►Cheap Debt for Corporations Fails to Spur Economy
Graham Bowley/New York Times
“American corporations have been saving more money since the financial collapse of 2008. But a recent rush of blue-chip bond offerings — including a $4.75 billion deal last month by Microsoft, one of the richest companies in the world — has put even more money in their coffers.
Corporations now sit atop a combined $1.6 trillion of cash, a figure equal to slightly more than 6 percent of their total assets. In the first quarter of this year it was 6.2 percent of assets, the highest level since 1964, when it was 6.4 percent.
When will they start spending that money — in particular, by hiring?
That is part of what has become the great question of this long, jobless recovery: When will corporate America start to feel confident enough to put its cash to work, building factories and putting some of the nation’s 14.9 million unemployed to work?”
►The Trade and Tax Doomsday Clocks
Donald Luskin/Wall Street Journal
“If today’s low rates expire at year-end per current law, that would at a stroke reduce after-tax income for every working American, the average reduction being 3.3% according to the Tax Policy Center. Do the math: 94% of income goes to consumption, and consumption is 70% of gross domestic product. All else being equal, if the Bush tax cuts don’t get extended, that’s a 2.3% hit to 2011 GDP. That means instant double-dip recession, starting at midnight, Dec. 31.”
►The Outlook, Policy Choices and Our Mandate
William Dudley/New York Federal Reserve
“Although so-called ‘soft-patches’ are quite common during the early stages of an economic expansion, this soft patch is a bit different. First, it looks like it will last somewhat longer because the deleveraging process is not yet complete. Second, the current weakness is somewhat more concerning because it is occurring at a time that the central bank has already cut interest rates to near zero.”
►QE2: estimates of the potential effects
“Although we are used to thinking of the Federal Reserve as playing a key role in determining interest rates, it is far from clear that the Fed matters that much for interest rates at the moment. The Fed’s traditional influence comes from changing the supply of reserves injected into the banking system, which in normal times would quickly change the interest rate at which banks lend those reserves to each other overnight. But with over a trillion dollars in excess reserves and the overnight rate practically at zero, the Fed’s primary policy tool is completely irrelevant at the moment…
There might still be some ability to affect longer-term interest rates from much more massive operations. The theory is that by taking some of the supply of longer-term bonds off the market, this might raise the price and thus lower the yield on those bonds.
I remain of the opinion that while the Fed is understandably reluctant to embrace QE2, it may have little other choice.”
►Plosser voices concern over further easing
Robin Harding/Financial Times
“The US Federal Reserve must not launch a new round of asset purchases without setting out what they are meant to achieve, the president of the Philadelphia Fed has warned in an interview with the Financial Times.”
►Risk, Uncertainty and Monetary Policy
Geert Bekaert, et al./Working Paper
“A lax monetary policy decreases risk aversion after about five months…Monetary policy may indeed affect asset prices through its effect on risk aversion, as suggested by the literature on monetary policy news and the stock market, but monetary policy makers may also react to a nervous and uncertain market place by loosening monetary policy…the relationship between risk aversion and monetary policy may also reflect the joint response to an omitted variable, with business cycle variation being a prime candidate.”