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Household deleveraging is a very healthy indicator

The Fed's latest data on households' debt service burdens (as of Dec. '09) came out just the other day, and the news continues to be good. Households are reducing their debt burdens, which are best measured as shown in the chart by comparing total debt service payments to total disponsible income. Indeed, by this measure, household financial burdens are no higher today than they were in the mid-1980s. (Measures that compare household outstanding debt to income are flawed, because they compare the stock of debt to the flow of income; it only makes sense to compare the flow of debt service to the flow of income: to compare monthly debt payments to monthly income.)

By reducing their debt servicing burdens, households are expressing a strong desire to increase their holdings of money. (Reducing one's debt is equivalent to increasing one's holdings of money, just as increasing one's debt is equivalent to reducing, or shorting, one's exposure to money.) This is the phenomenon that the Fed has been fighting for the past year or so. The increase in money demand on the part of households and businesses has been so huge that the Fed has had to take extraordinary measures to increase money supply, via a massive expansion ($1.25 trillion) of bank reserves.

As an objective observer of the goings-on in the economy, I can't find anything in this data or in this chart that paints a worrisome picture for the economy. If the financial crisis of 2008 was brought on by excessive borrowing, we have surely corrected the underlying problem by now.

As a contrarian, I would note that with the deleveraging trend so patently obvious, and with the Fed so blatantly accommodative, it is probably not a bad idea to swim upstream and increase one's leverage these days. Which is equivalent to saying that holding cash is such a mainstream strategy—and so minimally remunerative—that it is embarrassing. See my posts over the last year on this same subject here.

Government failure, not market failure

Allan Meltzer is one of the great living economists. I've been a fan of his ever since he was asked to review the first research paper that I produced for clients of the firm I worked for back in 1981. He wrote an article in the WSJ a few days ago titled "Market Failure or Government Failure." It's short, sweet and to the point: the financial crisis of 2008 was the direct result of misguided government intervention in the market.

Last year the New York Times ran several articles about the end of capitalism. Others picked up this meme and reinforced it with claims that greedy bankers and deregulated financial markets had brought the world to the brink of another Great Depression. Then— just in the nick of time—we were allegedly saved by timely, forceful and intelligent government actions. The groundwork was laid for the next phase: more government regulation of financial and economic life.

Left out of this narrative is the government's disastrous mortgage and housing policy. Without the policies followed by Fannie Mae and Freddie Mac—and the destructive changes in housing and mortgage policies, like authorizing subprime and Alt-A mortgages for impecunious borrowers—the crisis would not have happened.
How can we avoid another crisis? We need to fix the problem of government intervention in the markets. It won't help at all to increase regulation.

Regulation often fails either because regulators are better at announcing rules than at enforcing them, or because the regulated circumvent the regulations. Consider the Basel Accord, passed following bank failures in Germany and the U.S. in the 1970s. This was supposed to reduce banking risk by requiring banks to increase capital if they increased holdings of risky assets. But financial markets circumvented it by putting the risky assets off their balance sheets. Unusual? Not at all. In 1991 Congress passed the FDIC Improvement Act, which authorized regulators to close banks before they lost all their capital. Regulators ignored it. Unusual? Not at all. Bernard Madoff, Allen Stanford, AIG—regulation failed in all of these instances.

This is because regulation is static, while markets are dynamic. If markets don't circumvent costly regulation at first they will find a way later.

The answer is to use regulation to change incentives by making the bankers and their shareholders bear the losses. Beyond some minimum size, Congress should require banks to increase their capital more than in proportion to the increase in their assets. Let the bankers choose their size and asset composition. Trust stockholders' incentives, not regulators' rules.
And consider these words of eternal wisdom:

The market is not perfect. It is run by humans who make mistakes. But the same humans run government where they make different, often more costly, mistakes for which the public pays.

Capitalists make errors, but left alone, markets punish such errors.

Unfortunately there is no one except the voters to punish the irresponsibility of politicians (from both parties) who continue to make costly spending promises that the government will never keep, but for which taxpayers will ultimately pay dearly. The healthcare reform bill being discussed these days is a perfect example of a new government program that will be extraordinarily expensive and inefficient. Voters must rise up and stop this madness.

HT: Russell Redenbaugh

The growth of government

This is a partial response to a reader's post (by DouglasR) that raised a number of issues regarding the proper role of government in our economy. This chart shows total government spending (federal, state and local) as a % of GDP. It is thus a good measure of the "size" of government, since it tells us how much of the economy's total spending is managed or controlled by government.

Note that just over 100 years ago, government represented only 8% of the economy, and now it has reached just over 40%. I think this is an alarming number. When I and other fans of limited government urge a reduction in the size and scope of government, we are not talking about going back to 8% that prevailed in 1900. Most of us would be happy with getting government to shrink back to the level of 30% or so that prevailed in the 1950 and 60s. Even that implies that almost one-third of all the money spent in the economy would pass through the hands of government, or that one-third of all the money that is earned is taken (by taxes) by the government. Surely one-third of GDP is not too small a role for government, and many would argue that it is still way too much. Our Founding Fathers, of course, would have been apoplectic at the mere thought that government could one day consume or command one-third of the economy's resources.

There is a maxim worthy of repeating here. For every increment in the size and scope of government, there is a corresponding decrease in the liberty of the individual. Government cannot expand without encroaching on individual freedom. With Obamacare we are seeing close up the extent to which the government seeks to control our lives. Mandating that everyone purchase healthcare insurance, deciding how much insurance companies can charge, prohibiting insurance companies from denying coverage, attaching the wages of those who refuse to cooperate, mandating what types of insurance coverage we must purchase; this is all frightening, something that would put us on a slippery slope that has no foreseeable end.

What about future growth? I would say that we have achieved the status of the greatest nation the world has ever seen in spite of the growth of our government. I think that if we rolled back the size of goverment just a few decades we could see continued economic expansion that would lift the welfare of all citizens, both here and around the world. I believe that only the private sector is capable of creating new and productive jobs, and new and creative ideas. The private sector is abundantly capable of creating solutions to all kinds of scarcities, should they exist. Silicon, one of the most abundant elements on earth, was only recently harnessed to do the drudgery work of hundreds of millions of workers, who might otherwise be at work switching phone calls, etc., thus freeing up those workers to do countless other things that contribute to the general prosperity. Without computer chips, the internet would be impossible, and the internet itself was an unimaginable concept when I was born.

To paraphrase the great Julian Simon, the only scarce resource on our planet is human ingenuity. If government is prevented from smothering productivity, entrepreneurship, and ingenuity, our future can be as bright and as big as our imaginations.

The decline of Obama's presidency

We are living in exciting times, especially as the healthcare bill approaches a faux-vote in the House this weekend. Obama has staked his presidency on this bill, and it is an abomination. Every poll I've seen says that the public is clearly against the bill. As this chart shows, 44% of the people "Strongly Disapprove" of the job that Obama is doing. I have to believe that the majority believe that passing this bill using the "deem and pass" strategy is not only wrong but unconstitutional. Obama himself said that this is not the way to govern, but when push comes to shove it looks like he will do anything and contradict himself without qualms.

I still don't believe the bill will pass, and even if it does it will be immediately challenged. If it passes it will become the focus of a referendum in the November elections. It's very likely that if this passes, it will be the last major bill that the Democrats pass in a very long time.

I think the people are outraged, and the outrage is spreading and building. The expansion of government contained in this this bill is gigantic. The bill will vastly expand the reach and intrusiveness of the IRS, which by the way will only need $10 billion to implement. This is Big Government writ large. It is a crazy quilt of rules and bureaucracies that is nightmarish in scope. It is almost inconceivable that our president would stake his administration, and the Democrats their Party's reputation, on a bill that is so complex and controversial; that they would sell it as a deficit-reduction measure when it obviously will end up costing hundreds of billions more than the CBO is projecting (if not trillions).

If there is anything good about this bill, and about Obama's decline in the polls, it is that the people are seeing what Big Government is really about, and it is not pretty. It is becoming scary. I have faith that the American people will not stand for this. I believe we are living in a time of great political change, and it will end up being for the better: for a smaller, less intrusive government. If not now, then we are doomed. But I'm not ready to give up on America, individual liberty, or free markets yet. Are you?

Presentation to NAPM Orange County

Last night I used this presentation when addressing the folks at the OC chapter of NAPM. It's not a standalone presentation, but some of the charts are interesting, and some of the bullet points. I'm not sure this will come across unless you download it first and then run it as a PowerPoint show. I stupidly used an old version of PowerPoint to put this together, and it doesn't do a good job handling my charts and fonts. Next time I'll use Keynote. Let me know if there are problems with this and I'll try something else.

The Obama-Baier interview on Fox

If you didn't see it (I didn't), you can read the transcript here. My impression is that Obama came out of this in a very weak position. Kudos to Bret Baier for an excellent interview. Reading this confirms my belief that healthcare reform is a fiasco that is now of the highest order.

NAPM Orange County

Blogging has been a bit light today, and probably will be tomorrow, since I am scheduled to deliver a presentation to the Orange County Chapter of the National Association of Purchasing Managers tomorrow evening in Irvine. I'm putting together a nice collection of charts and bullet points, and hope to make them available following the presentation.

My main points:

Expectations were simply abysmal one year ago, but now they have greatly improved. The market expected a deep depression, and instead we got a moderate recovery. But the market's expectations for the future are still very cautious: 2-3% growth, low inflation, and the risk that we get another collapse.

Friedman's Plucking Model of growth suggests that given the depth of the recent recession, we should expect very strong growth for the next several years—6% or more per year. From a supply-side perspective this is unlikely, however, given today's rather awful combination of expanding government, a major expected increase in tax burdens, inflationary monetary policy, and protectionist rumblings.

Offsetting these negatives, there are many encouraging developments in the economy that reflect a V-shaped recovery. Corporate profits are strong. Swap spreads are back to normal. Capex is strong. Manufacturing is rebounding. Housing looks to have bottomed. Money is abundant. Mortgage rates are very low. The labor market is no longer contracting and is poised to expand.

The market is downplaying these positives, however. PE ratios are below average. Credit spreads are at or near recessionary levels. Business investment hasn't increased from where it was 13 years ago. Global industrial production is still way below its 2008 high. PE ratios are below average. Equity prices haven't budged since 1998. The unemployment rate is very high.

On balance we should expecte a modest/moderate recovery, with 3-4% growth and a rising inflation trend. Given that the market's outlook is more pessimistic than this, it makes sense to be bullish on equities, corporate & emerging market debt, and commodities. T-bonds and MBS look like the most vulnerable asset classes.

The outlook could improve significantly as we get closer to the November elections, since there are likely to be significant and positive changes to fiscal policy that come out of the election. The key to a more bullish outlook is to cut spending, keep taxes low, and tighten monetary policy. This of course runs directly counter to the consensus, which fears that the withdrawal of fiscal and monetary stimulus would doom the economy. On the contrary, I think fiscal and monetary stimulus are part of the problem.

Inflation is alive and well

The Producer Price Index dropped -0.6% in February, mainly because oil prices fell. Core prices were up 0.1%. Year over year, both are in positive territory; we might say that inflation at the producer level is somewhere between 1% and 5%.

Nevertheless, it's hard to get a grasp on what is happening, with all the gyrations of late. So I put together the following chart which shows the Producer Price Index from 1960 through Feb. '10. (Note how prices have risen fully 640% over this period!! Just a little bit of inflation every year can really add up.)

I've identified 5 different inflationary periods on the chart, with the annualized rate of inflation noted for each. It begins with the wonderful years in the early 1960s when inflation was basically nonexistent. From '66 through '73 we had inflation that resulted from massive government spending programs that the Fed felt obliged to monetize to some degree. Then from '74 through '82 we had the calamitous inflation that resulted from a massive devaluation of the dollar and a Fed that could never tighten enough. From '83 through '03 we enjoyed relatively low and stable inflation thanks to Volcker's bold monetary tightening in the early '80s, and Greenspan's able stewardship of the Volcker legacy. From '04 on, we've had mostly easy policy from Greenspan and Bernanke.

Inflation in the past six years has averaged about twice what it did from '83 through '03, and to judge from the Fed's super-accommodative policy stance, inflation threatens to move even higher. At the very least this chart reminds us that Fed policy does make a difference. It is not unreasonable to expect inflation to be 3% or more in coming years, regardless of how weak the economy is and how much economic slack exists. Bernanke & Co. are stuck in their Phillips Curve rut, much like the Fed was stuck in the 1970s; always thinking that a weak economy would keep easy money from being inflationary. It didn't work then and it's not likely to work now. Very unfortunately for all of us who believe that low and stable inflation is a precondition to prosperity.

The VIX is down, but the market's fears are still huge

I'm showing this chart for the umpteenth time in order to emphasize a point I haven't made in quite awhile. The chart shows how tight the relationship between implied volatility (a proxy for the market's level of fear, uncertainty, and doubt) and equity prices has been over the past year. As fear and uncertainty subside, equity prices rise. It makes perfect sense, especially since the crisis that set in starting in mid-2008 was all about widespread fears of a global financial collapse.

The point I want to make here, however, is that when the yield on cash is basically zero, and the Fed tells you yet again, as they did today, that cash is going to yield zero for quite some time to come, you have to be consumed by fear, uncertainty and doubt to want to hold on to cash. You have to be extremely, extraordinarily worried that the economy is fragile and likely to suffer a setback; that the housing market is on the verge of another collapse; that the Chinese are going to sell all their bonds and send our yields soaring; that the Fed is going to make a huge inflationary mistake and then have to crush the economy; that Obama and the Democrats in Congress are going to take over the healthcare industry and end up spending trillions more than they are claiming it will cost; that the U.S. government will lose its AAA rating and sink under the weight of many tens of trillions of unfunded liabilities; that no one in Washington, nor any group of concerned citizens in the heartland, will be able to stop this runaway federal government spending train, much less turn it around.

If instead you think that there is a glimmer of hope that catastrophe might be averted; that the economy might manage to eke out a moderate recovery with growth rates of 3-4%; that the political winds are now blowing to the center-right instead of the left; that the housing market, after one year of price and construction stability, can manage to avoid another collapse; that the gradual return of confidence will boost consumer spending and lift the animal spirits of businesses just a little bit; that some people out there have enough of a profit motive to figure out how to put at least some of the economy's many idle resources and workers back to work; then you have no reason to hold cash, and every reason to invest in something other than cash. And as investors who currently hold cash gradually come to understand this line of reasoning, the very act of shifting out of cash will add to the economy's upward impetus and become a self-fulfilling prophecy.

There are many wise investors who argue that the equity market is overvalued, that it has risen too far, that it's another bubble waiting to pop. I take issue with those concerns, because I see plenty of evidence that tells me the market is still very conservatively priced. T-bond yields of only 3.65% tell me that the bond market has virtually no hope of the economy returning to trend growth in the foreseeable future. MBS spreads at historically tight levels tell me that the bond market has almost no fear that the economy or inflation will surprise to the upside. Credit spreads are still at levels that in the past have been the precursors to a recession. Corporate profits are well above average compared to GDP, yet equity prices haven't budged for over 10 years and P/E ratios are only average. On the whole, I think the level of yields, spreads, and equity valuation is only consistent with a belief that the economy will be very weak for a long time, and that downside risks still outweigh upside risks.

So if you are even the slightest bit optimistic, it pays to take some risk these days. And to top it off, that's what the Fed thinks as well, and that's what they are trying to encourage people to do.

Fed's MBS purchase program ending with a yawn

The Fed's program to purchase $1.25 trillion of MBS will end in a few weeks, but for all intents and purposes, and as far as the market is concerned, it is over. The big question all along has been how much these purchases, which began about one year ago, were distorting the market, and therefore how disruptive the end of the program might be.

A quick glance at the top chart here would suggest that the Fed's purchases have played a significant role in bringing down mortgage rates and thereby supporting the housing market; fixed rates on jumbo mortgages have fallen 235 bps since the program was announced on Nov. 25, 2008, and conforming rates have fallen about 125 bps.

But since the Fed has only been purchasing conforming MBS, that doesn't explain the outsized decline in jumbo rates, and the huge narrowing of the spread between jumbo and conforming rates. If the Fed were artificially supporting the prices of conforming MBS, then the spread between conforming and jumbos should have widened, not tightened.

Spreads on conforming mortgages have fallen to their lowest levels ever, as shown in the second chart. Could this be all due to Fed purchases? I tend to doubt it. If the Fed were artificially supporting the market, then the proximity of the end of the support should have already caused the market to push spreads wider, but there's no sign of that yet. Yes, spreads have widened just a bit in the past several days, but that's no more than just a random blip.

I've argued in the past that the end of the Fed MBS purchase program could result in a 30-50 bps widening in MBS spreads. That's still possible, but right now it seems less likely. The explanation for why spreads are so tight is therefore this: spreads are tight because the market expects Treasury yields to be relatively low and stable for a long time, and MBS are therefore very attractive since they offer higher yields with virtually no default risk.

Milton Friedman on the fallibility of monetary and fiscal policy

Just a reminder that neither fiscal nor monetary policy is well-suited to fine-tune the economy. Efforts to do so generally cause more harm than good. I can vouch for the wisdom of these words, having observed the interaction of politics and economics for the past 35 years. Milton said this in 1958, and it is still true today, if not more so:

The available evidence…casts grave doubt on the possibility of producing any fine adjustments in economic activity by fine adjustments in monetary policy....and much danger that such a policy may make matters worse rather than better…The basic difficulties and limitations of monetary policy apply with equal force to fiscal policy.

Political pressures to ‘do something’ …are clearly very strong indeed in the existing state of public attitudes.

The main moral to be had from these two preceding points is that yielding to these pressures may frequently do more harm than good. There is a saying that the best is often the enemy of the good, which seems highly relevant. The attempt to do more than we can will itself be a disturbance that may increase rather than reduce instability.
HT: John Taylor

Residential construction still appears to have bottomed

The release of housing starts and building permits for February showed that activity softened a bit, but considering the weather, the results were a bit better than expected. In any event, as these charts show, it continues to look like we have seen the bottom in residential construction activity, which occurred last April, when housing starts were 17% lower than they were in February '10. Building permits in February were 23% higher than they were last April.

Baltic update

It was Feb. '09 when I first highlighted the rise in the Baltic Dry Index as a "green shoot" that augured for a global recovery, and I remarked last May that the dramatic rise in the Baltic was "very bullish." I found this chart quite interesting, since it illustrates how the Baltic has indeed been an excellent indicator of the recovery in equity prices worldwide. Usually it is a coincident indicator, but for most of last year it was a leading indicator, probably because the market was so pessimistic that it was reluctant to pay attention to any positive signs.

Commodity price update

This chart shows the Journal of Commerce Index of commodity prices (blue line), as well as four subcomponents of the index. The y-axis is set so that all indices are equal to 100 in mid-November '01, which is the point at which most commodity prices hit a multi-year bottom. It was also around that time that the U.S. economy pulled out of the 2001 recession. Gold prices had hit bottom in January of that year.

I think it's impressive that all types of commodities are in a rising price trend these days. Of particular note: textile prices, not typically subject to speculative frenzy or hoarding, are only 6% below their all-time high, which was registered early last December. Similarly, the prices of miscellaneous commodities (hides, rubber, tallow, plywood, red oak) are only 6.5% below their all-time high, which occurred in late 2003. A growing global economy and expansive monetary policy are driving a whole range of sensitive prices higher.

More evidence, I submit, that deflation concerns are misplaced. And more reason for the Fed to be increasingly worried about keeping short-term interest rates at zero.

Export update

Here's an update to a chart that shows that goods exports are roughly correlated to outbound container shipments from the ports of Los Angeles and Long Beach. For a long time it's been saying that goods exports (which factor into GDP) were on the rise, given the strong rebound in container shipments. The signal seems to have weakened a bit in the past six months, with container shipments running at a fairly constant rate, and exports slipping a bit in February. But abstracting from the recent weakness, goods exports, and exports in general, have grown very rapidly (more rapidly than ever before) since bottoming last April, as shown in the next chart:

Although the trade picture has become somewhat less bullish in recent months, it is far from becoming a negative. Both exports and imports are still likely to be in a rising trend, despite monthly fluctuations. As the last chart shows, the globalization trend, in which cross-border trade for most countries becomes an increasingly large fraction of overall growth, is quite powerful and thus is unlikely to be derailed.

Many observers are cheering the reduction in the trade deficit that is apparent in the narrowing in the gap between the lines of the last two charts. A reduced trade deficit adds to the calculation of GDP, but a narrowing of the deficit is not always a good thing. Most of the narrowing this time has come from a big reduction in imports. Part of that reduction owes to the almost 50% decline in oil prices, which is good, but most of it comes from a big reduction in foreign capital inflows as the world's investors have curbed their enthusiasm for investing in the U.S. (we can only have a trade deficit to the extent we have a capital surplus). Thus, while the shrinkage of the trade deficit adds to the calculation of current GDP, it also reflects a diminished capacity for future growth due to a reduction in foreign investment. The brightest part of the trade picture is the evidence that exports are growing strongly (up at an annualized 21.5% in the past six months) and remain on an upward trend. This reflects not only strength in our ability to produce, but also strength in demand from the rest of the world. The U.S. is not likely to be the world's engine for growth this time around, given our current monetary and fiscal policies, so it's very encouraging to see that the rest of the world has a healthy appetite for our goods and services.

The Fed can't resist allowing the economy to dictate policy

This chart compares the rate of capacity utilization in manufacturing, mining, and electric and gas utility industries, as calculated by the Federal Reserve, with the inflation-adjusted Federal funds rate. The capacity utilization number is not a literal measure of industrial capacity, but it does serve as a decent proxy for the amount of "slack" present in the economy, which in turn is a proxy for how weak or strong the economy is. The real funds rate is a decent proxy for how tight or loose monetary policy is.

As the chart illustrates, these two variables have been highly correlated for the past 15 years, and they have tended to move together most of the time since 1970. What this means is that the Fed almost always pays a lot of attention to the state of the economy when it makes decisions regarding whether to tighten or to ease monetary conditions. That's because in the Fed's model of inflation, economic slack plays a very important role: the model assumes that idle capacity which results from economic weakness exerts strong downward pressure on prices, and this in turn calls for—and permits—very accommodative monetary policy. The Fed today feels comfortable predicting that interest rates will be unusually low for a long time, because it believes that a lot of idle capacity effectively negates the inflationary risk of easy money.

There are two problems with this approach. One, because inflation does not necessarily move in the same direction as economic growth; it's very possible for high inflation to lead to very weak growth and lots of economic slack—you only have to study the hyperinflationary economies of Brazil and Argentina to see plenty of evidence to support this claim. Inflation is a monetary phenomenon, as Milton Friedman taught us.  Two, because it imparts a reactionary bias to monetary policy: the Fed tends to end up chasing the economy as it strengthens or weakens. For example, when the economy became very strong in the 1996-2000 period, the Fed over-reacted and tightened too much, thus setting the stage for the 2001 recession and the deflationary pressures that became evident in 2000-2003. This in turn set the Fed up for a massive easing campaign, which led to rising inflation pressures (e.g., the housing market bubble) in 2004-2008. The Fed insists it is proactive, but its model of inflation makes it behave in a reactive fashion, and that tends to amplify the gyrations of the business cycle.

As most supply-siders would argue, it would be far better for the Fed to pay attention to market prices, such as the value of the dollar, the price of gold, the prices of commodities, the shape of the yield curve, the level of real interest rates, the breakeven spreads on TIPS, and credit and swap spreads. Right now, for instance, these market-based indicators of inflationary pressures and economic health are saying that there is no reason for the Fed to be as easy as it is, and that in fact the Fed should have begun raising interest rates some time last year. The economy is clearly coming back to life, and inflationary pressures are clearly rising. There are no signs of impending economic distress in these indicators that would warrant today's super-easy monetary policy stance.

What's the message for investors? For one, I think there is a very strong likelihood that the market is over-estimating the risk of deflation, and consequently that the market is overly-pessimistic about the future prospects for the US economy.

Two, I don't think that easy money has resulted in unwarranted optimism about the economy's future, just as I don't believe that the faux-stimulus fiscal policies we have in place are the only reason the economy is growing. When fiscal policy and monetary policy are appropriately calibrated, they can contribute to the economy's health and potential growth, but they can't create growth out of thin air.

I don't see any sign that the market has been fooled into thinking the economy will grow because interest rates are low, even though it is fashionable to worry that an early move by the Fed to raise rates would threaten the recovery. If easy money guaranteed a strong economy, I would be even more optimistic than I am today, but it doesn't. When money is too easy it creates distortions in the economy, and it eventually leads to real trouble because the Fed has to raise interest rates sharply (effectively strangling the economy) to bring down the ensuing inflation pressures. The market knows this. A huge increase in interest rates is already priced in, via the historically steep Treasury yield curve.

Furthermore, I think it's clear that markets worry more about inflation than the Fed's model suggests: breakeven spreads are in the range of 2-3%, which implies inflation at the upper end of the Fed's target, and the consensus outlook for growth, which is in the range of 2-3% per year, is far below the growth rate that one would normally expect following such a steep recession as we've just had. When the private sector expects a big increase in future tax burdens, that severely depresses animal spirits and that is a big reason the economy is not likely to enjoy a strong recovery.

Today's easy money and profligate fiscal policy add up to a bad combination, no matter how you slice it. That is a big reason why I think markets are still very pessimistic about the future. In order to be optimistic, you have to believe that monetary policy and fiscal policy are going to change for the better, and I do. I think the Fed is going to be forced to tighten sooner than expected, and I think that will be a big plus, since it will restore confidence in the dollar and reduce the risks of future inflation. I think that fiscal policy is going to be much less expansive (on the spending side) than current projections suggest, and that therefore tax burdens are going to be lower than the market currently fears. That will also be a big plus, because anything that shrinks the future size of the economy will increase the willingness of the private sector to invest in the future.

Industrial production continues to expand

U.S. industrial production rose a bit more than expected in February, overcoming weather-related difficulties and Toyota recalls. More importantly, however, the recovery in U.S. industrial output comes against a backdrop of a global recovery, as reflected in this chart. There is still plenty of room for improvement before production reaches the highs of 2008, but there are few if any roadblocks for the attainment of this goal. It's likely therefore that industrial production will continue to expand for the foreseeable future. It's nice also that the latest production numbers from Europe reflect a pickup in the pace of growth in recent months, whereas earlier estimates suggested a slower recovery. Japanese industrial production has virtually exploded, surging 32.5% in the past year. Expanding global output is also reflected in industrial commodity prices, which continue to set new highs after slumping in 2008.

Popups (2)

I think the source of the pop-up windows that many visitors have seen was one of my website counters (Motigo). I've removed it, and hope this fixes the problem. Thanks for all the helpful suggestions. If you still see popups, however, please let me know.

In any event, it bears repeating that using a browser like Internet Explorer, or any browser that does not give you the option of blocking popups, exposes you to the annoyance of popup windows. I highly recommend using either Safari or Firefox (I use both).