Gauging the Odds of a Double-Dip Recession Amid Signals and Slowdowns
Harvey Rosenblum and Tyler Atkinson/Dallas Fed/December
The yield curve’s steep upward slope suggests a low probability of a recession in the coming year. Nonetheless, many economists are reluctant to rely on this indicator because the curve’s shape and slope have been distorted by the Federal Reserve’s unconventional monetary policy: a near-zero federal funds rate and a quantitative-easing program that damped intermediate- and longer-term Treasury rates. With near-zero short-term rates, it is almost impossible for a yield curve inversion, that is, short-term rates exceeding longer-term ones.
There is some reason to believe the unemployment rate could climb again. Claims for jobless benefits remain at a level usually associated with an increasing unemployment. Even if the rate does not increase, it remains elevated, straining the overall recovery.
While the current real price of oil does not fit the criterion of a shock, it sits at levels only seen in the early 1980s and 2006–08. An oil supply shock would be especially damaging to the already weak recovery.
Most forecasters project growth at 2 to 3 percent over the next year, but not gaining sufficient momentum to advance safely above stall speed. Until this situation is resolved, policymakers will continue facing pressure to pursue fiscal and monetary measures to guide the economy toward full employment and more robust growth.

The Euro at Mid-Crisis
Kenneth Rogoff/Project Syndicate/Dec 2
Now that the European Union and the International Monetary Fund have committed €67.5 billion to rescue Ireland’s troubled banks, is the eurozone’s debt crisis finally nearing a conclusion?
Unfortunately, no. In fact, we are probably only at the mid-point of the crisis. To be sure, a huge, sustained burst of growth could still cure all of Europe’s debt problems – as it would anyone’s. But that halcyon scenario looks increasingly improbable. The endgame is far more likely to entail a wave of debt write-downs, similar to the one that finally wound up the Latin American debt crisis of the 1980’s.
Trichet Keeps Pressure on EU as Bond Program Buys Time
Simon Kennedy and Simone Meier/Bloomberg/Dec 3
Jean-Claude Trichet is keeping the onus on governments to fix the debt crisis as the European Central Bank buys bonds to win politicians time to ax deficits.
Warning European Union leaders that they can’t rely on “benign neglect” to quell market turmoil, Trichet, the ECB’s president, is deploying a two-pronged strategy to ease roiled markets. The bank snapped up Portuguese and Irish bonds again today after Trichet yesterday assured investors that policy makers will delay the withdrawal of emergency liquidity…
“Trichet doesn’t see a quick and easy fix,” said Axel Merk, president and chief investment officer of Merk Investments LLC in Paolo Alto, California. “The ECB is most reluctant to intervene too heavily in the markets as that would take the pressure off policy makers to follow through with reform.”
The ECB’s purchases, which were stepped up during Trichet’s press conference in Frankfurt yesterday, have triggered a surge in bonds across the euro region’s periphery.
China ‘set to tighten monetary policy’
BBC News/Dec 3
China is to tighten its monetary policy next year, the Communist Party’s top body has said, in a sign that interest rate rises may be on the way.
The country has recently tightened lending rules by telling banks to keep more cash in reserve,
Now the Communist Party’s Politburo has said China will shift its monetary policy from “relatively loose” to “prudent”, the Xinhua news agency said.
Chinese exports to become a lot dearer
Natasha Bita and Michael Sainsbury/The Australian/Nov 27
Cheap imports of electronics, toys and textiles are at tipping-point…After two decades of exporting deflation by cutting the cost of everyday items for consumers around the world, the tables have turned in Asia’s industrial powerhouse…Wages, raw materials and other manufacturing costs in China are on the rise, forcing up prices for companies and consumers long accustomed to cheap clothing that costs less to buy new than to dry-clean.
Currency imbroglio: Estrangement problems of strange bedfellows?
Debojyoti Dey and Venkatachalam Shunmugam/VOX/Dec 3
The current spate of emerging market currency appreciation may appear to be another chapter in the “trade wars” between the US and China. It may appear that an undervalued renminbi enables the flooding of US markets with cheap Chinese goods, while a frustrated US battles hard to kick-start its domestic economy. But as our discussion…shows, China’s huge trade surplus has facilitated its continued investment in the US and enabled the continuation of a low interest rate regime that the latter wanted to maintain in its effort to steer the economy out of the woods. A low interest rate regime in the US led to most of its investors chasing the emerging market returns, thereby pressurising currency fundamentals. Though these two economies may be putting on public posture against each other, they are quietly playing a tango that neither can step out of. The same messy equilibrium contributed to the Great Depression and is now causing the current consternation in world currency markets. But it is an equilibrium, nonetheless.
The Federal Reserve comes (almost) clean about all the crazy stuff it did in 2008
Annie Lowrey/Slate/Dec 2
The Federal Reserve has made public an enormous trove of data about the emergency measures it took during the worst of the credit crunch and the ensuing recession. It’s confusing stuff: arcane spreadsheets showing more than 21,000 transactions totaling more than $3.3 trillion via an alphabet soup of programs. (Gratuitous example: the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, or, well, ABCPMMMFLF.) Still, the revelations provide a fascinating glimpse into the workings of the Fed in the apocalyptic days of 2008, when the world economy was on the verge of collapse…
The trove shows which firms used what facilities, when, for how much, and on what terms. (The Wall Street Journal has a handy tool so that the curious don’t need to wade through spreadsheets.)