Notes From Underground: Larry Summers has his St. Augustine Moment

Before I discuss the Financial Times piece penned by Larry Summers today titled, “How to Avoid Our own Lost Decade,”  and tomorrow’s economic releases, Alan Greenspan answers to continued criticism from Notes From Underground in a recent interview in Newsweek:

 Yet as the interview neared its end, his tone belied his agitation. “I am as sensitive as anybody. But criticism doesn’t bother me that much. I know with certainty that two plus two equals four, and I don’t need help to make that judgment.”

Now, let’s look at tomorrow’s economic releases. The closely watched RETAIL SALES is projected to be weak as consensus has the headline down 0.5% and ex-autos and gas the data looks to be up 0.3%. The PPI is also to be released and the headline number is expected to be a tepid 0.2%.

The retail sales number will be the most important as any greater weakness will test the equity markets, as investor sentiment is presently more concerned with a slowing economy rather than the ability of record low interest rates and FED balance sheet growth to maintain elevated asset prices. If the retail data is weaker than expected it will be important to see if the S&Ps are able to hold support levels. An S&P rally off those lows is an important test for the Greenspan/Bernanke emphasis “wealth effect.” Bernanke has pegged the success of QE2 on his often-noted PORTFOLIO BALANCE CHANNEL. Well, here’s looking at you Ben.

Larry Summers had an op-ed piece in the FT today that revealed his thoughts on the present state of the U.S. economy. I don’t know how much influence Summers has in the Obama administration, but if he still has the ear of Geithner and the President then Summer’s opinion is worth a read. The former advisor to Obama raises his deep concerns about the U.S. entering a lost decade similar to Japan. The basis of Summers’ argument is a typical Keynesian analysis based on the importance of diminished demand. He paints the problem as being “a sick economy constrained by demand.” Summers goes on to write that the “discussion about medium-term austerity need to be coupled with a focus on near-term growth.” Further he says, “The fiscal debate must accept that the greatest threat to our creditworthiness is a sustained period of slow growth.”

So what Summers provides is a very Augustinian view to the resolution of the present deadlocked budget battle. The state of the economy takes precedent and any austerity must be directed at the medium term after the U.S. economy begins to have more robust growth. So it seems that the administration’s stance is GOD MAKE ME CHASTE … JUST NOT YET. The Summers Doctrine implies that the FED will be the mainstay of U.S. financial credibility, fiscal austerity be damned.

An anemic economy slowed by tepid demand and excess debt held by the consumers stressed by a weak housing market. If Larry Summers is the voice for the Obama camp, the budget discussion is going to be troublesome as the Democrats pass on austerity and stress a growth-at-any-cost agenda. And still the bonds and notes rally. I am also a Keynesian in that markets can remain irrational far longer than you and I can remain solvent!


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2 Responses to “Notes From Underground: Larry Summers has his St. Augustine Moment”

  1. whitewavetrader Says:

    Makes perfect sense as we see the Mkts getting a bid off the recent Fiction sheet out of China

  2. rohrintl Says:

    Excellent perspective Yra, especially when you consider the degree to which more government spending isn’t going to make a difference. If QE1 and QE2 didn’t do much more than pump risk asset prices, why do they think letting the budget and overall debt go deeper into the black hole is going to help?

    It is of note that even the more prescient folks at the Fed are pointing out that the uncertainty around regulation and taxation are the real drags on job creation; which of course has kind of a ‘chicken and egg’ relationship to consumer demand. When he was on CNBC last week Dallas Fed President Richard Fisher did chapter and verse on the hundreds of regulations that are going to be written, as well as the impact from NRLB, EPA, etc.

    All this government spending the Obama administration would like to see continue feels like a guy who is turbocharging a car at the same time he’s throwing nails down in its path that are flatting out the tires. Which is the really scary part: what we need is the things they are not even remotely willing to consider: repeal Obamacare and rein in the EPA and NRLB. It’s either that, or even lower taxes and spending won’t make a difference in an economy with more risks than incentives to put money to work…

    …as the Obama administration’s great achievement has been to turn us into 1970’s Europe. Nice work.

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