Thursday August 19, 2010 - 15:19:27 GMT
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US Data - Soft Patch More Like Quick Sand, Calling For Fed Action Rising
Jobless claims are trending higher at if I had to bet the main source of newly unemployed are government workers as state and local governments face gaping budget deficits and in many cases no legislative responses to these deficits (California comes to mind). Everyone knows too that this trend is politically radioactive for the Democrats in Congress heading into the midterm elections in November. And since policy acts with long lags, there is no time like the present for policy action. Fiscal policy is not an option short of a serious mutiny of centrist Democrats in the House and some in the Senate facing election. Indeed not even the White House is going to push for new fiscal stimulus short of another calamity (I would argue there is far too much complacency on this risk at every level).
My point is the Fed is the only available optionâ€¦much as BOJ in Japanâ€¦and the political pressure on the Fed to act now and act big is growing exponentially in Washington and elsewhere in the liberal wing of the Democratic Party â€“ Krugman and Stiglitz come to mind. Frankly the message this week from Kocherlakota in public and likely Bernanke in private (to the Washington Postâ€™s Irwin) of no need to panic or move rashly is surely going to lead to a rerun of the Bush 41 confrontation with Greenspan in 1992 election year (more on the lineâ€¦Bush lost to Clinton).
And it is not as if the economy is humming along growing jobs and income. This economy stinks outside of two of the four bailed out industries (autos and banks â€“ insurance and mortgage securitization not real winners).
I am not pretending to be a fly on the wall in the White House or the FOMC. But circumstances suggest Bernanke is under huge political pressure to act and act nowâ€¦that message will get even more backing when Yellen and Raskin are confirmedâ€¦and likely Diamond with a lag.
Bernanke will act and there will be more QE ahead and it wonâ€™t be particularly gradual. Another lousy payroll report in short order will break the way of the White House and Democrats. The Fed has a long history of reacting rather than â€śproactingâ€ť. So what should a panicked Fed do? Buying more Treasuries is so 2009. How about buying munis which would allow state and local gvts to get back to more easily funding deficits and keeping public sector workers on the payrolls?
Yes the phrase (song line) â€śyes I am turning Japanese, I really think soâ€ť is over used and tiredâ€¦but look at the BOJ and Japanese gvt â€śYen summitâ€ť next week to get an idea of what lies ahead for the Fed and US gvt policy debate and direction. I am betting on both the BOJ and the Fed cracking under the pressure of an ever rising currency, weakening economy and the approach of key elections and hitting the panic buttonâ€¦fall elections are just around the corner and by-any-means-necessary applies.
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