● Endgame: The End of the Debt SuperCycle and How It Changes Everything
Excerpt via publisher, John Wiley
The bankruptcy of Lehman Brothers in the fall of 2008 drew the curtain on a very long 60-year Act I in the debt supercycle. You could feel in the air the end of a golden period, when everincreasing quantities of debt could lead to ever more consumption and “wealth.” As stock markets crashed globally and the lines of unemployed lengthened, the end of the era was something we could observe in real time.

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Today’s employment report for February suggests that the stock market rally that began last September correctly anticipated rebound 2.0 in the post-recession period. Private sector employment rose by a net 222,000 last month, the most since last April and a sharp rise from January’s feeble 68,000 advance. Even better, job growth was widespread across the economy. Only retail trade suffered a setback in the private sector. In short, today’s employment news is good—the best, in fact, in nearly a year.

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The theory of “crowding out” predicts that higher government borrowing may force interest rates higher than they otherwise would if the private sector prevailed in the money markets. How does this theory jibe with recent history? Read on for some perspective…
Crowding Out Watch, Updated
Menzie Chinn, Econobrowser | Mar 1
I’m teaching the concept of portfolio crowding out in my intermediate macro course (handout with algebra here) now, and as I was going through the notes, I observed that last I had checked, there was (still!) little evidence of crowding out… Relative to my September post, the ten year TIPS is slightly up, but the five year remains at zero (well, actually negative). This means that whatever upward pressure there is on government interest rates due to the large supply of government debt, it is being offset by low demand from the private sector (or by demand from offshore sources).
A Federal Shutdown Could Derail the Recovery
Mark Zandi, Moody’s Analytics | Feb 28
While the government spending cuts proposed by House Republicans for this fiscal year mean only modest fiscal restraint, this restraint is meaningful. If fully adopted, the cuts would shave almost 0.5% from real GDP growth in 2011 and another 0.2% in 2012. This wouldn’t be true if the current budget deficits were crowding out private investment, but they aren’t. Business demand for credit has recovered modestly, and households continue to lower their debt obligations. Interest rates also remain extraordinarily low. Some of this is due to the Fed’s credit easing, but global investors also remain willing buyers of U.S. debt even at low interest rates.

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● A Vice President in the research division of the Federal Reserve Bank of St. Louis responds to the attacks on the central bank via one rather prominent critic in Congress: Ron Paul’s Money Illusion
● The case for arguing that QE2 worked: Quantitative Easing and America’s Economic Rebound
● Scott Sumner also argues that QE2 succeeded: Feldstein–>Glasner–>Feldstein
● But Mark Thoma thinks it’s too early to say for sure: Long and Variable Lags in Monetary Policy
● Meanwhile, central bankers aren’t completely immune to learning from history: An historical perspective on the Great Recession

Was that a tipping point for the trend in jobless claims? Today’s update of weekly filings for new unemployment benefits shows a drop to a seasonally adjusted 368,000 for the week through February 26. Initial claims haven’t been this low since May 2008. Today’s number also marks another milestone since the end of the recession: the first back-to-back weekly readings below 400,000.

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More is better when it comes to asset allocation, at least in theory. But how much is too much? Common sense suggests that there’s a point of diminishing returns to dividing up portfolios into ever finer slices. Exactly where that point lies is unclear, however. That’s partly because analyzing widely divergent portfolio choices rapidly spins out of control as a quantifiable research project intent on dispatching a few concise insights. Reviewing the infinite, in other words, doesn’t help much in the search for one-size-fits-all advice.

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My latest story for Financial Advisor is hot off the press. The focus is factor indexing, which is getting easier. The question, of course, is whether easier means better when it comes to juicing risk-adjusted returns, particularly in a multi-asset class framework. For some perspective, you can read the digital version of the article here.

There’s enough upward momentum in today’s ADP Employment Report for February to encourage the belief that the labor market is healing. But true to form these days, there’s still not enough juice in the numbers to slay worries that job growth will be anything other than modest for the foreseeable future.

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Reuters blogger Felix Salmon grumbles that the market’s driving him batty, and so he urges us to ignore it, if only for sanity’s sake. “The one thing I’ve learned over the past three years is that the market just isn’t a sensible or rational place,” he writes.

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Manufacturing is on a roll. Today’s update of the ISM Manufacturing Report for February shows that “economic activity in the manufacturing sector expanded in February for the 19th consecutive month.” In fact, the latest rise brings the index to the previous high, set in 2004. The question is when, or if, the revival in manufacturing will spill over into the labor market?

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