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Wednesday, August 31, 2005


Mark Thoma

I had exactly the same reaction. I didn't think the article supported the opening at all, and I agree with what you are saying. Implicit is that expectations can have a big effect and I agree there too. It would be interesting to run two different post hurricane economies (or post 911 economies). In one of them the press, the analysts, etc. all say this is no big deal, the economy will be just fine. No problem at all except a few bumps in the short-run. All reports are rosy and optimistic. In the other world, the sky is falling. Analysts, the press, everyone uniformly speaks of doom and gloom in the foreseeable future. Economic fear is pervasive. I wonder how much those two economies would differ.

Edward Hugh

Good Mark, then we're in tandem. A counter example *might* be the terrorist attacks in London. I have blogged to the effect that the Jury is still out here, since we won't know till the winter, but the initial conditions are definitely different. The housing boom has slowed, and the many of the dial readings have been moving over towards the red zone (see, inter alia, yesterday's post on the UK), so it could just be that the shock hit at the wrong time. One more time we have to wait I'm afraid, but it is an interesting 'one to watch'.

Angry Economist

The economist is full of journalistic opportunism. I get a bit upset, but if I remember that it is economic journalism and not economics then it makes me feel better.

They do all manner of ridiculous studies and make ridiculous claims on a regular basis.

They also make up lots of editorial nonsense too.

Nonetheless, all the other newspapers do all this and more too...

fred c. dobbs

I'm amazed at how most commentators on this subject seem to think this is just another hurricane. And we all know for econ 101 that hurricanes add to growth with all the usual rebuilding.
Except, what if there is no rebuilding? At least not right away. New Orleans is destroyed. How many jobs do you think there will be in the city next time the BLS payroll survey rolls around?
A million people are homeless. And jobless. The transportation and energy infrastructure are ruined for weeks, if not months.
This aint Hurricane Hugo.
The economy is amazingly flexible, but the adjustments needed now won't occur overnight.
Consider that consumers are already stretched like a rubber band and i think we're looking at a sharp contraction.

"Candide fainted away, and Pangloss fetched him some water from a neighboring spring. The next day, in searching among the ruins, they found some eatables with which they repaired their exhausted strength. After this they assisted the inhabitants in relieving the distressed and wounded. Some, whom they had humanely assisted, gave them as good a dinner as could be expected under such terrible circumstances. The repast, indeed, was mournful, and the company moistened their bread with their tears; but Pangloss endeavored to comfort them under this affliction by affirming that things could not be otherwise that they were.

"For," said he, "all this is for the very best end, for if there is a volcano at Lisbon it could be in no other spot; and it is impossible but things should be as they are, for everything is for the best."
--Voltaire or was it Edward Hugh?

Edward Hugh

"This aint Hurricane Hugo."

Fred, I don't disagree with you on the human and structural impact of this. I still don't think this will produce a US recession. I think we have to wait a few weeks and see the full assesment, but in economic terms the damage may well be less than you are imagining. Clearly the employment stats will be affected, but as you indicate reconstruction will also have a plus effect.

"Consider that consumers are already stretched like a rubber band and i think we're looking at a sharp contraction."

This is the part I don't buy. Here I think we have a difference of opinion.I think there's a lot of juice in the old lemon yet awhile.

You mention the Lisbon earthquake, and indeed I myself was thinking about this earlier today. I am watching streaming video of a local TV station. What strikes me is how many people talk about 'their faith' and how it will see them through.As you I imagine know, things are not quite like this in Europe, indeed it was that very Lisbon earthquake that marked the turning point as rationalist thinkers accross the continent found their faith stumbling in the face of an appauling reality. I don't suppose any of this convinces you, but all I can say is time will tell. If I'm wrong, come back and remind me.

gary lammert

As America's perhaps greatest natural disaster unfolds, coincidentally and, for the most part - unrelated, as demonstrated by recent equity valuation activity - so unfolds the second of three daily decay fractals that will make up the primary 2005 equivalent of the 1929 drop.
The first decay fractal had a base of 11 days. Wednesday 31 August was the 18th day of a 27 to 28 day second fractal sequence. The ideal expected secondary top of this fractal sequence will range from 1.62 x 11days or 18 days to 2 x 11 days or 22 days.

Smart money is flowing into the ten year notes and thirty year bonds just as the waters are naturally flowing into the low areas through the disrupted dikes. Even as equities rose yesterday there was an uncharacteristic abrupt divergent lowering of the long term US interest rates (as previously predicted) driving TNX sharply down to 40.20. Three month US treasuries likewise were driven down but to a lesser extent with IRX at 34.30 on August 31, 2005. The spread of 6.9 is the smallest in over three years. The spread will most likely become temporarily negative within the next few months.

Just like in 1929 it will most likely be the third decay fractal of 27-28 days that will witness the profound drop that will be the equivalent of a very slow moving category 5 hurricane moving across the entire nation without benefit of a dissipating landfall. The civil and social chaos witnessed in New Orleans may well be a representative microcosm of the general unrest that could follow.
Gary Lammert The Economic Fractalist http://www.economicfractalist.com/


With a negative savings rate, how can you say that consumers are not stretched?

I think energy prices start to become a critical issue here. The storm may be the straw that breaks the camel’s back in terms of both (1) energy prices high enough to significantly impact consumer spending and (2) feed-through to the general inflation rate, which may force the Fed to cause a significant slowdown, or even a recession, to avoid a persistent impact.

While I agree that recession is not the most likely scenario, there are certainly reasons to worry. The reasons that occur to me for the strong consumer spending relative to income don’t make me optimistic that strong demand will continue: (1) the wealth effect from home equity, which may be coming to an end; (2) the rising price of energy in the face of inelastic demand, which may become more elastic as we move up the demand curve; and (3) discounting of autos, which leads consumers to purchase more now but less later. On the plus side, we’re finally seeing businesses start to spend more, but business confidence could also falter in the face of Katrina.

Edward Hugh

Hi knzn,

"With a negative savings rate, how can you say that consumers are not stretched?"

I think here we would get into a debate about the meaning of stretched. How much can you tighten an elastic band, just until it snaps I guess, and my feeling is the US consumer doesn't seem about to snap just yet. This doesn't mean it is a healthy situation.

"there are certainly reasons to worry"

Well then, we probably agree more than you imagine. I was just criticing the Economist for scaremongering, and I don't think its right when you are just being hit by a shock. Sentiment is important. Now...

"energy prices high enough to significantly impact consumer spending"

Well this is just what we don't know yet. If you are following James Hamilton then you will be aware that there is an argument thatthe release of the oil from the strategic reserve may infact bring energy down a bit in the medium term. It is the short term gasoline spike which is the realm risk. So this brings us back to whether we are in basically stable or unstable equilibrium. If its the latter, then of course we can get the straw that breaks the camel's back argument, but this is not my view.

"but business confidence could also falter in the face of Katrina."

This could happen, but at the nmoment they look prettyb 'tasty'.

Basically I think we should keep an open mind, not cry Cassandra, try and analyse, and watch and wait. But thank you for your considered opinions.

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