeless shelters.  There are also walls built to prevent mudslides in uninhabited areas and, of course, tetrapods; (3) government positions have spiralled out-of-control.  There are so many government workers that they've become their own demographic that politicians try to sex up for votes. 

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Signs of a Jobless Recovery

The news of the Dow closing over 10,000 points yesterday was hailed as proof that the economy is back on track, the index is now up from a low of 6,470 in mid-March- a gain of over 54% in 6 months.  That is startling growth, though probably much of that is due to unnecessarily painful losses in the first place, after all the Dow is still down over 28% from its high.  However, as Michael Roston points out, all of that progress in the stock markets hasn't trickled down into employment as evidenced by record military enlistments:

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