Krugman

Today, Freddie Mac announced that the 30 Year FRM declined to a new all time record low, dropping by 1 bp to 4.57% from the week before. Yet even as mortgage rates hit fresh weekly records courtesy of the Fed's undisputed control of the mortgage market, the only thing increasingly more certain is that even at 0.00% there is precious little marginal demand in the primary market for housing. Here are the latest observations from Rosie on precisely this phenomenon, and much more.

Remember the Fed economist who said all bloggers are idiots, and only Ph.D's are smart enough to understand why the market can go up 4% on double dip depression news? Neither do we. But the following obliteration of the Richmond Fed's errand boy by GMO's James Montier, who is once again back to posting on his blog http://behaviouralinvesting.blogspot.com, is completely worth the read.

The Secretary-General of the OECD Angel Gurria shares some surprisingly candid observations on the suddenly overpopular debate over austerity versus perpetual stimulus, saying it does not have to be one or the other, a choice he calls a "false dilemma" but instead you need one and the other, to be able to achieve any form of economic recovery. "Today's numbers are absolutely unsustainable, not only are they going to spook the market, they are simply not financeable. Whether the market is spooked or not it is almost secondary, you just can not hold it up for too long because you won't be able to finance these deficits, and they are creating a confidence crisis also." We hope that part about the market being "held up" is merely a Freudian slip, because we know that nobody does that - after all the market finds its natural level of supply and demand, and any purported "holding up" would involve central bank intervention... and we all know that's pure conspiracy theory. As to the solution: "Spain and Greece and Portugal are countries which have to start an earlier process of adjustment. It's not going to happen overnight. There has to be a clear path of where they are going. When you are cutting budgets, you have to cut those things that would not affect growth like education, research and development, the things that will move the economies in the years to come." On how to convince Germans to stop saving and start spending: "No reason why one should do that, and there is no possibility of success. Germans are reacting to a situation that was unsustainable. Medium and long-term there is no way that the speed and accumulation of debt can be sustained." And yes, "short term growth" will inevitably be impacted. Gurria can only hope the markets would cut these countries some slack when growth comes in far below expected... Which it won't.

China's State Administration of Foreign Exchange (SAFE ) is once again making waves, by reminding the world about its trillions in dollar-denominated holdings, and that these could be dumped in a heartbeat. Of course, in tried and true Chinese fashion, it is notifying the world it has no intention of using the "nuclear option" which of course is merely a reminder that the nuclear option not only exists but is certainly at the forefront of any "diplomatic" negotiations with the US. As Reuters reports, "In a series of questions and answers posted on its website, www.safe.gov.cn, SAFE asked rhetorically whether China would use its $2.45 trillion stockpile of reserves, the world's largest, as a "nuclear weapon." Apparently, the primary focus of the Q&A was to allay fears that China may be stockpiling gold in the open market: "SAFE was lukewarm about gold as an investment. "It cannot become a main channel for investing our foreign exchange reserves," the agency said, noting the size of the gold market was limited and prices were volatile. Buying more gold would also not help much in diversifying China's reserves." Of course, with all this occurring in light of recent disclosure that the BIS has been involved in gold swaps to provide liquidity to unknown banks, immediately obviates this statement, since, as we have pointed out previously, the Chinese 7 and 30 Day repo markets are still sufficiently strained, and gold would certainly come in useful to allay fears that domestic banks have something beyond massively underwater residential loans on their balance sheets to fund trillions in liabilities. All the Chinese statement really is, is a warning to the US to avoid following the advice of such permaspenders as Krugman, and now Goldman, and to launch into another round of monetary devaluation via QE. We are skeptical that once Bernanke puts the presses into turbo mode once again, that China will theatricize the same kind of wholesome support for US-based assets.

Last week, Goldman, in a piece unambiguously titled The Second Half Slowdown has Begun, made it all too clear that unless the US government were to succumb to yet another, and another, and another round of drunken sailor spending, the gratuitous ability of its sellside analyst to place crap companies on Conviction Buy lists may suddenly become mysteriously impaired as reality seeps through the gaps, thereby infuriating CEOs of worthless and overlevered widget makers, who know all too well their corporate earnings are about to be taxed through the nose by the Obama crack economic team, as their stock is about to plunge. Today, just in case the threat may have been missed by the cheap seats the first time around, here comes Jan Hatzius with the ominously titled "Disturbing Signs" which reads like Paul Krugman's induction essay into the Useless Economists' Society.

I'm getting scared.

 BN  11:58 *KRUGMAN: U.S SHOULD USE `EVERYTHING WE CAN' TO BOOST GDP, JOBS
 BN  11:58 *NOBEL LAUREATE KRUGMAN COMMENTS IN BLOOMBERG TV INTERVIEW
 BN  11:58 *KRUGMAN SAYS FED SHOULD HAVE 3%-4% INFLATION TARGET LONG TERM
 BN  11:58 *KRUGMAN SAYS U.S. GOVERNMENT NEEDS TO `GO OUT AND HIRE PEOPLE'
 BN  11:58 *KRUGMAN SAYS SECOND MAJOR STIMULUS PLAN PROBABY WON'T HAPPEN
 BN  11:58 *KRUGMAN SAYS U.S. ECONOMY MAY BE FACING A `VERY LONG SIEGE'
 BN  11:58 *PRINCETON'S KRUGMAN: `MARKETS HAVE BEEN FAIRLY CALM SO FAR'
 BN  11:58 *KRUGMAN SAYS FEDERAL RESERVE SHOULD DO MORE QUANTITATIVE EASING
 BN  11:58 *KRUGMAN: `WE NEED TO GET MORE STIMULUS INTO THE REAL ECONOMY'

In an interview with Bloomberg TV's Erik Shatzker, Niall Ferguson picks up where Reinhart and Rogoff leave off. The historian discusses the bond vigilantes, "Bond vigilantes are a bit like the people short selling investment banks a couple of years ago. You start with Bear Stearns and Lehman Brothers, you don't get to Goldman Sachs until quite late in the game. In a way the sovereign debtors of the western world are pretty much in that position today. And we are working down the list, starting with Greece, moving on to Spain and Portugal, the UK dodged the bullet by implementing some preemptive measures. Sooner or later the bond vigilantes will get to the US, I don't think it will be this year, but in the absence of any political will to address this problem, this is simply an inevitability." As to why it is inevitable, Ferguson observes the case of the UK which was the only one to manage to grow its way out of massive debt load: "Britain after 1815 had two big advantages, it had the only the industrial revolution at that point that was going on in the word and had the world's biggest empire. I don't see anyone in that happy position today." The outlook: "Is it going to be inflation or is it going to be default. Right now there is no sign of inflation. We have monetary contraction at an alarming rate, and zero inflation in terms of core CPI, so the option of inflating this debt away doesn't seem to be there right now. What you are left with is therefore default. And I think it is a fair bet that US will default at least on the unfunded liabilities of Social Security and Medicare at some point in the foreseeable future. What the Greeks discovered you are fine until you are not fine with the bond market and if you have a non-credible fiscal strategy of borrowing a $1 tillion a year for the rest of time, never ever again running a balanced budget, at some point the markets are going to get spooked, and I think that point is nearer than Paul Krugman believes. Nothing would spook the markets more than for Paul Krugman's advice to be accepted by the Obama administration. That might well be the trigger."

Let's go over a few myths on austerity, shall we?

What's driving bond yields to their lowest level since April '09? Could it just be an ominous 1930s echo...

The economic mood at 200 West has officially downshifted. In a report by Jan Hatzius, the Goldman chief economist warns that "the second half slowdown has begun." Hatzius says: "This is consistent with our long-standing forecast of materially slower growth of just 1½% (annualized) in the second half of 2010." And while the contraction has been obvious to all those without a metric ton of wool in front of their eyes, the two indicators that have broken Goldman's will were this week's NFP and ISM reports. And not only that, but Hatzius is now firmly in the Krugman camp, blaring an even louder warning that should the government cut off the fiscal subsidy spigot "there is some downside risk to our forecast of a gradual reacceleration in 2011 (to about 3% on a Q4/Q4 basis)." In other words, not only will H2 GDP officially suck, but since Goldman has now officially jumped on the Keynesian gravy train, and as Goldman has rapidly become the best contrarian indicator in the world (we can't wait for David Kostin to realize that endless economic stimulus, GDP and corporate profits are, gasp, related), it likely means that Obama will not allow for even $1 dollar of extra unemployment subsidies or state bailouts just to spite Goldman.

As always SocGen's Dylan Grice comes out with some tremendous insights in his latest weekly piece "Double dips, siren calls and inflationary bias of policy." While the gist of the piece is presenting a comprehensive overview of the traditional and cognitive biases toward inflationary policies and away from hard, unpopular, deflationary/austere measures, Dylan provides a chilling anecdote involving the 1980s conflict between the UK and Argentina, in which it was precisely war that pulled an extremely unpopular government, that of Maggie Thatcher, out of the gutter of public opinion, and soaring in popularity. Thatcher, who came to power oddly enough on a "mandate to smash inflation, smash the unions and downsize government", saw her popularity immediately slide to 25% (see chart) as people realized the very real pain associated with austerity and a regime fighting run away government. A tangent in Grice's argument is that on very rare occasions, the people of a country do end up making the decision to take on hardship, instead of kicking the can down the road (are you listening Summers?). Yet they promptly grow to regret their decision. So what was it that saved the government, and allowed the Conservatives a second term in which to complete the painful austerity project? The declaration of war by Argentina's General Galtieri over the Falkland Islands. The result was soaring popularity for the Iron Lady, and the rest is history. Looking forward, now that all of Europe is gripped in austerity, and make no mistake - this very same austerity is coming to the US on very short notice (sorry Krugman), and popularity ratings for all political parties are crashing, has the political G-8/20 elite been focused a little too much on the Falkland war? Is war precisely the diversion that Europe and soon America hope to use in order to deflect anger from policies such as Schwarzenegger's imposition of minimum wage salaries yesterday (yes, this is pure austerity)? And is there a Gallup or some other polling "unpopularity" threshold that the G-20 is waiting for before letting all those aircraft carriers parked next to the Persian Guld loose? Read the below excerpt from Dylan and make up your own minds.

In its just released Long-Term Budget Outlook, the CBO has come out with the most dire warnings on the US projected debt  to date. In summary, the healthcare spending and the Social
Security will consume an increasing portion of the budget and will push the national debt up sharply unless lawmakers act, CBO Director Douglas Elmendorf warned. "CBO projects, the aging of the population and the rising cost of health care will cause spending on the major mandatory health care programs and Social Security to grow from roughly 10 percent of GDP today to about 16 percent of GDP 25 years from now if current laws are not changed." While this does not sound too dramatic, the way it is attained is with the following ludicrous assumptions (which Paul Krugman would certainly call perfectly normal): "government spending on everything other than the major mandatory health care programs, Social Security, and interest on federal debt—activities such as national defense and a wide variety of domestic programs—would decline to the lowest percentage of GDP since before World War II." Good luck with that. In the more realistic, alternative fiscal scenario, the CBO observes, that "with significantly lower revenues and higher outlays, debt would reach 87 percent of GDP by 2020, CBO projects. After that, the growing imbalance between revenues and noninterest spending, combined with spiraling interest payments, would swiftly push debt to unsustainable levels. Debt as a share of GDP would exceed its historical peak of 109 percent by 2025 and would reach 185 percent in 2035." The CBO's conclusion is a nightmare to each and every hard-core Keynesian fundamentalist (you know who you are): "the sooner that long-term changes to spending and revenues are agreed on, and the sooner they are carried out once the economic weakness ends, the smaller will be the damage to the economy from growing federal debt. Earlier action would require more sacrifices by earlier generations to benefit future generations, but it would also permit smaller or more gradual changes and would give people more time to adjust to them."

• The $5 trillion rollover (Reuters) -
  good of Reuters to pick up on this theme. We
  wrote about this is November, and the number is not $5 trillion, it
  is $15 trillion
• Yet another jobs miss: ADP comes in at +13,000 on expectations of +60,000 (Bloomberg)
• Scrutiny of Goldman's board focusing on silence over conflicts (Bloomberg)
• As expected, Alex now a hurricane (Bloomberg)
• "Not only is Elena Kagan perhaps the most unqualified person to ever be
  nominated to the Supreme Court, but she is a neoliberal globalist hack
  who had the silver spoon of privilege surgically implanted in her Kagan
  rectum at birth" - All in the Family; The Globalist Kagans of Brooklyn (American Everyman)
• Putin rips Russian spy bust (WSJ)
• Why Obamanomics has failed (WSJ)
• Todd Harrison: Where we've been and where we're going (Minyanville)
• Krugman spits in the faces of imaginary bond vigilantes (NYT)

Paul Krugman, obviously in total distress over the G20 deficit cut pact, sees a 3rd depression coming to America. Meanwhile, Dr. Doom--Nouriel Roubini--sees a slowdown rather than a double-dip recession in the U.S., and Harvard University professor Niall Ferguson agrees.