An Historical Analogy applied to today’s debt ceiling crisis, with apologies to Barbara Tuchman

Discerning readers of history (so that excludes a number of people) will recall that in Tuchman’s magisterial account of how the world went to war in August 1914, she identified several factors that accounted for why the leaders of the great powers each felt victory would be painless assured. First, they thought that the war would be quick; “Home before the leaves fall”, as Kaiser Wilhelm predicted. Second, they broadly misunderstood the economic implications of the conflict, believing free trade would prevent an expansion of the conflict to continent-wide proportions. Third, military leaders failed to consider the political implications of military plans, such as the German violation of Belgian neutrality.

The result was a costly and prolonged war that no leader sought, or even contemplated, but were pushed into exactly because of their mistaken beliefs.

I think we could very much be in for a repeat of this experience. E

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– The major U.S. index futures are pointing to a lower opening on Monday, with sentiment reflecting nervousness over whether U.S. lawmakers will agree on a debt deal to avert a major disaster. The underlying anxiety could keep sentiment subdued in the markets and this is reflected in the rout witnessed by risky assets. The Asian markets ended sharply lower, while the European markets are seeing modest weakness. Traders may closely track the developments on the debt front before deciding their trading moves of the day.

U.S. stocks rebounded in the week ended July 22nd, as the Greek rescue plan, some positive economic data and earnings and hopes that the U.S. debt ceiling will be raised comforted traders and led to strong buying in risky bets, including equities, commodities and risky currencies.

Last Monday, debt fears weighed heavily on the major averages heavily, dragging them deep into the red.

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From a new IMF working paper by Prakash Loungani:

We document information rigidity in forecasts for real GDP growth in 46 countries over the past two decades….

We investigate: (i) if rigidities are lower around turning points in the economy, such as in times of recessions and crises; (ii) if rigidities differ across countries, particularly between advanced countries and emerging markets; and (iii) how quickly forecasters incorporate news about growth in other countries into their growth forecasts, with a focus on how advanced countries’ growth forecasts incorporate news about emerging market growth and vice versa.

Figure 6 from the paper shows how fast news is incorporated.

With an application to accurately counting stimulus effects, for the benefit of the numerically challenged

Here I try to explain why dividing a number at a point in time by a cumulative number does not make sense (Warning: some understanding of calculus helpful). Reader Manfred defends the Weekly Standard’s calculation of dividing net jobs created at an instant in time by cumulative spending to obtain a dollars/job figure. Specifically:

What is a stock is the amount of jobs in an economy at a certain point in time. But the 3.5 million figure is the *change* in the stock; this is the amount that the stimulus fans said that would be created new during a certain period of time; thus, it is a flow, not a stock.

A similar calculation was undertaken by Professor Mulligan (rejoinder here).

So, in order to illustrate the oddities of such a calculation, let’s consider two variables, y-hat and x-hat, which are deviations of the variable y from baseline, and x from baseline respectively. I p

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…you need to know how you got where you are. From the abstract to a working paper by myself, Barry Eichengreen and Hiro Ito, entitled A Forensic Analysis of Global Imbalances:

We re-examine the determinants of current account balances applying updated data to the framework based on Chinn and Ito (2007). …

…The main purpose of this study is to examine whether the determinants of global current account balances changed during the period preceding the global crisis of 2008-09 while inquiring into the prospects for the global imbalances in the post-crisis period. Based on our estimates, changes in the budget balance appear to be an important factor affecting current account balances for advanced current account deficit countries such as the United States and the United Kingdom. The effect of the “saving glut variables” on current account balances has been relatively stable for emerging market countries, suggesting the prominence of those factors is not a particularly recent phenomenon. We

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Congressman Ron Paul (R-TX) is apparently proposing that the U.S. Treasury simply refuse to pay interest and principal on the $1.6 trillion in Treasury securities currently owned by the Federal Reserve. Dean Baker, Greg Mankiw, Steve Williamson, and Stephen Gandel all seem to think it’s not a totally crazy idea. Here’s what I think they’re missing.

Steve Williamson frames the question as follows:

Now, to work through this, consider two alternative scenarios. First, suppose that, in the absence of Paul-default, the Fed holds the Treasury debt it has acquired until maturity. In this case, clearly Paul-default cannot make any difference. Without Paul-default, the Treasury makes the payments on the Fed’s Treasury holdings to the Fed, and the Fed sends those payments back to the Treasury. With Paul-default, the net flow between the Fed and the Treasury is the same: zero.

Here we need to distinguish between the Fed’s income statement, which keeps track of its profit or loss, and the Fed’s balance sheet, which keeps track of its assets.

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Event studies are one method that has been used to try to assess the potential effects on markets of nonstandard monetary policy measures such as QE2. The Federal Reserve Bank of St. Louis recently hosted a conference whose objective was to evaluate evidence on the effects of these policies. Here I relate remarks I made at the conference on some of the challenges from trying to use event studies to answer this question.

Event studies look at a narrow window of time around which a significant policy initiative was announced to see how markets responded at the time. The hope is that, over the short period studied, the policy announcement itself is the most important news item to which markets were responding.

For example, a paper by Joseph Gagnon, Matthew Raskin, Julie Remache and Brian Sack presented at the conference identified 8 key days on which major details of the Fed’s initial large-scale asset purchase (sometimes referred to as “QE1″) were communicated to the public.

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One of the most coveted jobs in the North American private equity landscape is available, and I regret not having passed the news along earlier. Its apparently no secret that the CPP Investment Board is looking for a new head of Funds and Secondaires, which was reported by Private Equity Online back in late April:

Head of funds and secondaries at Canada Pension Plan Investment Board John Breen will step down on 30 June “to pursue another avenue in private equity”, a pension spokesperson confirmed. CPPIB senior vice president Andre Bourbonnais is leading the search for Breen’s replacement.

Breen joined CPPIB in 2006, prior to which he was a founder of private equity firm MWI Partners and a managing director of the global private equity division of Merrill Lynch. He also was a founding managing partner of the captive private equity fund, CIBC Wood Gund Capital.

The time and attention of Mr. Breen

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