Clockwise Spirals – Krugman – Why are deflationistas like me worried about the possibility of deflation? In a word, history. Back when I learned macroeconomics — this was when dinosaurs roamed the earth, we performed simulations using stone axes, and students still learned about fiscal policy — one thing we were taught was that if you plot unemployment against inflation, the economy tends to go through clockwise spirals: high unemployment leads to falling inflation, then inflation stabilizes and maybe rises again once unemployment comes down. All of this was to be understood in terms of a Phillips curve in which actual inflation at any point in time depends both on the unemployment rate and on expected inflation, and expected inflation gradually adjusts in the light of experience. These clockwise spirals were really clear in cases where a severe recession produced a spike in unemployment and disinflation. Here’s the slump of the mid-1970s:
Two Point Nine One – Krugman – Remember this? May 29, 2009: They’re back. We refer to the global investors once known as the bond vigilantes, who demanded higher Treasury bond yields from the late 1970s through the 1990s whenever inflation fears popped up, and as a result disciplined U.S. policy makers. The vigilantes vanished earlier this decade amid the credit mania, but they appear to be returning with a vengeance now that Congress and the Federal Reserve have flooded the world with dollars to beat the recession. Treasury yields leapt again yesterday at the long end, with the 10-year note climbing above 3.7%, its highest close since November…Bond yield as of yesterday: 2.91 percent. What I’ve never quite understood is why so many investors still loooove the likes of the WSJ editorial page, while they hate, hate, hate people like, well, me — when believing anything the former says has historically been a very good way to lose a lot of money.
Negative Equity Breakdown – Here is some data from a recent congressional briefing by Mark Zandi, Chief Economist of Moody’s Economy.com, and Yale Professor Robert Shiller. I believe all of this negative equity data was presented by Zandi. A few key points, as of Q1 2010: There is almost $2.4 trillion mortgage debt for homes in negative equity. The total negative equity is $771 billion. There are 4.1 million homeowners with more than 50% negative equity (they owe 50%+ more than their homes are worth). This graph shows the percent of homeowners with negative equity (dashed line), percent of homeowners with mortgages with negative equity (blue), and the mortgage debt for homes with negative equity – all since Q1 2006. The second graph shows the number of homeowners in negative equity, by the percent of negative equity. There are 4.1 million homeowners with more than 50% negative equity, and another 5 million homeowners with 20% to 50% negative equity.
Fight Gears Up on Biomass –There is evidently no form of energy, including renewable energy, that lacks opposition. A big spat right now centers on biomass power plants. Biomass is a broad category that encompasses everything from burning whole trees to burning leftover wood chips, agricultural residues or household garbage. The focus of the argument is currently in Massachusetts, where state regulators are considering raising the bar for biomass plants. Supporters say that cutting down trees to make electricity is carbon-neutral, because the trees will regrow and absorb carbon dioxide from the air. But a recent study suggests that the trees will take years to do that, offering little short-term help. (The same argument can be made about solar cells; manufacturing them involves releasing carbon dioxide, then takes some time to break even before yielding a net benefit in decreased carbon dioxide emissions.) Biomass is a favored form of renewable energy because its generation can be reliably scheduled; the wind and sun can merely be predicted, and not always very well, leading to a need for extensive storage.
China’s worst known oil spill is dozens of times larger than the government has reported — bigger than the famous Exxon Valdez spill two decades ago — and some of the oil was dumped deliberately to avoid further disaster, an American expert said Friday. China’s government has said 1,500 tons (461,790 gallons) of oil spilled after a pipeline exploded two weeks ago near the northeastern city of Dalian, sending 100-foot- (30-meter-) high flames raging for hours near one of the country’s key strategic oil reserves. Such public estimates stopped within a few days of the spill.But Rick Steiner, a former University of Alaska marine conservation specialist, estimated 60,000 tons (18.47 million gallons) to 90,000 tons (27.70 million gallons) of oil actually spilled into the Yellow Sea.It’s enormous. That’s at least as large as the official estimate of the Exxon Valdez disaster" in Alaska, he told The Associated Press. The size of the offshore area affected by the spill is likely more than 400 square miles (1,000 square kilometers), he added.