This week brought lots of minor reports but nothing to change the outlook.
A 12 percent spike in December housing starts got more attention than it deserved — a dead-of-winter month is not a good indicator — and pushed interest rates up a hair. But inflation remains completely under control, core CPI up only 1.7 percent in the whole of 2012.
Three long-runners contribute to frozen markets: first, misinformation and scare-mongering about the Fed’s "quantitative easing" (QE); second, the European gap between wishful public pronouncement and weakening data; and third, the prospect of Japan trying to print its way out of deflation — not contained QE, but a true, inflation-inducing print job.
The core hazard facing us all: how to get right the timing and magnitude of fiscal austerity before the Fed has to stop buying our debt. We may be making more accidental, near-term progress than we know.
The newest estimates of deficits since the Fiscal Anthill deal suggest we may already be trying to reduce the deficit too fast. Going from $1 trillion to $750 billion in 2013 alone is about all the reduction the economy can take.
The real problem begins a half-dozen years from now, when unfunded boomer demand for health care hits the budget. We can make it through Obama’s second term while reducing current-year deficits alone, but it would be so much better to redefine the out-years now.
Our current borrowing binge is fading by one key metric: percent of gross domestic product (GDP). U.S. GDP will cross $16 trillion this spring. If we borrow $750 billion this year, that’s 4.7 percent of GDP — about half where we were four years ago.
A general rule (also applicable in Europe and Japan): As your debt approaches the size of your GDP, it had better not grow faster than nominal GDP or you’ll soon be borrowing just to pay interest. This year, for the first time in five years, our borrowing may roughly equal growth in nominal GDP.
The listlessness in markets corresponds to the policy vacuum in the White House. Where are we going, anyway? All normal people outside of government grasp the need for growth in order to escape our twin budget and unemployment predicaments. Any ideas, fellas?
President Obama has taken a reasonable approach to the Republicans’ debt-limit hostage plans: Don’t negotiate at all. Fair enough. There could come a time for a principled vote, "Not another penny," but not now. But, what will we do to get the economy going?
In the next three weeks we’ll know. Obama’s second inaugural will be Monday, and three weeks later, on Feb. 12, the State Of The Union. Obama’s new, combative version is not playing well even in his own party. Get on the wrong side of the New York Times’ Maureen Dowd — as he has — and he’ll wish he hadn’t.
Embrace the center? Or entrench on the Left, asking for consumption and carbon taxes to fund 20-year-old social promises made unaffordable by an economy that did not turn out as expected?
Many historians think the greatest-ever American speech was Abraham Lincoln’s second inaugural, on March 4, 1865, 42 days before his death. Among its strengths: It is the shortest inaugural ever given.
It began: "At this second appearing to take the oath of the presidential office, there is less concern for an extended address than there was at the first. Then a statement, somewhat in detail, of a course to be pursued, seemed fitting and proper. Now … little that is new could be presented."
Brevity is good. Forces the mind to boil to essentials. Inflicts priority. Limits ego.
The great grace of Lincoln’s words just weeks before Appomattox, an occasion for exultation at victory and a prostrate foe: Lincoln instead spoke of healing.
He concluded: "With malice toward none; with charity for all; with firmness in the right, as God gives us to see the right, let us strive on to finish the work we are in; to bind up the nation’s wounds…."
In these five years of Great Recession we have suffered nothing like the Civil War, but we have endured greater economic pain than any time in 80 years. May Obama find this a time for binding up, not for stuffing down throats.