By Lorena Hernandez Barcena, Manuel Alcalá Kovalski, Nasiha Salwati, Louise Sheiner
What’s the latest thinking in fiscal and monetary policy? The Hutchins Roundup keeps you informed of the latest research, charts, and speeches. Want to receive the Hutchins Roundup as an email? Sign up here to get it in your inbox every Thursday.
Using data on 29 advanced economies over the 2002-2019 period, Laurence Ball of Johns Hopkins University and Joern Onken of University College London find that transitory changes in the unemployment rate shift the natural rate of unemployment (the rate that is consistent with full employment and stable inflation). The authors estimate that, on average, there is a 0.16 percentage point increase (or decrease) in the natural rate of unemployment if the unemployment rate runs 1 percentage point higher (or lower) than its natural rate over a year. The authors also find that the natural rate is more sensitive to transitory decreases in the unemployment rate than increases. The results imply that shifts in aggregate demand have long-lived responses in the labor market and that “a ‘high pressure’ economy has permanent benefits,” the authors conclude.
The Paycheck Protection Program (PPP) was introduced during the pandemic to provide government-backed loans to small businesses. Sabrina Howell of New York University and co-authors find that, controlling for business characteristics, Black-owned businesses were about 12 percentage points more likely to receive a PPP loan from a fintech lender than a traditional bank. The authors find that this disparity is not primarily explained by differences in pre-existing relationships between borrowers and banks or by borrower application behavior. Instead, they find that the gap in lending is larger in areas with larger racial animus, such as the South, suggesting that the disparity may have been driven by racial discrimination. When small banks increase automation, reducing human involvement in the lending decisions, their rate of PPP lending to Black-owned businesses increases, they find. Fintech lenders and larger banks already implement automated underwriting processes, which may account for the discrepancy.
Using state-level data from 1994-2015, Sheila Campbell and Chad Shirley from the Congressional Budget Office find that, for every dollar in annual federal highway grants, state and local governments spent 26 cents less of their own funds on highways than they would have otherwise. This finding suggests a smaller degree of crowd-out than in much of the literature. Furthermore, for each dollar of ARRA highway grants—temporary federal grants provided during the Great Recession—state and local governments increased their own highway spending by 13 cents, although the response was smaller for state and local governments with larger deficits. The authors note that the response to ARRA grants might have been different because states had to spend the grants much more quickly and were required to maintain their previously planned level of spending for highways.
Chart of the week: Labor force participation declined sharply over the COVID-19 recession and remains far below pre-pandemic levels
Source: The Wall Street Journal
“Amid the prolonged and painful pandemic, financial stability risks have been contained so far. Financial conditions have eased since the start of the pandemic. This reflects the continuing monetary and fiscal support for the economy which helped spur a rebound from 2020. Yet the sense of optimism which had propelled markets in the first half of the year has faded somewhat. Uneven vaccine access along with the mutations of the virus have led to a resurgence of infections. Investors are increasingly worried about the economic outlook amid greater uncertainty about the strength of the recovery. Anxiety about the inflationary pressures has recently pushed yields higher. A sudden and sustained repricing of risk could interact with underlying vulnerabilities that could lead to tightening of financial conditions which could put growth at risk in the medium term,” says Tobias Adrian, Financial Counsellor of the International Monetary Fund.
“Policymakers are now confronted with a difficult tradeoff. They must continue to provide near-term support to the global economy, yet they must simultaneously try to avoid the buildup of medium-term financial stability risks. After more than a year, complacency appears as a real risk. Asset valuations remain stretched and risk-taking persists. If left unchecked, such vulnerabilities could become structural legacy issues. Policymakers should formulate action plans that would guard against unintended consequences. Monetary and fiscal policy support should be more targeted and tailored to country-specific circumstances given the varying pace of the recoveries across countries. Central banks should provide clear guidance about the future approach to monetary policy and remain vigilant to avoid an unwarranted and abrupt tightening of financial conditions. If price pressures turn out to be more persistent than anticipated, they should act decisively to avoid an unmooring of inflation expectations. Policymakers should take early action and tighten select macroprudential tools to target pockets of elevated vulnerabilities.”
The Brookings Institution is financed through the support of a diverse array of foundations, corporations, governments, individuals, as well as an endowment. A list of donors can be found in our annual reports published online here. The findings, interpretations, and conclusions in this report are solely those of its author(s) and are not influenced by any donation.
Oil in wait-and-see mode, gold moves up
Oil consolidates at the highs Oil markets probed the upside overnight, helped along by another large spike in natural gas prices. However, oil lacked the…
Oil consolidates at the highs
Oil markets probed the upside overnight, helped along by another large spike in natural gas prices. However, oil lacked the momentum to maintain those intra-day highs as the US dollar started strengthening. With a lack of new headline drivers to sustain the moves. Brent crude finished 0.28% higher at USD 85.95 and WTI finished 0.50% lower at USD 83.75 a barrel, having traded as high at USD 85.35 intra-day. Asia has adopted a wait-and-see approach this morning, possibly on China nerves, leaving both contracts almost unchanged.
The US API Crude Inventories will be oil’s next volatility point, with a low print likely to lead to more price gains. However, the price action overnight does suggest that short-term upward momentum is waning as the trade gets ultra-crowded and the RSI indicators on both contracts remain overbought. Another 3 million barrel jump in inventories could spur some short-term long covering and see oil’s long-predicted sharp move lower finally occur to wash out some of the weak speculative longs. Once again though, I will reiterate that the overall environment for oil remains very constructive and any sharp sell-off is likely to see an equally sharp recovery. Of the two, WTI looks more vulnerable as it is more heavily traded by specs and Brent crude is more aligned to the international physical market.
The overnight highs at USD 86.70 and USD 85.40 a barrel for Brent and WTI form initial resistance. Trendline support at USD 83.40 and USD 79.70 a barrel should be the limit for any downside correction. Only a daily close below those levels suggests a deeper correction is possible.
Gold’s price action remains constructive
Gold staged another impressive rally overnight and there is no doubt that its price action is becoming more constructive towards further gains. Gold rose 0.85% to USD 1807.80 an ounce before some long-covering saw it fall 0.25% to USD 1803.20 an ounce in Asia. The rally is made more impressive by the fact that the US dollar has continued strengthening against the major currencies overnight. In contrast, US bond yields eased across the curve, and it looks like gold is taking its cues from them for now.
Gold has now recorded a daily close above USD 1800.00, and more importantly, the 100 and 200-day moving averages at USD 1793.50 and USD 1790.25 an ounce. One must respect the price action in these circumstances, especially when it appears not to be driven by fast-money gnomes. Therefore, gold has formed a nice layer of support between USD 1790.00 and USD 1800.00 now followed by USD 1780.00 an ounce. Initial resistance is at USD 1814.00 followed by the formidable zone of daily highs between USD 1832.00 and USD 1835.00 an ounce.
Gold continues to slowly but surely, form what appears to be the second shoulder of a longer-term inverse head and shoulders pattern. In the bigger picture, a rise through USD 1835.00 an ounce, would trigger the multi-month inverse head-and-shoulders technical pattern and swing gold’s outlook back to positive, targeting a move back above USD 2000.00 an ounce.
UK Faces ‘Plan B’ Peril: COVID Multiplies The Economic Threat
UK Faces ‘Plan B’ Peril: COVID Multiplies The Economic Threat
Authored by Bill Blain via MorningPorridge.com,
“T’was the best of times,…
UK Faces ‘Plan B’ Peril: COVID Multiplies The Economic Threat
“T’was the best of times, t’was the worst of times …”
The risks of Plan B and a further Covid Lockdown are multiplying. It will clearly impact markets, but the real economic effects of Covid combined with energy costs, supply chains and bleak company earnings forecasts may be pushing us towards stagflation anyway.
“How to address the biggest economic shock in 300 years?” asked UK Chancellor Rishi Sunak while doing his pre-budget politicking last week. Whatever you believe or don’t believe about Covid, Sunak is quite right to consider it at the centre of the on-going economic crisis. Markets should factor that reality accordingly – which boils down to a very simple question: how much will Covid force Central Banks and Governments to act to stabilise the global economy?
This week pay attention to the UK Budget on Wednesday on how Chancellor Sunak addresses the ongoing critical-care needs of the UK by stepping away from his previous “policy-mistake” sounding mention of austerity spending cuts and tax-rises to make noises about increased “levelling out” spending. Hanging over everything will be the question – how much more economic pain could Covid inflict?
It’s a tough question. A new lockdown would be economic suicide. The UK government plans to ride it out – but the history of the last 19 months says they won’t hesitate to make a U-Turn and institute Plan B if they think their credibility is on the line if the numbers of infections surge and the health service looks swamped. That’s a potential trade: should you sell UK stocks now on the likelihood the government will panic? (And buy-them back almost immediately as the Bank of England stops the noise about a rate cut and QE taper.)
But… another question is how much will rising infection numbers cause the economy to contract anyway? How much has confidence already been dented?
Here in Blighty, It’s a tale of two headlines:
Daily Telegraph: Coronavirus cases to slump this winter, say scientists.
The papers looks like it boils down to a political split – which may reflect the UK’s national pride in our venerable National Health Service. How much we are prepared to sacrifice to protect the sacred cow of the NHS has become a badge. The left-leaning, Labour supporting Daily Mirror is peddling one set of scientific views, while the daily journal of the Conservative Party, the Torygraph, finds another set of white-coats to quote.
What does the threat of Plan B or further lockdowns mean for the UK economy? A quick glance round the motorway service stations we stopped in yesterday shows many more people wearing masks, and I’ll be interested in how many people start working from again as the perceived threat level rises.
I wonder how rationally people consider the pandemic. The vector for the rise in infections is schoolchildren being children – their interactions will diminish this week due to mid-term holidays. Back in September, a British Medical Journal report (How is vaccination affecting hospital admissions and deaths?) said 84% of hospital admissions before July had not been vaccinated, although rates of vaccinated infections were rising – their conclusion was simple: unvaccinated people are 3 times as likely to go to hospital and 3 times more likely to die. There is a broad consensus the efficacy of vaccines wanes after 5-6 months – hence booster shots.
Maybe the best way to move forward is the Swedish solution of taking personal responsibility to rising infection numbers? However, research in the Guardian earlier this year suggests that strict-lockdown Denmark and easy-going Sweden experienced similar levels of economic dislocation, but Sweden suffered a death rate 5 times higher than Denmark! It’s down to behaviour – Sweden kept the schools, offices, shops and pubs open, but people got careful, stopped going out and kept the kids at home anyway.
As the supply chain crisis continues, and energy prices go through the roof, we already know it’s going to be a tough holiday season – retailers warning of toy shortages and price hikes on scarce Turkeys. It impacts consumer behaviour – we all want to spend, but if we can’t because of rising prices and falling incomes, and it feels dangerous to do so – then what effect does that have on spending patterns? It’s got to be negative.
We’re seeing the supply chain effects beginning to hit corporate results – an increasing number of firms have been giving lacklustre holiday earnings guidance. Intel took a spanking last week on the back of expectations of a downbeat outlook. Snap got pummelled on the back of a disappointing Q3 number. This week is big for Big Tech earnings – and names from Apple to Amazon could be pummelled by supply chain shortages and the problems these cause meeting holiday demand.
Headlines about a downbeat Apple sales forecast have consequences – not just in making global consumers a little more depressed about the future.
The very first thing junior economists learn about is multiplier effects – on consequences as lay-people call them. A company finds it can’t get it full allocation of Christmas units to sell so it cuts advertising, cuts stuff overtime and starts planning to cut investment in new plants, warehouses and future spending. Repeat over the whole economy, and with everyone with less in their pockets… as “transitory” inflation feels increasingly permanent, and you’ve got a perfect recipe for stagflation.
I often get accused of being a misery-guts and far too negative about the state of the global economy. My own market mantras include the classic: “Things are never as bad as you fear, but never as good as you hope”.
Think about that for a moment. Covid caused the greatest economic downspike in 300 years, but the actions of swift government interventions to prop up commerce and fuel consumer spending kept the global economy functional, but wobbly. The markets quickly began to anticipate recovery and upside – yet these remain vulnerable to the news and perceptions around this Coronavirus.
Covid fears are multiplying again. Renewed Covid instability on the back of lockdown news from China, Europe, Australasia, wherever, will continue to roil markets. Supply chains remain fractured and the consequences of the virus effects on the global economy will continue.
Get used to it…
The Gaslighting Of America
The Gaslighting Of America
Authored by Bob Weir via AmericanThinker.com,
I remember a comedy skit several years ago in which a woman comes…
The Gaslighting Of America
I remember a comedy skit several years ago in which a woman comes home unexpectedly and finds her husband in bed with another woman. Shocked, she demands to know who the woman is and why her husband is doing this. The couple get out of bed and start getting dressed as the man says to his wife, “Honey, what are you talking about?” The wife, perplexed at the question, says, “I’m talking about that woman!” Meanwhile, the other woman, now fully dressed, heads for the door. The husband says, “What woman? Honey, are you feeling okay? There’s no woman here.” Feeling dazed and confused, the wife begins to question her own sanity.
That’s a pretty good example of what the Biden administration is pulling on the psyche of the American people.
What they’re doing is not merely “spin,” which has become SOP whenever a political party does a clever sales job on the public in order to keep certain facts from them. No, this is much more than shrewd marketing; this is blatantly lying in the public’s face and telling them they’re crazy if they believe their own eyes.
When we look at videos showing thousands of migrants coming across our southern border with impunity, while Biden and his cohorts tell us they have the situation under control, we’re being gaslighted.
When thousands of Americans and Afghan allies are abandoned to be tortured and killed by Taliban terrorists, while Biden’s press secretary, Jen Psaki, tells us the war ended successfully, we’re being told not to believe what we’re seeing.
President Trump made our country energy independent, only to have his success overturned by Biden on day one of Biden’s presidency. That forced our country to once again be dependent on foreign oil. Biden said his action would help protect the environment. We scratch our heads and wonder how it makes sense to ship millions of barrels of oil on cargo ships from thousands of miles away, only to be used the same way it was used when it was processed here.
Does foreign oil have less environmental effect than American oil?
When Biden proposes a $3.5-billion “infrastructure bill” that is heavily weighted toward social engineering and radical “Green New Deal” initiatives, we’re told that everything is infrastructure.
We’re also told that the massive spending bill will cost “zero dollars” because the new taxes will be assessed only on the wealthy.
Then, to add more consternation to a public getting groggy trying to keep up with twelve-digit numbers, Biden and his accomplices want another $80 billion for the IRS so its agents can check into every bank account that has transfers of $600 or more. As if the IRS weren’t already a liberty-crushing organization, Biden wants to provide it with more ammo to use against those who oppose him. Nevertheless, we’re told it’s going after only tax cheats. Why would these people need $80 billion more to do what they’ve always done? Don’t ask, lest you get audited for questions they don’t want asked.
When the supply chain of cargo ships, carrying about a half-million shipping containers filled with goods from all around the globe, are stalled in the waters outside major American port cities, we’re told by White House chief of staff Ron Klain that it’s just “high-class problems.”
In other words, only the wealthy are waiting for the goods to arrive at stores. Moreover, Jen Psaki mocks it as the “tragedy of the treadmill that’s delayed” — another elitist poking fun at the reasonable expectations coming from the working class.
The list of gaslighting incidents is growing longer than Pinocchio’s nose.
Each time we are faced with another destructive lie, our attention is diverted to the latest Trump investigation or the probe of one of his supporters. Keeping the January 6 imbroglio alive is one of those diversions. The radical left has come to power by a sinister display of distractions from reality. A major part of that distraction is using accusations of racism to muzzle opposition. Most people will cower in fear of such labeling, even when they know in their hearts it’s not true. That’s precisely what makes the accusations so useful to those who seek power through intimidation and distortion of reality.
President Trump called out situations for what they are, without the odious and murky filtration of political correctness. That’s why the entrenched powers of Deep State corruption despised him.
Now we’re stuck with a president who says “what inflation?” as we pay higher prices than ever at the gas pump and the supermarket. I seriously doubt that shoppers are questioning that reality.
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