deflation

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The Fed Stands Pat

There is an unusual conformity about most of the commentary surrounding the immediate economic outlook: we are in for a slow and possibly long slog out of the hole we dug for ourselves. Today’s release of the Federal Reserve’s Open Market Committee meeting minutes confirms that their view sits plumb in the middle of the already narrow range of forecasts. They, too, see the next few quarters as slow and steady. Actually, slow and unsteady may be a better description.

This of course befudddles the financial media whose only goal in life seems to be to grasp any shred of positive news and spin it into an immediate surge. Some of them even get confused over whether a decrease is an increase: this morning’s ADP report on private payrolls was that they decreased by 84,000 last month. This is much less of a decline than we have become used to over the past year or so. So much so that some media outlets blared that we have turned the corner on jobs as evidenced in the increase to be found in the ADP data.

Confused? So was I. Then again I have long ago given up on the financial media’s ability to perform even the most cursory analysis.

But back to the Fed.

The issue is now not whether the economy will recover – it will – but at what pace and whether there are enough risks that it could stall again. The consensus appears to be that growth will be much slower than we normally see after a steep recession, and that both inflation and interest rates will remain low.

No one should go planning for boom times.

I applaud the Fed for embracing the research that shows, beyond any reasonable doubt, that recoveries following a financially driven recession are always much more difficult and slow developing. There is a huge difference between such a recession and a more normal recession – one driven by an inventory cycle for instance.

In a ‘normal’ recession the immediate cause of a slump could be a sudden overshoot in production which sparks an equally sudden cutback and hence a surge in unemployment. Once supply is brought back into line with demand producers re-hire and try to re-stock quickly in order to avoid losing sales. This results in a sharp uptick in the economy before things settle back down towards a long run sustainable pace. In other circumstances it is the Fed itself who initiates the slump by raising rates in order to head off the inflation produced by an economy growing above its sustainable rate. Such ‘too rapid’ growth creates overheating in prices because resources such as labor gets to be scarce and wages rise rapidly. This floods the economy with cash which then drives up prices even more – too much money chasing too few goods.

Either way the shock that knocks the economy off its sustainable path is relatively easily dealt with and the adjustment takes only a few months. After the imbalances are overcome growth resumes with an initial burst followed by a return to normal.

A recession caused by a financial shock – the real estate bubble and the implosion of the banks is a classic example – is a very different animal. This is because of the deflationary risk, the need to undo the excessive valuation of assets, and the complicated interactions that go on between the credit and other financial markets. Critical parts of the economy, most notably the banks, need to be steadied before growth can resume at anything like its long run pace. Currency fluctuations are another common feature of a financially driven recession, with the result that trade is affected. The attempt top protect the currency can then destabilize interest rates and set in motion another round of currency problems. In short a financially created recession is a bigger mess to sort out, and very often some of the regular policy tools are ruled off limits because of their impact on the credit or currency markets.

That’s where we are now.

These kinds of crises were well described by Hyman Minsky, a disciple of Keynes. They are not described well at all in mainstream economics which has no room for banks in its models. Yes you read that correctly. Textbook economics – you may see it referred to as ‘neoclassical’ or ‘Chicago school’ economics – assumes an economy in which money is treated as an illusion or ‘veil’ behind which the ‘real economy’ of goods production and consumption exists. So mainstream theory ‘lifts the veil’ and ignores money as having much impact other than as a potential distortion to prices transmitted through the money supply – if the central bank screws up the money supply it will create inflation. Because of this attitude towards money, and its role, mainstream theory pays no attention to banks, finance or things like debt. They simply don’t exist in the purist’s models. It was Keynes who blew the whistle on this nonsense and gave money a constructive role to play in an economy through his notion of the ‘propensity to save’ and so on. Minsky then refined Keyne’s ideas and produced a fully thought through theory of financial crises. Ironically, or perhaps presciently, Minsky called the crisis stage of his model ‘Ponzi banking’. But, because the neoclassical/Chicago school came to dominate the textbooks both Keynes and Minsky were forgotten until recently.

There is no question that a Keynes/Minsky inspired legislator would advocate deregulation of banking. Far from it. Sometimes capitalism needs to be saved from itself, which is what Keynes argued.

Meanwhile back to today’s policy issues: we cannot lower interest rates because we are effectively at zero. We cannot raise them to head off inflation because the banking sector is too fragile. We have pumped enormous amounts of cash into the economy but people, and especially banks, are simply hoarding it or paying off debt rather than spending it. Our currency is declining which is good because it makes our products cheaper for foreigners to buy. But it also makes foreign goods more expensive which could fuel inflation, which we would normally head off by raising interest rates … which we don’t want to do because the banks are so weak.

Well you get the picture.

The Fed obviously grasps all this and is saying it wants to stick to its current policies for a while longer. That implies withdrawing a little from its support of the real estate market, which is already in the plan for the next few quarters, but not undoing, significantly, any of the other major supports put in place last year to avert disaster. The recovery just doesn’t look strong enough for the Fed to kick away the training wheels just yet. Maybe not at all during 2010.

So the upshot is that the Fed is standing pat. At least for now.

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Thoughts on a Mixed Bag: Manufacturing and Construction

A brief update on today’s data:

  1. Manufacturing. The Institute for Supply Management released its monthly survey of manufacturers today. Its index of activity now stands at 55.9% up from 53.6% the prior month. Be aware that this data is a little old – the latest month reported is November – but clearly the industrial sector is headed in the right direction. This is the fifth straight month of increase and the highest reading since April 2006. Any reading over 50% is correlated with a growing economy, so today’s data supports all the other information we have been seeing: GDP is expanding. Also bear in mind that, while expansion seems to be broadly spread across the economy, some areas remain weak, and that this indicator gives us a less reliable guide to the future than it gives a ‘score keeping’ for the immediate past. With that caveat said I think we should take some comfort from the report especially with regard to the payroll figures we will be seeing on Friday.
  2. Construction. On the flip side the government released a gloomy construction report today. Spending on construction projects fell for the seventh straight month in November – by 0.6% – and is now off by 13.2% over the past twelve months. Non-residential construction is even worse: it has fallen by 20.6% over the last year. Making matters more depressing was the news that October’s data was revised from being flat to a decline of 0.5%. There is no way to put a rosy gloss on this information. The construction sector is shrinking fast and looks as if it will continue that way well into the current year.

Taking the two reports together makes it difficult to work up a great deal of enthusiasm for the next few months. All the signals are mixed. Some areas, such as manufacturing, are clearly improving, while others are still floundering. The net result is that we seem to be stuck in a series of cross currents making little substantive headway. Perhaps the best way to look at the near term outlook is that until we see data that is definitively supportive of growth, with a series of months of strong momentum, we cannot predict much beyond a mediocre spell of GDP numbers. And that could be for a long time.

This, of course, contrasts with the media cheering section where every step, however tentative, is seen as the beginning of a return to the glory days.

Just when those glory days were I have no idea: the entire decade of the 2000’s was a write-off for most people. Real incomes, stock prices, job growth … you name it, the 2000’s didn’t deliver anything at all. It was a decade we sincerely need to avoid replicating. Any policy enacted from 2000 through 2008 needs to be consigned to the trash, and any from last year copied only in a vastly scaled up version.

I think Krugman keeps on capturing it well: what seems to be missing in the analysis done by the cheering section is any hard thinking. All the evidence, and now there is tons of it, points to a very lethargic economy for many years to come. This lethargy results from one simple fact: our finance system is severely broken. Credit flows are weak. We are still unwinding from insanity the banks foisted on us. Asset values are still high – yes even housing is still expensive by historic standards in many areas. And far too large a portion of corporate profits flows out to managers rather than to shareholders or employees. Rent-seeking is rampant and corruption endemic.

We have deep and systemic problems, and we lack the willpower to fix them.

Let me illustrate what I mean: in Slate I read about the new record breaking passenger train being introduced in China. Following a glowing report about the technology and the benefits the high speed link would bring to the Chinese economy the reporter ended by stating, with abandoned ennui I presume, that ‘of course we could never introduce such a train here in the US’. For political and economic reasons. Our politics and economics, both of which we have lauded for decades as the model for the world to follow, now seem to be stopping us taking any bold action. Instead we are mired in petty bickering and endless culture wars. We have a Senate trapped in 1700’s posturing. We have an elite comprised of brilliant bureaucrats for whom triumph is avoidance of failure. Plus we have social sclerosis on a par with that much derided ‘Old Europe’, but with none of the benefits.

All of which apparently prevents us from carving our way through problems within the banking or health care sectors. Just look at the effort we expended to legislate a weak and borderline ineffective stimulus plan. At the very height of a national crisis no less.

I hope that Krugman turns out to be wrong. In his speech in Atlanta last week he spoke about Japan’s 1980’s experience and how we look very much as if we are emulating it. His point being that we have a model of what might be in store if we fail to be radical in our policy choices: Japan still hasn’t fully recovered from its deflation and asset price implosion of 38 years ago. He says that the Japanese evidence is why he remains more pessimistic than most about the next few years.

It may seem an odd thing to say, but if we want fewer of today’s mixed reports, if we want manufacturing and construction to drive rather than sputter forward, then we need substantial, significant, far-reaching, imaginative, and bold reform of finance. Without which we will have growth ho-hum growth and many lost opportunities. We will lose our vigor but retain a nice veneer of nearly acceptable performance. We will always be close enough to success that we cannot take aggressive action for fear of plunging downward. Yet we that same reticence will condemn us to watch opportunity pass us by.

And the chances of bold action are? Given this last twelve months?

Let’s just say I wouldn’t bet on it.

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Beware: The Hawks Attack

I understand if few of you know who Charles Plosser is. Most of you don’t even care. Maybe after you understand what he said in a speech yesterday you’ll pay attention.

Plosser is the head of the Philadelphia Federal Reserve Bank. Mercifully he will not have a vote on the Fed’s monetary policy setting committee until 2011, because he is a committed interest rate hawk. He wants to raise rates sooner rather than later, if not now.

His argument is straightforward: the economy is now growing, the crisis is dealt with and we should now start to return Fed policy to its anti-inflation task. That implies undoing much, if not all, the extraordinary ‘pump priming’ the Fed has engaged in over the last year or so. This should be done with urgency and aggression since the threat from a surge in inflation is deemed to be very high.

Plosser uses all sorts of sporting analogies and along the way seems to conflate ice hockey and monetary policy as only a true ‘jock’ could. Generally I find discussing policy issues in terms of ice hockey unhelpful, but apparently Plosser thinks otherwise.

Lets see what he said:

  1. The economy is now safely on a growth track. He expects GDP to grow 3% in the fourth quarter and by that same amount all nest year.
  2. He acknowledges that the stimulus is wearing off and that the inventory adjustment is fading, but he sees consumption as robust enough to carry the load along with a slow bounce back in real estate.
  3. He talks about unemployment in what I consider glib terms. He sees it as lagging the recovery – it always does – and so the fact that it is above 10% and was rising until very recently is of no real concern. It will come back down in due course. Besides there’s not much we can do about it.
  4. There is no immediate likelihood of either deflation or inflation. Both are under control because economic conditions are generally benign currently.
  5. But: inflation is a very real threat in the medium term – two to three years hence. This is because of all that cash sloshing about the economy as a result of the Fed’s various bail out and monetary stimulus actions. This cash represents a real threat since it cannot be absorbed by growth and so will find its way into prices. Hence inflation.
  6. The argument that inflation is not an issue because of all the slack in the economy is dismissed on two grounds: first it is difficult to measure ‘slack’; and second, we have had high inflation during periods of high slack anyway – e.g. the 1970’s.
  7. Apparently the markets agree with this assessment and are concerned about inflation down the road – the highly sloped yield curve suggests a high inflation risk premium for five year and beyond money.
  8. So … drum rolls please … the Fed should begin to rein in its activities; reduce the cash in the system; and raise interest rates. This will get it back to its anti-inflation stance [a.k.a. ‘encouraging price stability’] which Plosser says is the Fed’s raison d’etre.

Where do I begin?

He may be right about GDP growth. I think he is at the higher end of the optimistic forecast range, especially for next year, but let’s allow him his 3% growth rate.

He slips right by unemployment as if it is an awkward side issue. While he agrees that it is unfortunately high, he doesn’t perceive the need for any action – unemployment will take care of itself in due course. In this he is correct. What he misses is any notion of whether that timing is acceptable – do we really want high unemployment for the next five years? And, he fails to address the obvious problem that high unemployment could undermine growth through its sapping at both consumer confidence, and more concretely, at wages available for spending. He makes no comment on either of these issues and blithley sidelines the entire jobs discussion as being secondary.

I have warned you about this syndrome before. Its the ‘sound central banker syndrome’. They just love being seen as scrooges. It gives them a puritanical sense of rectitude: they are the bulwark against the follies of mere mortals like you and me who want a more secure future along with a job. In the eyes of central bankers the only security worth fighting for is ‘price stability’. Low inflation. Once this is assured the economy will take care of itself.

This is very laudable. And I agree that stable inflation over the long haul is vital to economic health.

But we don’t have an inflationary threat. There is none. Nada.

This is where Plosser’s ideology takes over.

You see, he’s a Chicago school guy. A proud one too. To those folks economics is really simple: scale back the government so it doesn’t get in anyone’s way; abolish all regulation; let the markets rip; and keep prices stable. Oh, and by the way, it is the Chicago school that teaches that there is no involuntary unemployment. If only those workers would accept lower wages they’d all have jobs.

Given this ideology it is hardly surprising that Plosser neglects to mention that the Fed has two goals in its Congressionally provided charter: price stability and low unemployment.

Conservatives do this all the time: they look at the part of the charter or article they prefer and ignore the other part[s]. They do that with the Second Amendment all the time – the constitution says absolutely nothing about the right to bear arms outside of the context of a ‘well armed militia’. And the Fed is supposed to put equal emphasis on unemployment and inflation.

Finally, Plosser’s notion that a steep yield curve supports his argument is a common hawk position. It fails the test of even mild scrutiny. Medium and long term interest rates are now back to more normal ranges. They are no higher than they usually are in periods of GDP expansion. They are certainly well in line with rates back in the earlier 2000’s. The steepness of the yield curve comes not from high long term rates – which is Plosser’s argument – but from historically low short term rates. Why are those short term rates so low? Hmmm. Banking crisis? Recession? Credit market chaos?

So Plosser’s entire discussion is supposed to lad us to the point of agreeing that raising rates is now, or soon will be, an imperative. But nothing in his argument, not even all that ice hockey jazz, actually supports him. His is an argument looking for a problem.

Presently all the analytical signs indicate that the Fed should keep rates low. Possibly for another year. The so-called Taylor Rule, the rule of thumb analysis that balance the Fed’s two targets of inflation and unemployment, produces a negative Fed Funds rate, as low as -6%, still. This may be off the mark, but at least is has an air of analytical rigor to it. Plosser offers no such rigor, simply an ideological viewpoint. Given a choice between analysis and Chicago school ideology I would prefer to put my money on analysis.

Keep rates down for a while yet.

Are there risks to this? Absolutely. The biggest being that our hyperactive banks will use those low rates to gamble and thus inflate a new bubble. There are signs that this is already happening in emerging market stock and asset prices.

But the downside risk to low rates is more than offset by the damage a rate hike would inflict on our economy.

If you believe, as I do, that growth is fragile, then a rate hike runs the risk of plunging us back into recession. There is too much rubbish still cluttering up bank balance sheets and more is on its way via the commercial real estate market. A second recession could undo all the good work we have done in patching up [but not fixing] the banks. So a double dip recession represents, to me at least, a far more dire threat, than that of excess liquidity slopping about global markets.

Basically it all comes down to whether you think unemployment matters enough to be a focus of policy.

To me it does.

To hawks like Plosser it doesn’t.

So beware: the hawks attack!

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Interest Rates and Bank Lending – What Lending?

Well not quite none. The point being that loans to businesses by commercial banks have been declining steadily for three months, at something like an annualized 28%. So while a lot of media attention has been given to all the shenanigans banks are playing with their retail customers – people like you and me – the bigger news is that they have put the squeeze on business like no tomorrow.

This is not good.

For about three decades banks had become steadily less important as sources of credit to business. The old fashioned bank loan was replaced a long time ago by things like commercial paper. The reason was simple: after the real estate debacles of the late 1970’s most banks had worse credit ratings than their premier customers. That meant those customers could borrow more cheaply from the credit markets than the banks could. The only problem was that there was no vehicle available for these customers to access those markets. In stepped the investment banks with products like commercial paper and within years most major corporations had dispensed with the traditional banking relationships of yore. The big banks lost both customers and income streams which drove them into searching for other ways to make a buck. The boom in credit cards and so on was partially fueled by this sequence of events.

Fast forward to last year: the market for products like commercial paper is referred to as the ‘shadow banking system’. It is a shadow because it performs the same kind of function as regular banking – moving money from people who have a temporary excess to people who have a temporary shortage – but is beyond the reach of the regulatory system. It is in the shadows.

This parallel ‘shadow’ system was, we were told for years, a wonderful phenomenon imbued with all the usual magical powers that free markets are supposed to possess: it was cheap, efficient, and unbiased. Its capitalist motivation drove it, its advocates claimed, to allocate capital in the most socially efficient way possible. And certainly better than the stodgy banks.

Call me skeptical but the results are in and the shadow banking system looks a lot less robust than it used to. All that cash flowing into mortgage backed securities etc probably wasn’t the wisest, most efficient or socially beneficial allocation available. But that’s just me. Those Wall Street wizards obviously know much more than I do.

The relevant part of this, to our story today, is that the shadow system was what froze up last year. So much for that Efficient Markets Hypothesis.

This freeze left most major companies, and a ton of not so major ones, exposed to cash flow problems. Their most important source of cash dried up and withered away in a few days. They faced a massive liquidity crisis.

In stepped the Federal Reserve Board who, acting as lender of last resort, pumped trillions of cash into the banks in order to flood the economy with liquidity. This flood is why we have so few, if any, bank panics. There have been no ‘runs on the bank’.

Since the Fed has to run things through the banking system, and not through the shadow system where it has no [or little] regulatory control, all this cash went to the banks, who were suddenly awash with cash. They still are.

Before I go on I should clear up what might be bothering you: if all the banks were awash with cash why did we need to bail them out?

That’s because the banks had two distinct problems.

We bailed them out because their assets stunk and were exposed as worthless. Or worth very little. Accounting rules require banks with useless assets to right the value of those assets down to the level that they could command were they sold in a market. These right-downs cut into bank capital. And if you right off enough you eliminate capital and through the bank into insolvency. An insolvent bank is one whose assets are wroth less than it owes its depositors. It was to prevent insolvency that we handed out vast sums of taxpayer money – that cash was used to bolster capital and thus allow the right down of assets without having to close the banks down.

So problem number one was a solvency issue. TARP fixed that. Or has so far.

The second problem is one of liquidity.

This arises when customers ask for their deposits back and a bank doesn’t have enough cash on hand to meet those demands. Ordinarily a bank would sell assets to raise the cash it needs. But in an economy riven through with fear it might not be possible to sell those assets. This would set in motion a classic bank run. A bank subject to this could have loads of good assets to sell and may have tons of capital. It simply doesn’t have cash. It is illiquid.

What’s this got to do with the decline of bank loans?

The problem is that we have masses of liquidity. As I mentioned above the Fed flooded the economy with cash in order to prevent banks runs. The banks, for a very short while back last fall, used that cash to provide loans to businesses. In effect the banks moved back into their old way of doing business: they issued bank loans to customers who had been getting their cash from the now defunct shadow system.

But recently the banks have stopped doing this. They obviously are concerned about making loans to businesses who may not weather the recession. Since the banks are still knee deep in toxic assets they naturally are afraid to add more. So they stopped lending.

Hence that dramatic decline in lending.

The implications are profound. Without credit the economy will have a very difficult time getting back on its feet. In fact it won’t. As long as credit contracts the economy will most likely sputter at best. So that 28% decline in business loans looms very large across any optimistic forecast for GDP growth. I would argue it undermines any credible chance of getting a sustainable recovery at all.

The double whammy of prolonged high unemployment and a frightened banking system will most assuredly prevent long term recovery. All our policy actions need to be targeted at resolving those two conundrums.

You might ask – at least those of you who are still with me – what happened to all that liquidity?

Well.

The Fed flooded the economy with cash. The banks said ‘thank you’ and deposited in the safest place they could. After all the purpose of the cash was to provide liquidity. Where is that safest place? The Fed. That’s right. The banks have deposit accounts at the Fed that they can access to pay depositors when they need extra cash. And that’s where most of the flood of liquidity ended up. Back in the same vaults it came from.

Phew.

Now this represents a different problem.

One that you will be hearing a lot about, especially as the first signs of growth emerge.

Here’s why it’s a problem:

When the Fed prints a ton of money – which it did this year – that money could find its way into the pockets of people who then try to spend it. As I just told you this is not a problem at the moment because the banks have stuffed all that cash in the Fed’s own vaults.

But.

What happens when things start to look good?

That banks will start to lend. Surely you will shout: that is a good thing! Well, yes and no.

As long as the economy is producing lots of things to buy, the answer is yes. The money will be there to let us buy all those new things. But if the economy is producing fewer things than we have the money to buy – there is too much money chasing too few things – then we will drive up inflation. That’s where inflation comes from. Too much cash and not enough stuff to spend it on.

And that’s a huge concern.

All the efforts the Fed made to prevent a liquidity crisis could now turn and bite back as rampant inflation.

This is why we will be hearing arguments from conservative economists that the Fed should raise interest rates sooner rather than later. Rising interest rates will slow that rate at which the banks can shovel all that cash out as loans – loan demand will be reduced because the loans cost more. That would allow the dispersal of all that liquidity without driving up inflation.

The risk of this?

That the Fed moves too soon and raises rates too early. That would kill any incipient recovery. That’s what the Fed did in 1937 with the result that the Depression lasted a couple years longer.

My own view is that the flood of liquidity is nowhere near being inflationary at the moment for two reasons: first, as I have told you, the banks are simply sitting on it and not lending. The trend in bank loans is exerting exactly the opposite pressure – it is deflationary not inflationary. Second: the economy is operating so far from capacity that we are a very long way from being at the point where there is excess cash and no stuff available to spend it on.

Combine these two arguments and I simply cannot see a reason to raise rates any time soon.

But I am not at the Fed.

There is a very strong and growing camp in the Fed that is arguing for a rate increase fairly soon.

I think they’re nuts. Those loan figures support me.

There are only two ways to explain those loan numbers. Either, as I have been talking about here, the banks are sitting on the cash for fear of future losses. Or there is simply no demand for loans. Given the drastic decline in industrial capacity utilization we have seen through this recession, this latter cause is highly probable. Add them together and we arrive at a water tight defense of low interest rates.

Bernanke will have to opine regularly on the virtues of tighter money, but once he’s back at the Fed he’ll have to keep the money spigot wide open.

Our problems are not done yet.

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Housing and Prices: Slow, and Slower

There isn’t much to discuss in this morning’s release of new home starts: they fell very slightly from June’s annualized rate of 587,000 units a year to 581,000 units a year. No big deal. The more interesting question is whether we can say anything about the longer term based upon this data. Probably. It looks as if the housing market is at the bottom of its cycle. Starts are off 74% from their peak. That means there is only one way to go: up. So I expect housing to become a positive growth factor in GDP this quarter and into next.

But I don’t expect it to be very significant.

The point is that the government’s stimulus efforts, in the case of housing that first time buyer tax credit of $8,000, has worked like a charm. The lower end of the market, in both the existing and new home sectors, have seen plenty of activity. This has allowed low end prices to firm up and stop declining quite as fast as before, and it encouraged a small upturn in new home construction as builders rushed to have appropriate inventory available before the tax credit expires. This more than anything seems to be the cause of strength in housing right now.

What happens when that tax credit goes away at the end of this year is more problematic. It may mean that housing wallows around for a while: a victim of consumer fear and tougher credit standards. In which case that positive contribution I mentioned above will ebb away next year which is why I focussed my comments on this quarter and next.

Even the most optimistic scenario for housing is a weak one. The bubble destroyed so much wealth – albeit it mainly paper wealth – and took whole states along with it. The entire feel good story of Florida for the past ten years has been swallowed effectively by the bubble: all that growth turns out to have been an illusion.

Hopefully the next housing cycle will be more solid. Given America’s obsession with real estate, and its continued welfare status – that awful tax credit for mortgage interest drives up home prices and skews investment – I doubt whether my hopes are justified.

As for today’s news on wholesale prices: they dropped sharply in July, by 0.9% at annual rates, based on the decline in energy costs. Even excluding energy they dropped very slightly, by 0.1%.

This supports my view that inflation simply is not an issue right now. Wholesale prices have dropped a record 6.8% over the last twelve months. The huge swing in energy costs is responsible for that: without energy prices rose 2.6% on the year, but even that is a low enough figure for it not raise inflation alarms.

With labor costs also dropping, as they did last month, average business costs are falling, not rising. If we then factor in extraordinarily weak consumer demand businesses have neither the motivation nor the ability to raise prices much, it at all. So inflation remains non-existent as a policy issue.

Taking all today’s data together what do we learn?

Not much new unfortunately. The economy remains very weak, although in parts it is beginning to show some life. The big questions are now about how strong and how sustainable those improvements are. And whether there is sufficient strength for the recovery to become self-sustaining next year. I have my doubts about that still.

With banking about to take a hit from commercial real estate and credit card debt right downs, credit extension will be soft. There are no signs of jobs suddenly becoming abundant. And debt still presses down on household budgets. That is a recipe for a very pallid tone to the recovery.

Today’s news seems to fit that scenario very well.

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