Thoughts and links 20/09/2010

US Fed
Central Bankers really don't like deflation or its threat because of the impact it has on behaviours in the economy and the chances of a Japanese style lost decade/s. James Bullard from the St Louis Fed wrote a cracking piece about the risks and what needed to be done a few weeks ago (link here http://research.stlouisfed.org/publications/review/10/09/Bullard.pdf ) and it seems the FOMC is listening and readying itself to implement his plan.

Certainly Quantitative Easing (QE) is the new buzz around markets as the Federal Reserve has left the way open to buying US Treasuries. Overnight US Treasuries rallied and, we think, will rally further equities can be underpinned by a lower hurdle rate but ultimately they'll get undermined by a lack of aggregate demand in the economy while gold and other commodities and commodity currencies (AUD specifically) will rise with concerns over the debasement of the USD. We don't necessarilly buy the argument of the debasement of the USD. In fact we disagree but the short term market reaction was for a weaker USD.

Personally we doubt QE will work given that unless we can get Americans off the unemployment queues and, more specifically, banks doing their job of financial intermediation (rather than financial hoarding) the best the United States can do for a few years more is muddle through. In Britain they have QE, inflation

FT Alphaville has some comments on what has emerged in the 4 short hours since the statement this morning. http://ftalphaville.ft.com/blog/2010/09/21/348846/fomc-follow-up/

The problem of excess saving - FT Alphaville
Here is an example of why the Fed is looking for a little inlfation http://ftalphaville.ft.com/blog/2010/09/21/347606/the-problem-of-excess-savings/

Steve Keen's take on de-leveraging...very wonkish so something for the economics minded.
http://www.debtdeflation.com/blogs/2010/09/20/deleveraging-with-a-twist/

Robert Shiller - 7 more bad years?
Robert Shiller is one of our favourite economists. For those of us with a Miniskyesq and behavioural bent he is the closest thing we can get to a behavioural macro-economist. Shiller is Professor of Economics at Yale University and co-author, with George Akerlof, of Animal Spirits: How Human Psychology Drives the Economy and Why It Matters for Global Capitalism. You should read "Animal Spirits" it is a great book for those who want to understand how the economy really works rather than how it is "supposed" to work. For example "Our bookmarks a break with tradition. in our view economic theory should be derived not from the minimal deviations of from the sytem of Adam Smith but rather from the deviations that actually do occur and that can be observed."

In this link he talks about the recent work by Carmen and Vincent Reinhart which build on Carmen's work with Ken Rogoff. Basically all of this work tells us there a re few years to go. http://www.project-syndicate.org/commentary/shiller73/English