Roubini: Washington must manage perceptions

Iconoclastic economist Nouriel Roubini says that is the key issue in walking a tightrope between continued recession, with even deflation worries, and inflation.

Deflation and its discontents

Paul Krugman has a sweeping riff on the latest job and wage numbers, the possibility of inflation, the growing need for more Obama Administration economic stimulus work and more.

Ironically, or whatever, after that gloom-and-doom tale, he goes on to accuse many of his fellow economists of scaremongering — about inflation. I’m sure Krugman’s right in the short term, but is he right in the long term?

Non-economist and fellow New York Times columnist David Brooks says China disagrees.

No Viagra after Fed shoots last wad

The psychological bluff and gamble that is the baseline of capitalist economics (hear that, pseudskeptic Michael Shermer?) has its denoument today when the financial warlock of the world’s largest economy throws pretty much his last major thunderbolt and drops the funds rate to one-half percent. Since all economists have Japan’s recent past history in mind, one-half percent is, essentially, the new zero on interest rates.

So, now, more than ever, economic recovery rests in part on the believeability factor of Ben Bernanke, including people believing him that cutting interest rates will significantly help restore economic liquidity.

Note to Ben: It won’t.

Now, rate-cut supporters will argue Big Ben also has to worry about deflation, reflected by a record 1.7 percent drop in consumer prices. But, first, monetarism is not the best guaranteed deflation-fighter. Second, everybody knows that oil prices caused much of the drop. (So why, as opposed to inflation, is Big Ben not now just focusing on core CPI?)

Update, 6:20 p.m. So Big Ben went even lower than expected and dropped the funds rate to zero to one-quarter percent.

First, by having a range, Big Ben is trying to avoid putting himself in the Japanese zero percent box. Too late.

Second, you really have shot your wad, even with a bit of rate range. There is nowhere else to go with interest rates. Money supply? If credit stays locked up, that will not make a big difference either.

Deflation hits America’s breadbasket

Wheat prices are collapsing even faster than banks in America’s heartland.

And, that cheap price at the gas pump, in addition to running the risk of deluding Americas into buying SUVs again, undercuts the ethanol-propped price of corn.

Prices may well drop another 50 percent, reversing part-time farmers, many of them perhaps retirees fleeing the coasts, doing farming. OTOH, land prices will probably drop by at least that much, enticing semi-retirees to cybercommute from the heartland.

A snarky look at how the Fed caused the housing-credit bubble in the first place

It’s basically by “counterfeiting” $3 trillion of money over the past few years. This is pretty funny, but with good explanatory value:

• I use $1 trillion to buy stocks (jump starting the bull market)
• I use $1 trillion to buy U.S. Treasury bonds (thus driving bond prices higher and interest rates lower)
• I use $1 trillion to go around to every neighborhood in every major city of the U.S. and start buying houses for 10 percent higher than the listed price.

And you get all these benefits:

• This will create jobs, since lots of employees and consultants will be needed to spend $3 trillion.
• The stock market indices will soar. Everyone's 401(k) and day-trading portfolios will increase in value.
• Home prices will increase by 10% overnight.
• Interest rates will fall which will make it even cheaper for everyone to borrow money to buy new cars, upgrade into a bigger homes, and buy new gas plasma TVs every year hoping against hope of getting to watch the CUBs someday play in the World Series.
• The lifeblood of America, vastly underpaid Real Estate Agents, will get a much needed and well deserved infusion of cash.
• The economy will be humming so fine that no one will care about the loss of jobs to India and China.
• Cheap goods will continue to pour into the US and the CPI will show only a modest 2 percent rise in the price of goods.

Boy, you just can’t beat that, can you?

It does show, in addition, that, although Adam Smith was hugely wrong about his “invisible hand,” he was right on the money about human greed.

Mike Shedlock goes on to say that not just an ordinary recession, but a deflation similar to late 1980s Japan, is very possible. Bill Fleckenstein, another financial analyst who seems to have good insight, agrees.

Personally, I’ve upped my recession odds by Aug. 1, 2008 from 1-3 to 2-5. I’m leaving the Jan. 1, 2009 prediction at 1-2, but those odds will probably get adjusted upward soon.

Oh, and if your 401(k) has any such risk investments, look out.