Month: January 2009

Is that too silly a question?  (And have purveyors of the liquidity trap argument been willing to make predictions?)  After all, the TED spread is now below one and there are other pieces of financial good news.  If the liquidity trap ends (assuming there was one in the first place), monetary policy will work to stimulate aggregate demand.  A big fiscal stimulus won't be necessary.

Will there still be a liquidity trap three months from now?  Six months from now?  With all those smart people in the White House and at Treasury?  What if there is a ten percent chance, each month, that the liquidity trap goes away?

The proposed fiscal stimulus is a big, irreversible investment, which may or may not be needed, and of course it takes some time to get rolling.  The traditional economist's recommendation is to apply a very high hurdle rate to such commitments.  One alternative is to wait and see if the liquidity trap ends in the near future.

I am not an optimist about the real side of the economy, but I would be surprised if we still were in a liquidity trap one year from now.

Paul Krugman writes:

…the traditional immunity of advanced countries like America to third-world-style financial crises isn't a birthright. Financial markets give us the benefit of the doubt only because they believe in our political maturity — in the willingness of our leaders to do what is necessary to rein in deficits, paying a political cost if necessary. And in the past that belief has been justified. Even Ronald Reagan raised taxes when the budget deficit soared.

But do we still have that kind of maturity? Here's the opening sentence of a recent New York Times article on the administration's budget plans: ''Facing a record budget deficit, Bush administration officials say they have drafted an election-year budget that will rein in the growth of domestic spending without alienating politically influential constituencies.'' Needless to say, the proposed spending cuts — focused only on the powerless — are both cruel and trivial.

If this kind of fecklessness goes on, investors will eventually conclude that America has turned into a third world country, and start to treat it like one. And the results for the U.S. economy won't be pretty.

Of course that's from 2004, when the budget deficit was far lower, so it holds all the more today.  Arnold Kling makes a related point.

It is, of course, still a completely coherent position to think that without a fiscal stimulus there will be no recovery and thus this default risk will be all the higher; I presume that is Krugman's position.  Still, in absolute terms, our worry about default risk should be relatively high.  And if there's anything we've learned over the last two years, it is that "once in a lifetime" outlier events can happen.

Keep in mind that banks still need a lot more money.  So that's a reason to be quite fiscally conservative on as many other things as possible.

Here are some interesting thoughts from Robert Waldmann.  (How long will the liquidity trap last anyway?)  And Greg Ip writes: "Last week, markets pegged the probability of a U.S. default at 6 percent over the next 10 years, compared with just 1 percent a year ago."

I liked this part, even though I don't think AD is always the key factor:

Some people seem to infer from this that output and income can be raised by increasing the quantity of money.  But this is like trying to get fat by buying a larger belt.  In the United States to-day your belt is plenty big enough for your belly.  It is a most misleading thing to stress the quantity of money, which is only a limiting factor, rather than the volume of expenditure, which is the operative factor.

That's Keynes, writing to Roosevelt.  The letter is interesting throughout, how about this part:

I put in the second place [as a priority] the maintenance of cheap and abundant credit
and in particular the reduction of the long-term rates of interest. The
turn of the tide in great Britain is largely attributable to the
reduction in the long-term rate of interest which ensued on the success
of the conversion of the War Loan. This was deliberately engineered by
means of the open-market policy of the Bank of England. I see no reason
why you should not reduce the rate of interest on your long-term
Government Bonds to 2½ per cent or less with favourable repercussions
on the whole bond market, if only the Federal Reserve System would
replace its present holdings of short-dated Treasury issues by
purchasing long-dated issues in exchange. Such a policy might become
effective in the course of a few months, and I attach great importance
to it.

That's exactly what the Fed has been stressing and what Robert Lucas has advocated as well.

Get the double entendres out of your mind:

Lola – or Rora – to give her a slightly more Japanese pronunciation – is a beauty and she knows it.

Customers pay by the hour for her company. Usually they just want to stroke her, but as a special treat for favoured clients, she will lie back in a chair, close her eyes and pose for photographs.

Lola is a Persian cat who works at the Ja La La Cafe in Tokyo's bustling Akihabara district. It is one of a growing number of Cat Cafes in the city which provide visitors with short but intimate encounters with professional pets.

When I called, there were 12 felines and seven customers, mostly single men…

It costs about £8 ($10) an hour to spend time in a Cat Cafe.

Here is the article, courtesy of Marco Haan; other Japanese markets are discussed as well, including the renting of pet beetles.

And no, this next one is not a "sexy" Markets in Everything, but it, via Megan McArdle, is still remarkable in its own way: Quilt with Matching Tote.