Is Europe Recovering Yet?

Natural Disaster Vulnerability vs Income

US vs European GDP

Fiscal Cliff Extra

So I'm trying to game out this fiscal cliff thing now that it seems to be becoming a matter of urgent practical importance:

• It seems likely at this point that there will be no agreement before Jan 1st given that Speaker Boehner cannot deliver his caucus (about 90% certain of this).
• I assume that Obama will not be so weak as to immediately capitulate to the right wing of the house Republicans (about 90% certain of this too).   
• So then we go over the "cliff", payroll taxes and income taxes rise, defense spending falls, etc
• Public blames Republicans, but hard-core right-wing Republicans don't care what the public (aka "liberal media" and "biassed pollsters") think.
• The federal deficit falls, but not to zero, so, very shortly, we hit the federal debt ceiling again.
• Republicans refuse to raise the debt ceiling unless all their demands are met.
• Obama gets to choose between the various constitution-stretching options to ignore the debt-ceiling, or capitulating to whatever the conservative wing of the Republicans will vote for (and never being able to look his progressive friends in the eye again).
• In the meantime, the economy goes in the tank due to the combination of the reduced spending power of the taxpayers and government contractors, and uncertainty over whether the federal government will honor its debt or not.
• Public is furious, but none of the players face reelection for two years, so no change in positions in the short term.

Does anyone know exactly when we hit the debt ceiling again assuming that we do in fact go over the cliff?  I haven't quickly been able to determine this but I seem to remember reading that it's Jan/Feb.

If this really is a game of chicken, who swerves first?  It seems like whoever wins this gets to basically dictate most of what happens for the next two years.

In the meantime, seems like we individually would want to sell speculative assets, avoid risky ventures and career moves, reduce spending and generally hunker down until the dust settles.

Dissents or insights welcome in comments.

Update: Wonkblog says that the latest we hit the debt ceiling is February (we actually hit it this week but the Treasury can use the by-now-familiar extraordinary measures to hold it off a few more weeks).

Cement Production: China and Elsewhere

Current IMF Growth Forecasts

Recent Pause in IPO Pricings

The Median Influencer

This blog post is being largely outsourced from this Interfluidity post Depression is a Choice by the often brilliantly insightful Steve Randy Waldman:

Usually, economists are admirably catholic about the preferences of the objects they study. They infer desire by observing behavior, listening to what people do more than to what they say. But with respect to national polities, macroeconomists presume the existence of an overwhelming preference for GDP growth and full employment that simply does not exist. They act as though any other set of preferences would be unreasonable, unthinkable.

But the preferences of developed, aging polities — first Japan, now the United States and Europe — are obvious to a dispassionate observer. Their overwhelming priority is to protect the purchasing power of incumbent creditors. That’s it. That’s everything. All other considerations are secondary. These preferences are reflected in what the polities do, how they behave. They swoop in with incredible speed and force to bail out the financial sectors in which creditors are invested, trampling over prior norms and laws as necessary. The same preferences are reflected in what the polities omit to do. They do not pursue monetary policy with sufficient force to ensure expenditure growth even at risk of inflation. They do not purse fiscal policy with sufficient force to ensure employment even at risk of inflation. They remain forever vigilant that neither monetary ease nor fiscal profligacy engender inflation. The tepid policy experiments that are occasionally embarked upon they sabotage at the very first hint of inflation. The purchasing power of holders of nominal debt must not be put at risk. That is the overriding preference, in context of which observed behavior is rational.

US vs EU GDP Growth

Regional Misery Distribution

OECD Projects Brief Mild Recession in Europe

Global Market Capitalization

US vs Eurozone Growth

Can we Grow the Economy Any More?

Kevin Drum had an interesting post yesterday in which he collected a list of theories for why it's difficult to grow the economy any more:

1. The basic Rogoff/Reinhart observation that financial collapses due to asset bubbles just take a long time to work through. Given the size of the 2008 collapse, historical evidence suggests that it's going to take five or six years to recover, and that's that.
2. The Tyler Cowen "Great Stagnation" hypothesis. We've picked through all the low-hanging economic fruit over the past century, and like it or not, we're now entering an extended period of low productivity growth because we're not inventing lots of cool new stuff.
3. The related (I think) investment drought hypothesis. Ben Bernanke famously ascribed the housing bubble partly to a "savings glut" from overseas, and the flip side of that is an investment drought. The reason financial assets became so popular is that, even with all that money sloshing around the system, there simply weren't very many high-quality investment opportunities available in firms that make real-world goods and services, and that hasn't changed.
4. The peak oil theory. Production of oil has pretty much maxed out, which means that every time the economy gets moving it will create a spike in oil prices, which will send the global economy back into recession. We're now in a continual oil-fueled boom/bust cycle that limits our long-term growth rate.
5. The Michael Mandel contention that increased consumption simply leaks out of the economy to China and other countries. Stimulating consumption in the U.S. just won't do much for the American economy if all those extra dollars mostly get spent on overseas goods and services.
6. Various structural explanations that suggest the United States has an increasing number of workers who flatly don't have the skills to do anything useful in the modern economy — a problem that was temporarily masked by the housing bubble and was only fully exposed when the economy collapsed. This takes various forms, both weak (workers can be retrained but it will take a while) and strong (forget it, they're simply useless).
7. The self-serving group of partisan hack theories: regulatory uncertainty is the real problem, taxes are too high, the EPA is strangling America, hyperinflation is just around the corner, markets are cowering in fear of future deficits, etc. etc.

Of these, I subscribe to versions of 1, 4, 5, and 6.  But let me comment first on the ones I don't agree with.

Morning Tealeaf Reading

Reading the state of the global economy is only getting harder.  However, here's my read this morning (subject to change without notice):

• I think that the US economy is likely to improve a bit in the second half (absent new and unforeseen shocks).  I think the slowdown in the last few month's data was primarily a function of the high energy prices in the spring.  Those in turn were caused by turmoil in the Arab world and actual loss of Libyan production.  I expect global oil production will resume growing now (perhaps slowly and fitfully) at least for a bit.
• I think the Republican ploy over the debt limit has probably caused a significant hit to confidence and aggregate demand in July/August.  However, people will forget after a short while.  The actual agreement seems to be only very mildly contractionary in the near term and in the medium and long term it is all subject to renegotiation anyway.  There's probably some lasting damage to investor confidence that might cause some relative shifts in the prices of different asset classes but not have a big impact on the real economy.
• The US fiscal picture continues to be very unsustainable in the medium term, but I don't think we are close enough to the edge of the precipice for it to cause serious economic damage this year or next.
• Large US banks seem broadly sound.
• In the absence of specific reasons to contract, the economy will tend to revert to its natural tendency given enough resources - to grow.  I would be surprised to see an out-and-out recession in the US now.
• However, I think the US recovery will continue to be basically jobless as companies continue to invest in more technology as a substitute for hiring.  I don't expect to see much if any improvement in the employment/population ratios.  I don't expect the highly polarized political system to be able to come up with anything that has any impact on this.
• Europe still seems to be in a world of trouble to me.  Now that Spain and Italy have lost bond market confidence to the degree that they have, I don't see how this can get better without getting a lot worse first.  It's going to take heroic efforts to avoid a complete break-up of the Eurozone, and the current political leadership has certainly not shown any sign of the necessary courage and ability - at every stage, they've shown an uncanny knack for doing too little, too late.  It's hard to see how the worsening crisis doesn't eventually lead to an outright Eurozone recession.
• The implications for the rest of the world are complex, however.  A loss of European demand will tend to be a drag on other economies.  On the other hand, in a resource constrained world it may tend to moderate resource prices (particularly oil) and in turn allow a little more room for everyone else to grow before triggering the next energy price shock.

Your thoughts welcome in comments...

May Global Oil Supply and the Libyan Mini Shock

Gross World Product Will Not Grow at 4%+ for Five Years

Latest IMF World GDP Forecasts

Will China Slow Down by 2015?

Growth Was So Faster in the Post War Years

Kevin Drum tries to set Matt Yglesias straight, arguing that this logarithmic graph of real GDP demonstrates that growth has not been any slower in the past thirty years than the previous thirty years: