Be afraid; be very afraid.

From "'Created or saved' doesn't add up", by Joseph Lawler:

...[t]he "created or saved" numbers are meaningless. The administration purposefully devised the metric to be nebulous. Without a counterfactual, showing the trend of unemployment in the absence of the stimulus, it is impossible to know how many jobs the stimulus saved.

But this is completely counter to what I learned in economics, and how, for instance, the CBO conducts analysis. I assume Mr. Lawler doesn't dispute the impartiality of the CBO (but who knows?). Here's the way real macroeconomists conduct analysis:

As the President has discussed, analysis done within the Administration has shown how his tax cuts have substantially offset the series of adverse shocks that have been buffeting the economy. Simulations of a conventional macroeconomic model show that, without the tax cuts, the level of real GDP would have been about 2 percent lower in the

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Pretend, just for a moment, that you’re President Obama. You have big spending plans – national health insurance, two wars, and a trillion dollar bailout for your friends on Wall Street. Not to mention paying for the soaring costs of Social Security and Medicare.

Unfortunately, revenues simply aren’t keeping up.

Your Treasury Secretary – accused tax-evader Timothy Geithner – tells you that the unfolding recession is starving the country’s government for tax revenue. Indeed, just as you unveiled your trillion-dollar national health plan, Tricky Timmy informed you that federal tax revenues were dropping the fastest since 1932 – at the height of the Great Depression.

What to do…cut spending? Well, Obama did challenge his cabinet in April to come up with a whopping US$100 million in budget cuts. That’s out of an estimated 2009 budget deficit exceeding US$1 trillion, perhaps more. To put that

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Rice rationing redux?  Chris Mayer on the return of rising food prices… Dan Amoss on what the Fed says versus what the Fed does… Russia sings dollar’s praises, dollar bulls stampede… Chuck Butler looks past the rhetoric… China’s latest resource grab… Iraqi oil… America’s best-selling car… with an MSRP of $60…

We begin a new week pondering the question that bedevils the conscientious market observer every day.Inflation? Deflation? Or as Agora founder Bill Bonner is wont to suggest, both?

“Inflation – rising prices, or a drop in the purchasing power of the dollar – will soon rise to the very top of economic concerns,” writes Chris Mayer. “I can’t understand why there are pundits who insist we can’t have inflation while the economy is weak. There are plenty of examples of weak economies with high inflation. After all, I don’t think they are hitting on

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Stock Market Rally in Financial Horror Movie. Drag Me to Hell! That’s the title of the first horror movie with a credit crunch theme. No kidding. We just read about it in the Financial Times. The idea of the movie is simple enough. A young woman is a mortgage loan officer at an LA bank. She wants a promotion… but to get it she has to prove that she’s tough enough to say ‘no.’ So when a creepy customer comes in and asks for an extension of her mortgage, the woman rejects the proposal… perhaps a little too coldly.

Then begins the horror.

But just look around. There are plenty of frightening and unnatural scenes going on.

Broadly speaking, it’s a merciless war between inflation and deflation. But there are many different attacks, ambushes, counterattacks, feints, and massacres going on.

The Dow retreated 173 points yesterday. Typically, following a major fall

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Economist Robert P. Murphy at the blog Free Advice must have heard me screeching with Total Mogambo Disrespect (TMD) about Congress and Obama deficit-spending almost $2 trillion this year, and he says, “If fiscal policy is a disaster, monetary policy is even worse.”

I interrupt and say, “You said it, dude! The inflation in prices from such an inflation in the money supply will destroy us all, probably taking the fast-food industry with it, and then where the hell will I be when I say, ‘Boy! I’d sure like a taco right now! Let’s go out for tacos! Who has any money with which to buy tacos?”

Well, Mr. Murphy is apparently not that interested in my gastronomic concerns, and notes that “Unfortunately, the issues here get very complicated, and so it’s difficult for the layman to know whom to trust. Not only do left-wingers like Paul Krugman

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Greg Mankiw cites a study by Cogan, Cwik, Taylor, and Wieland to buttress his arguments that fiscal multipliers are small, especially when considering New Keynesian models. He also provides a startling graphic showing the dynamic multipliers from Romer-Bernstein versus the Taylor (1993) model, incorporating model consistent expectations; this graphic motivates Wieland et al. to remark:

We first show that the assumptions made by Romer and Bernstein about monetary policy -- essentially an interest rate peg for the Federal Reserve -- are highly questionable according to new Keynesian models. We therefore modify that assumption and look at the impacts of a permanent increase in government purchases of goods and services in the alternative model. According to the alternative model the impacts are much smaller than those reported by Romer and Bernstein.

Cogan et al. use a New Keynesian dynamic stochastic general equilibrium (DSGE) model, specifically the Smets-Wouter model (Working Paper version of AER paper here).

In

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The exchange between Brad Delong and Greg Mankiw ([1] [2], followed up by [3] [4]) reminded me of some earlier work Iqd done with Yin-Wong Cheung on the time series properties of real GDP, back in the "unit root" wars. Briefly, Mankiw was alluding to work with Campbell indicating GDP was well approximated as an ARIMA process, while Delong is arguing that using unemployment, which is trend stationary, indicates that indeed sharper increases in unemployment presage more rapid GDP growth. The former characterization is univariate in nature and the latter is bivariate. Of course, we've moved on since those days -- the entire VAR and SVAR literature expands the set of variables, but at the cost of greater complexity -- but simple characterizations can still be useful.

This brings me to the results Cheung and I obtained. In "Further Investigation of the Uncertain Unit Root in U.S.

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Some thoughts on the extent of the problem and options for solution.

John Hempton (hat tip: Mark Thoma) offered an interesting perspective on the nature of the current problems facing the banking system. Hempton suggested that there are three different numbers we might use when speaking of the problem assets held by the banking system: (1) the loss that banks have already acknowledged or have made loan loss provisions for, which Hempton puts at around 10%; (2) the loss that banks would face if they had to sell the assets right now, which Hempton puts at 50% or $3 to $4 trillion in losses; (3) the loss that would actually be realized if the assets were held to maturity, which Hempton claims would be 25% or $1.5 to $2 trillion in losses.

A question raised by those last two numbers is why buyers are only willing to pay 50

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Today's announcement from the Federal Reserve marks the end of the road for Plan A (fighting the recession by lowering interest rates), and the beginning of ... what?

The Fed's announcement begins:

The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.

Although that caught the headlines, it's really the anticlimactic part. The actual fed funds rate and short-term T-bill rates had been well below the Fed's previous "target" of 1.0% for some time, making today's announcement little more than an acknowledgement that that's indeed where we are. At least we can all finally agree that further rate cuts from the Fed are completely irrelevant, if for no other reason than because it's physically impossible for there to be any more ahead.

Source: FRED.

The main

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Greg Mankiw notes some odd behavior this week in the values reported by the U.S. Treasury for the yields on constant-maturity Treasury Inflation Protected Securities.

In normal times when investors anticipate positive inflation, the yield on nominal Treasuries should exceed that on TIPS, since both coupon and principal on TIPS grow with the CPI. That normal state of things was dramatically reversed over the last month, when the 5-year TIPS came to pay 200 basis points more than the 5-year nominal Treasury. But on Monday, the TIPS yield fell 214 basis points, while the nominal yield was down only 22 basis points, leaving the TIPS yield only slightly above the nominal.

Reported yields on nominal and inflation-protected 5-year Treasury securities. Data source: FRED [1], [2], and U.S. Treasury [1], [2].

Here is Greg's interpretation:

That is a huge change

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