By Joseph E. Gagnon

Today, we're fortunate to have Joe Gagnon, senior fellow at the Peterson Institute for International Economics, as a guest contributor.

With short-term risk-free interest rates essentially at zero in the major developed economies, conventional monetary policy is in a liquidity trap. As a number of commentators have observed, printing zero-interest-rate money to buy zero-interest-rate assets has no real economic effect because the assets are near-perfect substitutes for money. But does that mean that central banks have lost their power? Jim Hamilton asserts that central bank purchases of other assets, with positive yields, can always create inflation, though he is silent as to whether they can affect output. Building on Gauti Eggertsson and Michael Woodford, Scott Sumner argues that central banks can boost output and inflation despite zero interest rates by raising the public's expectations of future inflation and thus

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In my last post, I cited Jeff Frankel's keynote speech from a recent Bank of Canada-ECB workshop. He also pointed to the end of "Exorbitant Privilege" and "Dark Matter", and other arguments of American exceptionalism. I think we'll see resounding evidence of this in Friday's release of the US end-2008 Net International Investment Position (NIIP).

First, recall nearly two and a half years ago, I posted this figure...

Figure 1: Net International Investment Position, end-year (blue squares), and Cumulative Current Account balance on a NIPA basis (red line), as a ratio to GDP. NBER recession dates in gray shading. Sources: BEA International Investment Position release of June 2006, BEA NIPA release of October 2006, NBER, and author's calculations. Originally posted here

...and asked if "gravity can be defied?" At the time, I argued the answer was "no", and observed that NIIP reversion to

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For Immediate Release

Chicago, IL - June 8, 2009 - Zacks.com releases the list of companies likely to issue earnings surprises. This week's list includes National Semiconductor (NSM) and The Talbots Inc. (TLB). To see more earnings analysis, visit http://at.zacks.com/?id=3207.

Every day, Zacks.com makes 4 stock picks available, free of charge. To see them, go to http://at.zacks.com/?id=3567.

The Week's Events

S&P 500 members Brown Forman (BF.B), National Semiconductor (NSM) and Pall Corporation (PLL) headline what will be a very light earnings calendar. Only 37 companies are confirmed to report.

On the economic front, the Fed will release its periodic Beige Book on Wednesday afternoon. The next morning we will get May retail sales numbers from the Commerce Department.

Tuesday: April wholesale inventories Wednesday: Fed Beige Book, April trade deficit, May treasury budget, ...

S&P 500 members Brown Forman (

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“The crash has laid bare many unpleasant truths about the United States. One of the most alarming is that the finance industry has effectively captured our government”, says Simon Johnson, a chief economist with the International Monetary Fund in 2007 and 2008. In an article entitled “The Quiet Coup” in the May, 2009 issue of the Atlantic magazine he (with James Kwak) goes on to say that “if the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform and if we are to prevent a true depression, we’re running out of time”.

America is in financial crisis but instead of the financial oligarchy being broken up to permit essential reform they are continuing to use their influence to prevent precisely the sorts of reforms that are …

THE PRICE OF SPOT GOLD bounced 1.6% from an overnight low of $860 on Wednesday, steadying at $876 an ounce as Western stock markets ticked higher despite a raft of miserable Eurozone data. Crude oil rose back above $100 per barrel, while long-dated government bonds continued to rise in price, pushing yields still further below the rate of inflation. The Dollar slipped from two-week highs on the currency markets. "European economic woes should sustain the greenback's safe-haven appeal today," believes Manqoba Madinane at Standard Bank in Johannesburg , "despite downside correction warnings from technical momentum indicators, and this could impact precious metals. "Several other warnings of downside risk for precious metals have emerged," he adds, noting that CDX investment grade credit spreads have narrowed, "indicating receding financial market system risk." Tuesday saw inter-bank lending rates leap yet again, however, with the cost of raising ...

A couple interesting pieces out there today on the Russian market jitters and what the falling price of oil is exposing. First, from CFR.org: In fact, the 2008 crisis bears several similarities to the economic breakdown that unfolded almost exactly one decade prior. The first and most obvious is the rapidly plummeting price of oil, the commodity on which Russia's economy floats. While oil prices currently remain well above the lows of a decade ago, current prices have lost significant ground since their July peak of over $147 a barrel, hitting a low in early September of just over $90 (CNN). This sharp volatility proved unnerving for Russia, which produces more oil than any country other than Saudi Arabia. Moscow also relies on exports of natural gas and other commodities, the prices of which have also plummeted from summer highs. Additionally, analysts say the short-term outlook for commodity prices ...

The three-pronged assault on Congress by President George W. Bush, U.S. Federal Reserve Chairman Ben S. Bernanke and U.S. Treasury Secretary Henry M. "Hank" Paulson to push for speedy passage of the proposed $700 billion banking bailout package is making headway, causing investors to turn bullish in anticipation of federal intervention. By 10:45 a.m. in New York today (Thursday), all three major U.S. indices had huge jumps, as optimism that Congress would soon come to an agreement on the proposed bailout legislation buoyed U.S. markets. The blue-chip Dow Jones Industrial Average Index gained 195.62 points (1.81%), to trade at 11,020.79. The tech-laden Nasdaq Composite Index shot up 35.05 points (1.63%), to 2,190.73. And the broader Standard & Poor’s 500 Index rose 19.61 points (1.65%), to reach 1,205.48. That same optimism had the opposite effect on oil, putting downward pressure ...