Mish's Global Economic Trend Analysis

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DeLong-in-Wonderland Posted: 02 Sep 2013 08:10 PM PDT Preposterous economic proposals from economists living in academic wonderland are the norm. For example: Please consider the following statements by Brad DeLong, a professor of economics at the University of California at Berkeley, from his post Central Banking: Banking Camp vs. Macroeconomics Camp. A prolonged and sustained central-bank policy of purchasing ever-increasing quantities of long-term assets is essential to get a financial sector with diminished appetite for risk to use some of its risk-bearing capacity for its proper purpose of reducing the risk burden on entrepreneurship and enterprise. But such a policy removes diminishes financiers' ability to rely on the easy business of riding the duration yield curve for profits. A simple and straightforward central-bank statement that in the aftermath of 2008-2013 it is clear that inflation targets in the 0-2%/year range run unwarranted downside employment risks, and that inflation targets should instead be in the 2-4%/year range is an obvious no-brainer from the standpoint of an organization that exists to balance aggregate demand to potential aggregate supply. In Academic Wonderland Those in academic-wonderland think inflation is the cure for everything. Somehow they know (or believe central banks should know)... The right amount of inflation The right amount of risk taking The right amount of unemployment The right policies that will achieve 1, 2, and 3 above. In the Real World In the real world, the Fed can set inflation targets but the market does not have to agree In the real world, The Fed can target money supply but it cannot force consumers to borrow or banks to lend In the real world, asset bubbles frequently form before price inflation hits In the real world, the Fed missed a huge asset bubble in dotcom stocks in 1998-2000 In the real world, the Greenspan Fed created the biggest housing and credit bubbles in history In the real world, Bernanke did not even realize there was a housing bubble until it burst No Brainer or No Brains? DeLong states "... it is clear that inflation targets in the 0-2%/year range run unwarranted downside employment risks, and that inflation targets should instead be in the 2-4%/year range is an obvious no-brainer..." If inflation was a cure-all, India would not be in the midst of a currency crisis If achieving 4% price inflation without causing other economic distortions was so easy, Japan would have had inflation decades ago I could provide a thousand more examples but won't. Delong-in-Fantasyland DeLong humorously bills his blog as "Grasping Reality with Every Possible Tentacle: Brad DeLong's Semi-Daily Journal--Fair, Balanced, and Reality-Based 99.4% of the Time". Let's return to the real world. When Nixon closed the gold window, the expansion of credit exploded. The Fed blew asset bubble after asset bubble. Fed policies not only got the US economy in serious trouble twice, those policies continue to play a huge part in the wage discrepancies that inflationists like DeLong moan about. In the real world, Japan got in trouble to the tune of 250% of GDP with ridiculous Keynesian and monetarist "solutions" that did not work. In the real world, Japan is in deep trouble financing interest on its national debt, even at rates close to 0%. Delong-in-Wonderland says the cure for such problems is more of the same polices that got us in trouble in the first place. DeLong may as well stand in front of the ocean and command the tides to stop. Such is the thinking (or lack thereof) of those in ivory towers who think mind-over-matter and Alice-in-Wonderland policies work. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

India Manufacturing PMI Contracts for First Time Since March 2009; Eurozone Manufacturing PMI 26-Month High of 51.4 Posted: 02 Sep 2013 08:50 AM PDT A weak manufacturing recovery of sorts is underway in Europe. How long it lasts remains in question, with France not participating in the recovery. The Markit Eurozone Manufacturing PMI® shows Final Eurozone Manufacturing PMI at 26-month high of 51.4 in August (July: 50.3). Country PMI Rankings The upturns in production at German, Italian, Dutch and Austrian manufacturers all strengthened on the back of improving inflows of new business. Output also rose further in Ireland and returned to growth in Spain as a result of an increase in new business. All of these nations also reported higher levels of new export business, with rates of increase hitting 28-month highs in Italy and the Netherlands, a 32-month record in Spain and a 29-month high in Austria. German exports rose following five months of decline, while the rate of growth in Ireland held broadly steady at July's seven-month peak. In contrast, output, new orders and new export orders fell at French manufacturers. Production also declined in Greece, despite stabilisations in both total new business and foreign demand following prolonged spells of contraction. India Manufacturing PMI Contracts for First Time Since March 2009 The HSBC India Manufacturing PMI™ shows Manufacturing operating conditions deteriorate for first time in over four years. Business conditions in the Indian manufacturing sector deteriorated during August for the first time in over four years, with both output and new orders falling at faster rates. Export orders also declined, ending an 11-month sequence of growth. The seasonally adjusted HSBC India Manufacturing Purchasing Managers' Index™ (PMI™) fell from 50.1 to 48.5 in August, indicating a moderate deterioration of business conditions. The latest index reading was the lowest in four-and-a-half years and the first sub-50.0 reading since March 2009. Amid reports of fragile economic conditions and subdued client demand, new orders placed at Indian manufacturers fell solidly in August. Furthermore, the rate of contraction accelerated to the fastest since February 2009. Order book volumes across the intermediate goods sector decreased at a sharp and accelerated pace, while consumer goods producers registered a slight decline. New business from abroad also fell, ending an 11-month sequence of growth. Anecdotal evidence suggested that competitive pressures increased and that demand from key export clients was weaker. Consequently, Indian manufacturers reduced their production volumes for the fourth consecutive month in August and at the fastest rate in four-and-a-half years. Clearly this is not good for the Rupee. Nor is the outlook promising for India's preposterous growth target of 6 percent. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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