The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

April 25, 2007

Some Inconvenient Truths

The Financial Times has uncovered some stumbling blocks on the road to carbon neutrality.  Its multi-part report starts with a useful tutorial:

Offsetting is a fundamental principle of the Kyoto protocol – an agreement among more than 160 countries that came into force in 2005. It allows developed nations to meet emissions reduction targets by funding projects such as wind farms or solar panels in poorer countries through the so-called “clean development mechanism”. This awards such projects “carbon credits”. The credits, which can be traded on the international carbon markets, sell for between $5 and $15 (€3.66-€11, £2.50-£7.50) per tonne of carbon dioxide. To aid comparison, other greenhouse gases – such as nitrous oxide and methane – are measured as equivalents of CO2.

Carbon markets have grown rapidly since they were brought into being by the Kyoto treaty and the start of the European Union’s emissions trading scheme in 2005, under which companies were issued with tradeable permits to emit carbon. The price of carbon in the EU scheme more than halved last year after it was revealed that more permits had been issued than were needed in the first phase, from 2005 to 2007.

In the first nine months of 2006, according to the United Nations and World Bank, up to $22bn of carbon was traded. About $18bn of this was through the EU’s emissions trading scheme, and $3bn through the Kyoto mechanism.

The third element, the voluntary market, is where most offsets are bought. Businesses participating in this are not bound to reduce emissions, unlike companies under the EU trading scheme or governments under Kyoto. In 2005, the World Bank estimates, the voluntary market formed under 1 per cent of global dealings, trading fewer than 10m tonnes of carbon a year. But by 2010, the consultancy ICF International forecasts it will grow 40-fold to be worth $4bn.

Most companies going carbon-neutral use intermediaries to buy offsets on their behalf.

According to the FT, however, all has not gone well:

The FT investigation found:

■ Widespread instances of people and organisations buying worthless credits that do not yield any reductions in carbon emissions.

■ Industrial companies profiting from doing very little – or from gaining carbon credits on the basis of efficiency gains from which they have already benefited substantially.

■ Brokers providing services of questionable or no value.

■ A shortage of verification, making it difficult for buyers to assess the true value of carbon credits.

■ Companies and individuals being charged over the odds for the private purchase of European Union carbon permits that have plummeted in value because they do not result in emissions cuts.

In the end, the FT editors conclude that it's time to join the Pigou club:

The Kyoto protocol to fight climate change expires in 2012. The shape of a successor treaty is still in doubt, but one aspect seems certain: carbon trading will play a major role. A Financial Times investigation today reveals that carbon markets leave much room for unverifiable manipulation. Taxes are better, partly because they are less vulnerable to such improprieties.

I'm waiting to hear a good case made to the contrary.

UPDATE:  More on the topic, from Greg Mankiw and from Felix Salmon.

UPDATE AGAIN: Yet more at Reviving Economics: Here, here, and here.

April 25, 2007 in Energy, This, That, and the Other | Permalink


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A carbon tax program is not going to eliminate the problems with compliance and monitoring. You still need to figure out who is polluting and by how much, and to verify any claims of output reduction. This has to occur within a multinational framework where many countries are going to be motivated to cheat and to assist their local industries. The system doesn't regulate itself.

Another big question with taxes is whether there would be tax credits for projects that sequester carbon. From the policy perspective, this is desirable: if someone can come up with a cost-effective technology to remove carbon from the air, we would want to reward them. If everyone else has to pay to put carbon into the air, they should get paid to remove carbon from the air.

But once we do this, I think we would see many of the same problems of abuse and misdirection that have bedeviled the carbon credit program. If someone is planting a forest and wants to claim a tax credit, how do we know that the trees are really going to be allowed to grow for the next 50 years? Particularly in the third world, the institutions necessary for accountability and monitoring just do not exist.

While a Pigouvian carbon tax does make economic sense and is probably simpler to implement than cap and trade, it is far from a simple fix. Advocates should be prepared to face the same kinds of messes and problems that the EU carbon trading system has run into in its first years.

Posted by: Hal | April 26, 2007 at 12:41 PM

I forgot to mention another problem with a carbon tax: setting the level. The paradox is that setting the carbon tax rate at a level corresponding to economic estimates of future harm will probably not produce significant reductions in greenhouse gases.

A commonly bandied about figure is $100 per ton of carbon. This is actually rather high compared to most analyses. (Tol[1] reviewed the literature in 2005 and found that $14/tC was the median among over 100 studies, with higher quality studies producing lower values.) The Stern report did come up with a higher number but that is something of an outlier and has been criticized for unreasonably low discount rates[2].

But even if we use $100/tC, that is only about 20 cents a gallon of gasoline. That's going to be a drop in the bucket compared to existing European gasoline taxes. And even in the U.S. it's largely going to be lost in the noise of our month to month gas price fluctuations. I can't believe that an extra 20 cent gas tax is going to force anyone to conserve significantly or change their habits to reduce CO2 emissions.

It may be easy to sign up for the Pigou tax program, but when it is time to bell the cat and put a number on the table for the cost to put a ton of carbon into the air, I think we're going to see a lot less agreement. It's pretty tough to come up with a number that is both scientifically defensible as a cost, and which will also lead to realistic CO2 reductions.

[1] http://www.uni-hamburg.de/Wiss/FB/15/Sustainability/enpolmargcost.pdf
[2] http://www.econ.yale.edu/~nordhaus/homepage/SternReviewD2.pdf

Posted by: Hal | April 26, 2007 at 12:56 PM


the short-run elasticity e.g. of gasoline demand with respect to the gasoline price maybe very low, but the long-run effects are much more pronounced. Although it will not likely reduce the mileage, it will definitely make buyers shift toward more efficient cars. The difference between U.S. and Europe does not need to be mentioned. It's like with the recent hike with gasoline prices - it had a deniable effect for the moment, but I bet that people think much more about fuel consumption when they get their new car.

A similar development is likely to be seen in the energy efficiency of housing, an area where there are even higher reserves, I believe.

Having said that, I have to agree with you that 20 cents per gallon (I am relying here on your claim) is very small. In this respect, the increases in market prices will have a much stronger impact. (I was tempted to write "were much better", but did not, since I am not convinced at all what is "better" in this game).

Posted by: pinus | April 26, 2007 at 01:31 PM

Taxes at the point of production of coal, oil, and natural gas should be moderately simple. Other pollutants, even water vapor, should be considered but unless concentrated would probably not be workable. Subsidies for technologies that lower demand and increase efficiency should be more substantial, measurable, and concentrated. Sequestration is more difficult as all the energy inputs must considered and are often difficult to measure. Many actions may have impacts which are nearly incalcuable.

Posted by: Lord | April 26, 2007 at 03:19 PM

Hal -- Your points are well taken. Conceptually the cap-and-trade system will look like some sort of equivalent tax scheme, as Greg Mankiw points out. You note the issue with tax credits, and that does seem to be part of the problem. By way of analogy, think about a tax policy designed to increase saving. We can either tax consumption or subsidize saving. We can construct these policies so that they are in an abstract sense equivalent, but with the latter it might be harder to eliminate loopholes that merely involve shifting around behavior. (Think tax-preferred accounts vs other forms of saving.) I could be wrong, but I take it from the FT article that this is what is happening to some degree with the carbon-trading system. Perhaps there is a way to construct the trading system that avoids that particular problem, but it seems easy with a tax system -- just don't go down the road of crediting particular types of activity (inputs) and focus on outputs. Not easy to do, but it seems to me that applies to both approaches more or less equally once a trading system involves caps.

Posted by: Dave Altig | April 28, 2007 at 09:53 AM

Another issue with regard to a Pigou tax, which is touched on in some of the articles you link to, is what to do with the embarrassing windfall of tax revenues. Classic Pigovian theory would be to rebate them to the public more or less evenhandedly. In practice everyone seems to feel that they have better ideas, whether Mankiw's reduction of corporate income taxes or alternative proposals to boost renewable fuel research.

Actually we in the U.S. are lucky. Since carbon pollution is a global problem, it needs to be solved on a global level. A global Pigouvian tax of say $100/tC would collect $200 billion/year in the U.S. based on per capita U.S. emission of about 7 tC/year. Since worldwide average emission levels are only about 1.4 tC/yr, 80% of the U.S. tax receipts should be distributed to the 100-odd countries which emit less than the global average. This $160 billion will make a nice supplement to our existing foreign aid budget of $15 billion and will no doubt be welcomed by the third world.

The bottom line is that to really do Pigou right most Western countries will have to divert the great majority of these new tax revenues to the poor countries of the world which are getting harmed by global warming caused by the rich. It is plainly equitable, but given the relatively modest funding levels foreign aid has achieved in the past it is questionable how well this will go over as part of the Pigou package.

Carbon numbers from http://www.nationmaster.com/graph/env_co2_emi_percap-environment-co2-emissions-per-capita (dividing by 3 since that page shows CO2 rather than C emissions).

Posted by: Hal | April 29, 2007 at 02:47 AM

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April 11, 2007

The Nattering Naybob Takes On Verizon Vs. Vonage

The Nattering Naybob has been thinking about this story ...

Vonage Holdings Corp. must pay $58 million plus monthly royalties to Verizon Communications Inc. for infringing three patents on Internet-telephone service, a federal jury ruled...

The jury found that three of five disputed patents were infringed and all five are valid.

... and he is not happy.  Naybob's post contains a long and detailed discussion of what the disputed patents are about.  Most of it is beyond me, but I do get the drift:

To allow a patent like this to stand would be analogous to allowing Verizon to patent the common practice of placement and use of salt and pepper shakers on public restaurant and cafeteria tables.

If these patents and their claims are found valid, Vonage would find it difficult to design an alternative way of hooking its network to the [PSTN].

And so would any VoIP provider as the entire VoIP industry has built its back on the ENUM standard in RFC 3761. Therefore, the entire VoIP industry would have to shut down, and the ENUM internet standard as defined would also be dead.

OK, I don't exactly understand that last part. Nor do I feel competent to judge Naybob's claim that the patent system is in this specific case being used to restrain competition rather than protect legitimate intellectual property rights.  But it does bring to mind Adam Jaffe and Josh Lerner's "Innovation and Its Discontents."  Say Jaffe and Lerner:

Over the course of the nineteenth and twentieth centuries, the United States evolved from a colonial backwater to become the pre-eminent economic and technological power of the world. The foundation of this evolution was the systematic exploitation and application of technology to economic problems: initially agriculture, transportation, communication and the manufacture of goods, and then later health care, information technology, and virtually every aspect of modern life.

From the beginning of the republic, the patent system has played a key role in this evolution. It provided economic rewards as an incentive to invention, creating a somewhat protected economic environment in which innovators can nurture and develop their creations into commercially viable products. Based in the Constitution itself, and codified in roughly its modern form in 1836, the patent system was an essential aspect of the legal framework in which inventions from Edison’s light bulb and the Wright brothers’ airplane to the cell phone and Prozac were developed.

All good, right?  Nope.

In the last two decades, however, the role of patents in the U.S. innovation system has changed from fuel for the engine to sand in the gears. Two apparently mundane changes in patent law and policy have subtly but inexorably transformed the patent system from a shield that innovators could use to protect themselves, to a grenade that firms lob indiscriminately at their competitors, thereby increasing the cost and risk of innovation rather than decreasing it...

The origin of these pathologies goes back to 1982, when the process for judicial appeal of patent cases in the federal courts was changed, so that such appeals are now all heard by a single, specialized appeals court, rather than the twelve regional courts of appeal, as had previously been the case. And in the early 1990s, Congress changed the structure of fees and financing of the U.S. Patent and Trademark Office (PTO) itself, trying to turn it into a kind of service agency whose costs of operation are covered by fees paid by its clients (the patent applicants).

It is now apparent that these seemingly mundane procedural changes, taken together, have resulted in the most profound changes in U.S. patent policy and practice since 1836. The new court of appeals has interpreted patent law to make it easer to get patents, easier to enforce patents against others, easier to get large financial awards from such enforcement, and harder for those accused of infringing patents to challenge the patents’ validity. At roughly the same time, the new orientation of the patent office has combined with the court’s legal interpretations to make it much easier to get patents. However complex the origins and motivations of these two Congressional actions, it is clear that no one sat down and decided that what the U.S. economy needed was to transform patents into much more potent legal weapons, while simultaneously making them much easier to get. 

An unforeseen outcome has been an alarming growth in legal wrangling over patents. More worrisome still, the risk of being sued, and demands by patent holders for royalty payments to avoid being sued, are seen increasingly as major costs of bringing new products and processes to market. Thus the patent system -- intended to foster and protect innovation -- is generating waste and uncertainty that hinder and threaten the innovative process.

Jaffe and Lerner summarized their reform proposals in a Wall Street Journal op-ed piece last year:

Our proposed reforms start with the recognition that much of the information needed to decide if a given application should be approved is in the hands of competitors of the applicant, rather than the [U.S.Patent and Trade Office]. A review process with multiple levels efficiently balances the need to bring in outside information with the reality that most patents are unimportant. Multilevel review -- with barriers to invoking review increasing at higher levels, along with the review's thoroughness -- would naturally focus attention on the most potentially important applications...

And to the litigation issue discussed in the Naybob post:

... there are always going to be mistakes, and so it is important that the court system operate efficiently to rectify those mistakes, while protecting holders of valid patents. Today, the legal playing field is significantly tilted in favor of patentees.

The reliance on jury trials is a critical problem. The evidence in a patent case can be highly technical, and the average juror has little competence to evaluate it. Having decisions made by people who can't really understand the evidence increases the uncertainty surrounding the outcome. The combination of this uncertainty with the legal presumption of validity -- the rule that patents must be presumed legitimate unless proven otherwise -- is a big reason why accused infringers often settle rather than fight even when they think they are right.

Both Jaffe and Lerner and Mr. Naybob make the argument that the stakes in getting all this sorted out are high.  On that, I concur.

April 11, 2007 in Economic Growth and Development, This, That, and the Other | Permalink


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A tip o the hat and many thanks... keep fightin the good fight.

Posted by: The Nattering Naybob | April 18, 2007 at 01:03 PM

Exotic Ho Chi Minh City, still referred to as 'Saigon' by many, has preserved its distinctly Asian feel and ancient culture, where monks pray in the numerous pagodas, temples and mosques. The capital Hanoi, is a pleasant and charming city of lakes, shaded boulevards and public parks. The old quarter, built around the Hoan Kiem Lake, is an architectural museum-piece characterised by its narrow streets. Ha Long Bay, with its 3000-plus islands rising from the clear, emerald waters, dotted with beaches and grottoes created by waves, is one of Vietnam's natural marvels.

Posted by: Vietnam tour operator | April 18, 2007 at 09:09 PM

Those that know me know that I am very conservative in my approach to anything. Conservative means . . . we have the right to do business with anyone who wants and deserves our business. I do not like entitlements either public or private. I have used Vonage for my telephone service and long distance. Not only is their service much less expensive than what the wireline carriers offer, Vonage's service is far superior than the service provided by Bell South (the new AT*T) and Verizon. I had cell phone service with Verizon for three years plus. I just cancelled that cell phone contract. I felt that their service fell below the minimum standards acceptable to me. Verizon, in my opinion, does not have it's customer's interest at heart.

Now, here comes the mighty wireline carrier, Verizon, with all it's money and muscle. They are trying to put Vonage out of business. Like Al Gore, they are claiming ownership of the Internet. I don't believe that they invented it nor do I believe that they own it. I do not believe that they should be allowed to put Vonage out of business just because Vonage is out performing them. If Vonage loses then you as a user of communications also lose.

I very seldom get involved in organized things such as this, but I very much remember the OLD AT&T. I do not want that again. However, it is happening again anyway. Companies like Vonage have given us long distance and local service at very high quality and very low prices. My service cost me basically twenty five dollars a month and that includes all local and long distance calls. Their computerized services are far superior to any wireline carriers, like AT&T and/ or Verizon.

This is your fight too. If Verizon 'whips" Vonage, they are whipping you too. Vonage needs your help in fighting the BAD GUYS here!.

I think that you should pass this on.

R McPeak

A very happy Vonage customer.
A very unhappy Verizon customer, to the point that I canceled service with them last week..

Vonage email contacts, if you want them:

This is a copy of my letter to the CEO of Verizon, sent this date.

Dear Mr. Lataille,

I believe that competition is good for you and good for me. It helps you become more innovative, more lean and quick in the marketplace. And it saves me money, brings me new products and services that make my life better.

Currently, your company is trying to stifle competition and take selection out of the marketplace. I want you to know I support Vonage as they fight to defend my right to a better and more affordable phone service.

It's clear to me Verizon's actions could limit my freedom to choose a communications provider. I am concerned that if you succeed, the cost of phone service for me and many other U.S. consumers may increase. Instead of competing in the marketplace, Verizon has chosen to bully Vonage in the courtroom. I stand with Vonage as they say enough is enough.

Finally, I say to you, Mr. Lataille, why don't you try competing for my business, instead of trying to put your competitors out of business? It's time you get into the real courtroom where consumers are the judge.

I canceled my cell phone account (706) 726-4500 with Verizon in the last week. I tried very hard to talk with someone in your organization regarding the extremely poor service that I was receiving from Verizon. NO ONE at Verizon cared that I was trying to salvage my account with Verizon. I gave up on your company. Now you want to destroy one of your competitors, Vonage, who is doing an excellent job servicing it's customers. Mr. Lataille, I tried to reach your office and you would not make it possible that I could. Perhaps if enough of your customers quit doing business with Verizon, you might someday get the message. Leave companies like Vonage alone. People like me will remember what you are doing here. NO ONE wants the old AT&T back in spite of what AT & T is telling us. Verizon is just another clone.

Long live Vonage. Shame on "old meannie" Verizon. Vonage must be really waxing your tail!


R McPeak
34 Barnsley Drive
Evans, Ga 30809

Former customer of Verizon . . . Existing happy customer of Vonage . . . at my choice!

Posted by: r mcpeak | April 26, 2007 at 10:33 PM

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March 29, 2007

Some Uncomfortable History

It hasn't been a good week.  From new home sales to residential housing prices to durable goods, you have to dig pretty hard to unearth a little positive spin.  So, it's as good a time as any to conjure up  comparisons to the last recession -- which, as reported at Economist's View and at Calculated Risk, is exactly what Evan Koenig does in an article published on the Dallas Fed website.  Evan concludes:

There are several disturbing similarities between the U.S. economy's recent behavior and its behavior in 2000–01, but also some reassuring differences.

There is nothing amiss in Evan's analysis, but I like to make the comparison in a slightly different way.  Let's conjecture that, if a recession is in the cards, it will arrive sometime next quarter -- say, July.  To me, then, the best comparison is made by considering what the data looked like in December 2000, three months before the business cycle peak in March 2001.  If we do this, the reassuring news looks considerably less so.  For example, Evan says:

In 2000–01, consumption spending’s contribution to GDP growth fell by about 2 percentage points. Over the past couple of years, in contrast, consumption’s growth contribution has held comparatively steady.   

True, but here is a variation on a type of picture I have shown here before:




The blue line represents the data known as December 2000 -- that is, data through the third quarter of that year.  The yellow line illustrates what happened next -- which was, of course, a recession.  And the red line is the data we are looking at today, through the fourth quarter of 2006.  Reassuring would be if the blue line was clearly signaling some sort of weakness that the red line is not.  Reassuring is not what I see.

What about employment?

It is striking that while goods-producing job growth has slowed by about as much as it did in 2000, service-providing job growth has held up much better than it did in the lead-up to the 2001 recession.

To the pictures:





If you are working at, you might find some comfort in the downward drift of employment growth leading into 2000.  But there certainly was not much hint of what was about to unfold. So to me those are pretty scary pictures.  In fact, just about every graph I look at gives me the willies:






Sleep tight.

UPDATE:  Kash does a similar experiment, in prose, for the 1990-91 recession.

March 29, 2007 in Data Releases, Housing, This, That, and the Other | Permalink


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» Fed Watch: Fed Still Looking Through the Slowdown – Should You? from Economist's View
Tim's email says he is a bit contrarian in this one. Agree or disagree, I'm sure he'd like to hear you reactions: Tim Duy: Fed Still Looking Through the Slowdown – Should You?: The spate of weak data has been [Read More]

Tracked on Apr 2, 2007 7:16:52 PM


and you should add ISM, chicago leading....

Posted by: miju | March 30, 2007 at 07:34 AM

What did Newton say: Make no hypothesis??

Turn that Recession date upside down on your charts...So that every down move was an up move...

Would you be any more or less worried??

Of course a Recession by July is possible.. but looking at the current data.. doesn't give one any support one way or the other..

So it's all based on your "beliefs" about some other priors...

Well enough.. so no pretty charts...be a Man Like Mr. Gspan... give me a number

25% ? 50%?

or for the masses.. tell me your odds which are more meaningful..

25%='s 3:1 against if you've forgotten the math

Posted by: SJONAS | March 30, 2007 at 07:36 AM

Ahh, Stan, you are tough customer. And you are, of course, right. The broader point is that we still can't reliably predict what will occur three or more months out -- both because the data is incomplete in real time and because the dynamics are just impossible to decipher.

But, am I mistaken or did you just question my manhood? Ok, I'll confess -- I'm a mouse. This blog does occupy a tiny, tiny corner of the world, and I try to be careful about indicating that the views expressed here are my own and should not be attributed to any of my employers. But my bosses would be really unhappy if by some tragic miracle some enterprising individual pegs me as that one "Fed official" who claims that the probability of recession is X% -- information, in any event, that would be a pure guess. So let me say this: Recession is still the less probable outcome -- after all, I think my rep is probably on the Little Mary Sunshine side of the scale. However, I'll also admit that I'm a little more concerned about the downside risks than I was, let's say six months ago. And I just wasn't comforted by any of Evan's pictures.

Posted by: Dave Altig | March 30, 2007 at 08:21 AM

It is still good analysis.

Posted by: spencer | March 30, 2007 at 09:17 AM

ECRI has gone out on a limb to say no recession this year. It will be interesting to see whose method is more reliable -- ECRI or Paul Kasriel

Posted by: BR | March 30, 2007 at 10:11 AM

YES, it is! )

Posted by: bailey | March 30, 2007 at 10:34 AM


I would be very interested your 'take' on Paul Kasriel's latest Econtrarian. (Follow BR's link above)

Kasriel says, "Recession Imminent ... barring upward revisions in the LEI [Leading Economic Indicators] and KRWI [Kasriel Recession-Warning Indicator]and sharp increases in the immediate months ahead, both indicators will be signaling that a recession is on the horizon".

Kasriel's indicators seem to preform better than the typical sniping that "economists have predicted 9 out of the last 5 recessions".

Posted by: Dave Iverson | March 30, 2007 at 11:49 AM

An excellent and, I believe, balanced analysis. I think it's always a good idea to look back at the data people had at the time, versus what we know now.

One other variable that might be of interest is corporate profits. The revisions to that series over the last recession are quite remarkable (see this picture).

Posted by: menzie chinn | March 30, 2007 at 01:02 PM

So many to side with here, I feel swamped in this sea of general agreement (of real men of course and not squeakers) about the looming possibility of a recession.

Time to mouse up and nibble on this:

"Recession is still the less probable outcome -- after all, I think my rep is probably on the Little Mary Sunshine side of the scale." (Yes, heavy on the 'Little' as some of us detect movement to what gardeners refer to as 'deep shade'.)

and point out that the Midwest might already be there (in Recession), that young families that could not count upon their own salaries to meet standard mortgage requirements are already there, and that Blackstone principals (but possibly not the new investors in their IPO) will never be there.

Posted by: calmo | March 30, 2007 at 03:05 PM

Very fine graphs! Seems like the predictable path -- down -- to me. Glad I've got everything short on the S&P 500.

Posted by: jg | March 30, 2007 at 03:26 PM

I wouldn't bet on a recession for the next 6 months because of strength in ECRI which is currently at cycle highs
and Wright model still at 46% probability (scroll down)

Posted by: BR | March 30, 2007 at 11:49 PM

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March 14, 2007

Students, Mark Your Calendar

I received this notice, from the Wall Street Journal:

The Wall Street Journal is launching a new online discussion forum for students!

Noted WSJ journalists will host discussions on WSJ.com to answer questions about topics and events important to students. This new forum is a unique opportunity for your students to interact with WSJ journalists, discussing current events and helping them connect classroom theory and the real world.

Students can visit our forum page on http://WSJstudent.com/forum to connect to the discussion.

Our first discussion is scheduled for Wednesday, March 21st.  Featured Journal Economics writers David Wessel and Greg Ip will discuss the Federal Reserve Bank's announcement regarding short-term interest rates.  Students can join David and Greg to talk about what the Fed did or didn't do, why and what difference it makes.

Be sure to let your students know about the discussion, scheduled for March 21st!  Please visit http://WSJstudent.com/forum to learn more!

I'm not sure how limited the access is going to be, but it's a great idea. 

March 14, 2007 in Federal Reserve and Monetary Policy, This, That, and the Other | Permalink


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Why does the opinion section always contradict the facts reported elsewhere in the Journal? Students ponder.

Posted by: centrist | March 15, 2007 at 11:54 AM

What makes you so sure that what is printed elsewhere is facts?

Posted by: Adrasteia | March 21, 2007 at 03:49 AM

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March 02, 2007

On Second Thought...

From The Wall Street Journal (page A4 in the print edition):

Former Federal Reserve Chairman Alan Greenspan toned down his warning that the U.S. might slip into a recession later this year, saying he doesn't think such a slowdown is "probable," according to investment bank CLSA Asia-Pacific Markets, which hosted Mr. Greenspan's speech.

"It is possible we can get a U.S. recession toward the end of this year, but I don't think it's probable," Mr. Greenspan was quoted by CLSA as telling the audience here. Mr. Greenspan spoke via satellite from the U.S. Associates of Mr. Greenspan in Washington confirmed the remarks...

"Things look reasonably good in the short run for the U.S. and the world," he was quoted as saying. But, "we can't just assume that this extraordinary period of recovery can extend indefinitely."

Actually, I think that is just what he said in the first place.

March 2, 2007 in Federal Reserve and Monetary Policy, This, That, and the Other | Permalink


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Hi Dave,

Didn't you just loose three posts here at Macroblog or is it just me?

I know that Typepad has been prone to this kind of 'rollback' before?

Posted by: claus vistesen | March 02, 2007 at 08:51 AM

claus B right.

Posted by: calmo | March 02, 2007 at 01:19 PM


Check out what Greenspan really said...it is really helpful to know what someone says and what others gossiping...

Posted by: alex | March 02, 2007 at 01:50 PM

c and c:

I'm not sure about losing posts -- everything looks ok on my end. I actually reposted this item a couple of times because I kept finding typos, so that may be what you are picking up.

alex -- Right!

Posted by: Dave Altig | March 04, 2007 at 08:08 AM

I have the same problem with lost posts. It goes directly from 2/26 to 3/2. Same in IE as in Mozilla.

Posted by: knzn | March 05, 2007 at 11:08 PM

And can you screen out Betty shoes?

Posted by: calmo | March 06, 2007 at 02:07 PM

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February 22, 2007

Hedge Funds Get A Regulatory Stay

From The Wall Street Journal:

After months of reflection, the overseers of the U.S. financial system have concluded that current regulations, administered carefully, are sufficient to prevent hedge funds, private-equity investors and other "private pools of capital" from threatening the stability of the broader financial system.

The report by the President's Working Group on Financial Markets -- the heads of the Treasury, Federal Reserve, Securities and Exchange Commission and Commodity Futures Trading Commission -- is their first comprehensive statement on hedge-fund risks since a study that followed the near-collapse in 1999 of giant hedge fund Long Term Capital Management.

The "principles and guidelines" released Thursday said that while hedge funds "present challenges for market participants and policymakers," the risks can be maintained through a combination of "market discipline" and limiting the private pools of capital to wealthy investors. It urged policy makers to scrutinize hedge fund counter-parties, such as banks and mutual funds, and rely on investors and their financial advisors to help mitigate risks.

...Mr. Paulson said. "What we've emphasized is market discipline."

Of course, it ain't over until it's over...

Rep. Barney Frank (D., Mass.), chairman of the House Financial Services Committee, said his panel will hold hearings on hedge funds this spring. He called the working group's report "a first step in addressing questions presented by the significant growth of hedge funds," but added "further study and monitoring" of systemic risk and investor protection were needed.

... but for now, the view is that the players are big boys and girls and that the exposure of banks, for example, are being contained through the prudent exercise of current oversight.  Or, in the workds of the headline writers at Forbes.com: Caveat Emptor.

February 22, 2007 in This, That, and the Other | Permalink


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I have been developing concerns about the possibility that hedge fund investment flows have become a destabilizing force in world financial markets. Following the maxim "think globally, act locally," I decided to take a look at how the behavior of o... [Read More]

Tracked on Feb 23, 2007 8:54:40 AM


I'm very reassured that Henry and Ben have vowed to protect the big money, overleveraged, high stakes gamblers they represent.

How about the rest of us?

Posted by: zinc | February 22, 2007 at 09:37 PM

I'd quickly side with those who believe in "market discipline" and "caveat emptor" along with this IF ONE responsible party would assure us the carnage will be limited to the emptor and the greater public will not be left with the bill. But, what are the odds of that?
This was an IDEAL opportunity for BB to address banking interests as separate from those of securities pushers.
It was an ideal opportunity for BB to call for single-body regulatory control of our wildly out of control financial sector.
It was an ideal opportunity for the FED to restore its independence from our executive branch.
It was another opportunity lost.

Posted by: bailey | February 23, 2007 at 10:53 AM


Just another sad example that the principle of 'might is right'.

Posted by: Martin | February 24, 2007 at 02:54 AM

I believe EVERYONE would benefit if more Economists would use the WEB (a little more productively) to hone their arguments.
We've had plenty of time to evaluate the growth of unregulated hedge fund industry, so much so that it should no longer be a matter of opinion whether they present a real risk to our economy that the FED will surely have to jump in with both feet to resolve.
So, why aren't we seeing an academic argument among our best & brightest to address the concerns of Dean Baker & afew others? Why in 2007 are we STILL left to the unquestioned decision of six or so representatives without a national discussion of this most important topic and why is Henry Paulson issuing a decree on this without first airing it out in a public forum? Where's the FED argument to support BB's position & why hasn't it been challenged by more Economists?
I think Dean Baker makes some WONDERFUL points, is the problem that it's just not rewarding to ALWAYS being on the outside? I would guess FED has within its staff & contractees MANY of the best & brightest Economic thinkers in the country. Is independent thinking not encouraged in BB's FED? http://www.prospect.org/deanbaker/

Posted by: bailey | February 24, 2007 at 02:45 PM

From Forbes: "Despite all the hand-wringing then and now about the 'dangers' of hedge funds to the markets, regulators have been reluctant to clamp down on them."

Yep.. Could it be that the reluctance comes from the high probability that even a whiff of regulatory furver would bring the houses of cards down immediately?

"'One of their key characteristics is that they are very nimble ... and that is good for the economy, because they help to create liquidity in markets, they help to spread risks around more broadly, and a regulatory regime that inhibited that flexibility and nimbleness would eliminate a lot of the economic benefits,' Bernanke said in Congressional testimony earlier this month."

I would agree with Bernanke, had not the Government set themselves up six ways to Sunday for Moral Hazard in this mess. So I have to agree with Bailey.

Too bad the US gov didn't set up a real "caveat emptor" at or just after the LTCM mess. The next time around the fallout will likely be much greater.

Dave, you or someone from the FED ought to read Michael Panzner's "Financial Armageddon" sometime soon and tell us why Panzner, (along with Doug Noland, Peter Bernstein and others) have it all wrong. Panzner's book scares the hell out of me, and I've been following these events for a bunch of years, even attempting to blog some of it on my site.

Posted by: Dave Iverson | February 24, 2007 at 07:22 PM


Bernake seems to prefer 'liquidity' to 'stability'.

Posted by: Martin | February 25, 2007 at 03:53 AM

Guys --

Let me be big clear that I don't think this is a settled issue. But much of the discussion seems to me to be imbalanced in exactly the opposite way you all suggest. Let's think about starting the conversation from the other direction: What are the benefits of hedge funds to the functioning of financial markets, and how can regulation be best constructed to ensure safety and soundness while preserving those benefits. The answer just isn't that obvious to me, and I think the current appproach makes a lot of sense -- conditional, of course, on the expectation that there will not be 1980s-style forebearance in the case of a big failure.

We do have some experience with hedge fund default and systemic risk, after all, in the form of LTCM and Amaranth. The former remains controversial, of course, but is it not fair to take the more recent Amaranth case and suggest that the larger issue in that case may have been the global currency crises -- or at least that big fund failures are like the failure of any other important financial concern: Of limited moment except when combined with excessive volatility on the broader stage?

Posted by: Dave Altig | February 26, 2007 at 08:25 AM

Dave, I'd love a real discussion on this issue, from ANY side. But, this Administration has only 20 months remaining (arguably less) - the discussion is OVER!
Let's face facts - Paulson was one of the fiercest traders on Wall Street, there aren't many people he couldn't run over. What's inexplicable is why BB wouldn't have extracted TREMENDOUS concessions for signing on.
I have no idea how this is going to play out, but let's be absolutely clear - there may be 6 or 7 signatures on Paulson's decree but the only one Wall Street cared a hoot about was BB's.

Posted by: bailey | February 26, 2007 at 11:14 AM


You are a much better economist than I am, so when you write,

"What are the benefits of hedge funds to the functioning of financial markets, and how can regulation be best constructed to ensure safety and soundness while preserving those benefits. The answer just isn't that obvious to me,"

I'm not exactly filled with confidence.

Posted by: Martin | February 26, 2007 at 04:29 PM

bailey -- I think you are being a little hard on BB. For one thing, the issue is very much in the sights, and really good people within the system are paying attention. Second, as the regulatory framework exists now, the Fed's authority essentially stops at the banking waters' edge, and it takes a lot of people signing on to move that authority onto shore. It's really not the sort of thing that could be pulled out as a bargaining chip in a job interview.

Martin -- Everyone is right to be asking questions, and to be concerned that we don't yet have the answers. All I am sayng is that I hope we ask the right questions, and be careful about the babies in the bath water.

Posted by: Dave Altig | February 27, 2007 at 07:41 AM

Dave, Yes I am, very glad to hear it, I have no doubt of that (or I wouldn't be incessantly haranguing about it), & if I didn't strongly believe single regulatory control didn't belong with the FED I'd have moved on long ago.
Obviously, I see this as the DEFINING issue for BB's FED so I'll sincerely apologise for my glibness; this is serious enough that it should not be minimalized in any way.
No one easily relinquishes such enormous power as was grabbed in our recent financial deregulation. Without a meltdown it will require an enlightenment tsunami within Congress to move the idea forward. BUT, how about a single sign from the FED to encourage us it's aware of, let alone up to the task? To date, BB has resolutely conformed to AG-like rhetoric that's way too easily interpreted as politically based (highlighting enormous costs of future entitlements while ignoring enormous costs of recent fiscal profligacy & the benefits of the deregulation over the costs.) I'd argue this tact back in the early days of this Administration when every sign of independence provoked a severe response, but times have changed.
While this Administration is adamently opposed to single-body regulatory responsibility, I'd expect the next one (whichever party wins) will not be so predisposed. So why not extend an olive branch to demonstrate openness & independence?

Posted by: bailey | February 27, 2007 at 11:40 AM

I for one would be against single body regulation. Which regulator do you pick. The SEC has been a terrible regulator over the years. They seem to be three steps behind. The SEC would destroy the futures industry. The CFTC has been a good regulator, especially since the CMFA act in 2000.

There certainly should be ways for these guys to interact with each other, and int he case of a financial crisis work together, but one regulator doesn't make sense to me. There are too many idiosyncracies in each market place for that.

Hedge funds are not a bad thing. If mismanaged and allowed too much leverage, they can bring about pressure in places that we may not want it. Amaranth was a classic bust, and most of its positions were in regulated futures. They were just able to manipulate settlements to give them good equity day after day.

LTCM was a different animal. It was given funding by Wall Street, and Wall Street was forced to bail them out. Of course, Goldman made a tidy profit in the bailing ; ).

I like the way they are proceeding on hedge funds. They are becoming an integral part of the flows of funds. It would be a shame to over regulate them for emotional reasons.

Posted by: jeff | March 03, 2007 at 05:25 PM

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February 06, 2007

Just A Thought

This, from John Irons, seems to sum up the general reaction to the President's 2008 budget proposal:

According to news.google.com, there are currently 306 stories on: “dead on arrival” bush budget

Am I the only one finding this sort of reaction increasingly wearisome?  I'm all for critical analysis -- I like to think that that is what macroblog is all about.  But maybe if we start insisting that the first thing out of the ever-moving mouths of pundits and lawmakers alike is about what is doable rather than what is not, we might actually some day make some progress.

As I said, just a thought.

February 6, 2007 in Federal Debt and Deficits, This, That, and the Other | Permalink


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While I agree with your sentiment, I do have one big bugaboo with the Presidential budget. Somehwere in the software that programs the numbers, a tax on futures trading always appears. It is party neutral, meaning both parties seem to include it.

It will move futures trading offshore, overnight. For those that don't think so, the average futures trader in Chicago would pay around 150K-200K a year. that is enough to put you out of business. Most large firms could pay 100K a day! Absolutely stupid.

Posted by: Jeff | February 06, 2007 at 10:40 PM

I have many hours involved thus far reading through this budget.

I haven't written it off yet.

Some of the analysis on program adjustments are pretty good, though the Borg Left and some of the Borg Right would disagree.

But they are only Borg, marching in lockstep.

Me. I read. Then decide. One helluva difference than what we have in play today in blogland and elsewhere.

Yeah, the country is going to hell with regard to reason and common sense.

Posted by: Movie Guy | February 09, 2007 at 09:39 AM

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January 28, 2007

Small Things That Bring Big Changes

This story, from the Wall Street Journal Online's Davos World Economic Forum blog, seems like one of them:

Mircosoft Corp. is developing on an online payment system that will be cheaper than credit card transactions, making it possible for companies to charge small fees for Web-based content and services they now offer for free...

Mr. Gates described a system that would undercut credit card fees, making it profitable for an online newspaper to charge small fees for an individual article, for example. “If you want to charge somebody $0.10 or $1 a month, that will just be a click … you won’t have to manage some funny thing or pay some big credit charge, where half of it goes to the clearing,” Mr. Gates said.

I have seen the future.

January 28, 2007 in This, That, and the Other | Permalink


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Ok, but how is it different from or better than PayPal? PayPal is a pretty good payment system that already has a wide network of users.

Knowing only what you and the WSJ report, I would have to guess that it has to do with integrating it into Windows and IE.

Oh yeah, PayPal already has a Firefox extension.

Color me unimpressed.

Posted by: William Polley | January 28, 2007 at 02:34 PM

William -- You have a point. I don't really know of a difference from paypal, though I was responding to the implicit claim that they think processing costs can be so made so low that very, very small transactions would be feasible. (The 50 cent newspaper, for example.) I guess Microsoft doesn't have much of a record on this stuff, so who knows.

Posted by: Dave Altig | January 29, 2007 at 07:09 AM

Micro payments has been an issue in the community for a long time with no resolution that I know of. M$ is always behind the curve.

Posted by: DILBERT DOGBERT | February 04, 2007 at 12:11 AM

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January 23, 2007

What Separates Pessimists From Optimists

You know what side of the fence Nouriel Roubini is on:

Among the hard landing pessimists, David Rosenberg – U.S. economist for Merrill Lynch – is very thoughtful. While he is – like me – pessimistic about 2007 he has recently argued that a series of six factors may keep Q1 growth better than expected. These factors include: “a delayed boost to retail sales as consumers use their holiday-season gift cards, the upcoming introduction of Microsoft's Vista operating system (which is shifting the timing of some capital spending plans), the late Chinese new year (which influences the timing of exports), government spending patterns and distortions introduced by the weather. Another reason is the decline in energy prices, which is giving a lift to real income.

Of these six factors I see low oil prices and the unseasonably warm weather as the most important ones that may temporarily boost growth to 2.5% in Q1.

Well, OK, but wouldn't it be just as fair to say that the rapid acceleration in oil prices suffered over the first three-quarters of the year temporarily restrained growth in the last part of the year?  And though it seems reasonable to argue that favorable weather may be providing a winter boost to economic activity, and though it may very well be that this in whole or part represents a shift in business activity that would have otherwise been realized in the spring and summer, doesn't that at least imply that the business was there to shift?  And doesn't that imply that the more pessimistic scenarios were not quite on target?

It's all how you look at it.

January 23, 2007 in This, That, and the Other | Permalink


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Roubini's style seems to be to arrive at a conclusion first and then try to find the data to justify the conclusion.

Posted by: Steve | January 24, 2007 at 04:42 AM

Sorry, but I just don't get it. If you're not happy with the way Roubini framed his argument, why not reframe it historically, say - since the Bush Administration took office, or for the last 30 years?
Or, if you feel the decrease in oil prices over 3 quarters is significant to our economic prospects, what about the increase in easy credit over the same period?
Here's one piece of short-term info. I do find relevant. I recall reading that some 40% of all homes purchased last year were financed with NO down-payment by borrowers who opted to pay higher mtg, rates rather than provide documented earnings history.
Is it the FED's job to see we never again suffer the horror of two successive quarters of negative GDP growth?

Posted by: bailey | January 24, 2007 at 09:00 AM

I have difficulty seeing how people will spend more with falling oil prices when they did not cut back much during rising ones.

Posted by: Lord | January 25, 2007 at 02:08 PM

The fall in oil has been met with a corresponding increase in grain prices. This will increase the costs of some foodstuffs in the food supply. Short term, you may see lower meat prices, because the higher grain price will force animals to market. Longer term, meat prices will be higher, because there will be less animals around.

Foreign demand for US commodity products is accelerating. I don't see the economy slowing down, unless there are tax increases, or health care cost increases.

Fed will be on hold, or will likely raise another quarter-but I am in the severe minority on this view.

Posted by: Jeff | January 25, 2007 at 10:39 PM

Jeff I agree Fed will be on hold and will only pressure the markets to adhere to their view. I don't believe they will raise rates for the risk of putting our economy into a hard landing scenario is too great. Rather they will rely on hawkish comments implying the rate hike scenario. Thus forcing the bond market to realign their expectations, which is what we saw today in the market. Expectations are just as effective if not more effective then the actually act. Which in the trading arena buying the rumor selling the fact, usually holds true. I think the US economy is ok for now but cannot bow to external pressure on commodities. If the rest of the global engine picks up the demand slack and the US consumer retrenches I believe that to be a good thing. The avg consumer is over extended and if Mr.Potter comes calling to early then the hard landing scenario will most certainly occur. The FED also cannot be to vigilant for the world is very unstable and I don't think our bond or stock market could handle a major disruption at this point. The FED targets price stability as much as Inflation and right now it is getting what it wants.

Posted by: Mike Agne | January 26, 2007 at 01:42 AM

Nouriel has been negative for so long it's almost depressing to see him wrong

he articulates everything so well --- but keeps upgrading his own GDP estimates , and pushes the recession further out into the future

he'll be right eventually.... maybe ( very Ritholtz-esque )

Posted by: john E | January 26, 2007 at 01:42 PM

A broken clock is right twice a day, which is more accurate than Roubini.

Posted by: cb | January 30, 2007 at 03:08 PM

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January 12, 2007

As Good A Statement About Fundamentals As You Are Likely To Find

As I look back over the past year, I tend to see a stumbling asset market (in this case the asset being residential housing), a contractionary energy-price shock (at least through summer), and relatively tight monetary policy (as evidenced by the inverted Treasury yield curve).  I might normally associate such a confluence with a tipping point in economic activity (in the wrong direction), but it increasingly looks like it isn't going to happen. 

Perhaps, as suggested in today's Wall Street Journal (page A1 in the print edition), the hero of the story is the recent reversal of the earlier oil and energy shocks:

Oil prices fell sharply yesterday and are now hovering at their lowest levels since mid-2005, raising the prospect of significant changes in the outlook for corporate profits, consumer spending and the global economy.

... oil's pullback "is coming at a great moment for the U.S. economy," says Ethan Harris, chief U.S. economist at Lehman Brothers in New York, who estimates that each $10 reduction in oil prices adds about a half percentage point to annualized growth in inflation-adjusted gross domestic product -- a broad measure of economic activity.

"You're worried about this one-two punch from housing -- first construction collapses, and then the consumer collapses. Lower energy prices are acting as a sort of smelling salt," Mr. Harris said.

I'm sympathetic to that view, but I also have to believe that part of the story is that the underlying "fundamentals" in both the US and global economy are incredibly strong.  What are those fundamentals?  I think Martin Wold nailed it:

Evidently, the underlying engine of the world economy is immensely powerful. So, indeed, it is. Today’s world economy is being driven by four closely interconnected forces: technological innovation, above all the collapse in the cost of collecting, analysing and transmitting information; entry into the world economy of the vast majority of human beings and, above all, of the half of humanity that lives in east and south Asia; the “catch-up” process in these economies; and the integration of global markets in goods, services and capital that we call globalisation...

To these forces should be added the background condition of monetary stability. We seem to know how to make a world of man-made (as opposed to commodity-based) money stable. This then has delivered low nominal interest rates. Combined with strong profits, rapid growth across the world and improved fiscal and trade positions in emerging market economies, spreads on risky assets have fallen to low levels...

The implication of this perspective is that any slowdown – or “mid-cycle correction” – will be short-term and shallow...

Provided the broad story of economic dynamism remains credible, the world economy will probably overcome temporary difficulties, including any needed adjustment of external imbalances or volatility in oil prices. But if the credibility of that broad story came into question, then such optimism must vanish.

So how plausible is maintenance of the underlying dynamic? For economic policy, this raises two big questions: the first is whether inflation will be contained; the second is whether globalisation will be sustained. On the former, there is no reason to forget what we have so painfully learned. On the latter, however, there is greater uncertainty.

On the latter, those lessons have an even longer and more painful history -- here and here, for example. If we don't forget them, we'll be just fine.  If we do...

January 12, 2007 in Economic Growth and Development, This, That, and the Other | Permalink


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On the matter of the first of those 4 blows where Martin Wold nails it:

"Today’s world economy is being driven by four closely interconnected forces: technological innovation, above all the collapse in the cost of collecting, analysing and transmitting information;"

I would consider this a glancing blow...a nail that was dinged rather than driven...a pin that was shielded by an intervening thumb that would require disintermediation before blows 2, 3, and 4 could continue.

I am cheered by the quotation marks around "fundamentals" to the point of inventing "workamentals": the grounds where work is done and not those playgrounds where the work is marketed or invented.

Posted by: calmo | January 12, 2007 at 02:33 PM

Bush is going crazy. He is shooting down any way out of the mess. Meanwhile, the US and the dollar are ready to collapse. The fight is to persuade the US Congress to adopt a real capital budget, and get out of the Thirty Years War in Iraq, Iran, etc.

The idea of an expanded war is the option of "stabilization" of the financial bubble. Look at the US bombing of Somalia, this is part of it. Force panic stricken people to do anything for a so-called "war economy".

Meanwhile, the widespread fraud of not reporting the true state of the Housing Market, is seen in the NY Times, Jan. 7th. Also see Moody's economy.com . The US Comerce Dept figures reported for new home sales both 1. significantly overstate the level of new home sales, and 2. understate the number of new homes listed for sale- inventory of homes for sale- due to Commerce's not taking account of people cancelling their contracts to buy new homes.
See http://www.real crash./com

Posted by: Howie Copywriter | January 14, 2007 at 09:36 PM

GO BEARS!-and not the stock market ones!

Posted by: Jeff | January 14, 2007 at 11:22 PM

While it is warranted that lower prices of oil increases inflationary pressures, it is also known that reductions in energy prices will lead to a lower fiscal deficit, improving fiscal savings. The temporary shifts in the price of oil provide only short term wealth effects for American consumers and the manufacturing industry. In the long run, investments in alternative energy (fueled by government taxation of oil) will make the domestic economy less susceptible to supply shocks.

The initial model of American intervention in oil markets was validated by the fact that oil rich nations would invest in dollar denominated assets. However, as the Euro strengthens, and as Chinese domestic consumption rises, America's dependence on foreign oil will harm its economic resiliency.

Additionally, the temporary boost to the steadily declining housing market, afforded by temporarily lower oil prices, could soon translate into lower consumptions-hence America's largest fear of a slowdown, a glut in domestic consumption. Economic growth at the cost of domestic stability is completely counterintuitive to the American growth model.

Posted by: Amit Sharma | January 25, 2007 at 03:09 PM

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