►Unemployment claims drop, while job openings rise
Applications for unemployment benefits fell last week for the fourth time in five weeks, a sign that layoffs are declining.
The Labor Department said Thursday that initial claims for jobless aid dropped by 11,000 to a seasonally adjusted 445,000. It’s the lowest level since the week ending July 10 and down from 504,000 initial claims in mid-August — the high point for the year.
Economists were mildly encouraged by the drop. But they also pointed out that claims remain at an elevated level consistent with weak job growth. Employers aren’t hiring enough to bring down the 9.6 percent unemployment rate.
►China must fix the global currency crisis
George Soros/Financial Times
I share the growing concern about the misalignment of currencies. Brazil’s finance minister speaks of a latent currency war, and he is not far off the mark. It is in the currency markets where different economic policies and different economic and political systems interact and clash.
The prevailing exchange rate system is lopsided. China has essentially pegged its currency to the dollar while most other currencies fluctuate more or less freely. China has a two-tier system in which the capital account is strictly controlled; most other currencies don’t distinguish between current and capital accounts. This makes the Chinese currency chronically undervalued and assures China of a persistent large trade surplus.
►Financial Shock and Awe
Barry Eichengreen/Foreign Policy
It is a misunderstanding to believe that the policies pursued by the BOJ, the Fed, and the Bank of England come at one another’s expense. What we are seeing, in all three cases, is not exchange rate manipulation but what is known as quantitative easing, actual or incipient. The evolution of BOJ policy makes this clear. What two weeks ago started as a modest foreign exchange market intervention has now turned into an explicit program of purchasing 5 trillion yen of Japanese treasury bonds and bills, commercial paper, exchange traded funds, and real estate securities. The Bank of England has made no bones about its continued commitment to quantitative easing. The Fed is moving slowly, slowly in the same direction.
This, of course, is precisely what is needed in a world where deflation has again become a problem and fiscal policy, for better or worse, is off the table. It is not a “beggar thy neighbor race to the bottom.” If anything it is a race to the top.
►Fed Rhetoric Will be Tied to Mandate of Full Employment and Price Stability
Asha Bangalore/Northern Trust
Financial markets are largely convinced the Fed will embark on QE2 at the November 2-3 FOMC meeting. Bernanke’s speech on August 27 was the trigger, followed by the FOMC policy statement on September 21 and recent rhetoric of Fed officials Dudley, Evans, and Rosengren.
►Using TIPS to gauge deflation expectations
Patrick Higgins/Macroblog (Federal Reserve Bank of Atlanta)
In the recent Survey of Professional Forecasters, economists were asked to give their subjective probability of deflation during the next year. Specifically, they were asked about the chances that the quarterly consumer price index excluding food and energy (core CPI) will decline in 2011. According to the respondents, the probability of core CPI deflation in 2011 was only 2 percent.
This rather sanguine view of the probability of deflation is encouraging. But is it a view shared by noneconomists? While there are many sources used to measure inflation expectations, there aren’t many that gauge inflation uncertainty or the risk of deflation. However, one might estimate a probability of deflation as seen by investors by exploiting the different deflation safeguards of a pair of Treasury Inflation Protected Securities (TIPS), which have about the same maturity date but different issue dates.
►Weekly Rail Traffic Maintains Steady Growth
Mark Perry/Carpe Diem blog
The Association of American Railroads today reported that weekly rail traffic continues to maintain a steady pace with U.S. railroads originating 299,394 carloads for the week ending Oct. 2, 2010, up 7.7% compared with the same week in 2009, but down 10.7% from the same week in 2008.
►How Much Does the Market Organization of Economic Life Matter?
Brad Delong/Grasping Reality with Both Hands blog
We are fortunate–if that is the word–to be able to answer this question because the twentieth century provided us with a natural experiment in the form of High Stalinist central planning. Karl Marx, you see, completely missed the utility of markets as devices for providing decision makers with proper incentives and for achieving allocative efficiency. (Why he missed this is, I think, a result of his crazy metaphysics of value, but I won’t go there today.) He saw markets only as surplus extraction devices–ways to quickly and fully separate the powerless from the value that they had created and that ought to have been theirs…
In 1989, the Iron Curtain came down, and we could see what a difference it made as we could examine levels of material well-being on both sides of the Curtain. This is as close to a perfect natural experiment as anyone could wish: the Iron Curtain’s location was determined by where Stalin’s and Mao’s and Giap’s armies marched–which is as exogenous to other determinants of economic well-being as anyone could wish.
Here are the results: