Risk Aversion returns…  Money Multiplier dampens stimulus effects…  TIC flows show concern of foreign investors… China back on growth track… And Now… Today’s Pfennig!

Good day… Chuck got an early start on a two week hiatus from the desk, so you will be stuck with me writing the Pfennig for the next two weeks. But don’t worry, you will still get a small dose of Chuck over the next week as he typically emails me his thoughts while on the road (I call it Pfennig Pfodder). Risk aversion dominated the currency markets overnight, as terrorists set off two separate explosions in Jakarta and investors moved money back into the ’safe havens’ of the US$ and Japanese yen.

Chuck wrote about this move yesterday, believing the bad news regarding CIT would probably cause a risk reversal. But the US stock market shook off the CIT news and rallied higher after a big earnings report by JP Morgan

In today's Economix post, Casey Mulligan argues that the greater than predicted unemployment numbers should not be ascribed to the negative effect of the stimulus, but rather to bigger than anticipated negative shocks.

We cannot blame the Obama administration for failing to predict June's 9.5 percent unemployment rate. That result just shows the size of the shocks hitting the economy: Even the best forecasters can miss the unemployment rate by almost two percentage points, even when forecasting fewer than six months ahead.

That makes sense, and is in line with my previous post. But he then argues that since we’ve seen little stimulus effect so far, we should cancel the stimulus, since it'd be costly on a per-job basis (and in any case, he believes the effect on GDP to be small [1]). These are interesting assertions meriting further analysis.

Stock-Flow Mismatch

We're all free to use whatever multipliers we

The Senate has closed debate on its bill. What have “moderates” wrought? Figures 1 and 2 depict the fiscal impulse arising from Senate and House bills, respectively.

Figure 1: Estimated spending and tax revenue reductions, per fiscal year, embodied in HR 1 Senate version. Shaded areas pertain to spending occurring outside of the 20 month time frame. Source: CBO, Cost Estimate of amendments in the nature of a substitute by Senator Reid for Senators Nelson and Collins to HR 1 (February 9, 2009).

Figure 2: Estimated spending and tax revenue reductions, per fiscal year, embodied in HR 1 House version. Shaded areas pertain to spending occurring outside of the 20 month time frame. Source: CBO, Cost Estimate of HR 1 (January 27, 2009).

The vertical axes in Figures 1 and 2 have been made conformable. What is clear is that

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From CBO Director Doug Elmendorf’s testimony yesterday, some numbers relevant to the ongoing debate over fiscal policy efficacy [1] [2]:

Table 5: from The State of the Economy and Issues in Developing an Effective Policy Response,” testimony of CBO Director Douglas Elmendorf, January 27, 2009.