Monday's announcement that Chinese growth was decelerating was not surprising; that it decelerated to below the consensus of 9.7% growth to 9% (y/y) in 2008Q3 was a surprise. This was reflected in the headlines: "China growth rate slows sharply" ((FT)), "China less likely to buffer world crisis as its economy slows" (LA Times), "China's economy feels chill from global crisis" ((AP)). For detailed numbers, see Haver.

Figure 1 depicts the growth rate for China's real GDP over the past 14 years.

There is so much chaff floating around about the roles of Fannie and Freddie and of the Community Reinvestment Act in the current crisis, despite the best efforts of economists like Jim Hamilton [0] [1], Mark Thoma and Janet Yellen, that it seems worthwhile to once again go through some of the arguments that have been forwarded.

From David Goldstein and Kevin G. Hall, "Private sector loans, not Fannie or Freddie, triggered crisis":

...or: "Yikes!"

There have been plenty of accounts that have noted the growing anxiety over economic growth over the short to medium term. However, this forecast from Deutsche Bank, released Friday night, is quite sobering, especially when compared to forecasts released just two weeks ago.

All eyes have been on the housing market as the trigger for the financial crisis, but we're all aware that there are other potential "triggers" for additional distress: auto loans and credit cards. In addition, spreads are not everything -- levels of real interest rates matter as well.

Let's start with credit spreads. Here are some pictures, courtesy of Deutsche Bank.

Let's assume the Treasury, the Fed and the rest of the community of international financial policymakers are able to stabilize the financial system. What are the options available, given the borrowing and spending policies of the Bush Administration?

From Chowdhury and Huie, "Skyrocketing Issuance," US Economics/Strategy Weekly (Deutsche Bank, 10 Oct.) (not online):

Messages from the August Trade Release and the September Import/Export Price release.

First, the trade deficit as a share of GDP is shrinking...as long as one excludes oil.

The economic advisers to Barack Obama and John McCain debated today at the UW-Madison. Ike Brannon spoke on behalf of the McCain-Palin campaign and Austan Goolsbee on behalf of the Obama-Biden campaign. Here's the link to Proposals for Change (Adobe Flash required).

For me, of greatest interest is the excellent question by Dean Knetter of whether the current financial crisis is to be attributed to too much government intervention (e.g., it's F&F, CRA, etc.) or insufficient regulation of the appropriate type.

The WSJ just released its newest survey of economists' views on the course of the economy. From the article:

On average, the 52 economists surveyed now expect gross domestic product to contract in the third and fourth quarters of this year, as well as the first quarter of 2009.

Or...Salt Water/Fresh Water Redux!

Figure 1: Log GDP (1996$), 1900-1967 (blue line), and linear trend (red line). Source:

From Chapter 1 of the IMF World Economic Outlook, released yesterday:

The world economy is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s. Against an exceptionally uncertain background, global growth projections for 2009 have been marked down to 3 percent, the slowest pace since 2002, and the outlook is subject to considerable downside risks. The major advanced economies are already in or close to recession, and, although a recovery is projected to take hold progressively in 2009, the pickup is likely to be unusually gradual, held back by continued financial market deleveraging. In this context, elevated rates of headline inflation should recede quickly, provided oil prices stay at or below current levels. The emerging and developing economies are also slowing, in many cases to rates well below trend, although some still face significant inflation pressure even with more stable commodity prices. The immediate policy challenge is to stabilize global financial markets, while nursing economies through a global downturn and keeping inflation under control. Over a longer horizon, policymakers will be looking to rebuild firm underpinnings for financial intermediation and will be considering how to reduce procyclical tendencies in the global economy and strengthen supplydemand responses in commodity markets.

The IMF released several chapters of the World Economic Outlook; one chapter entitled Financial Stress and Economic Downturns provides some insights into the ramifications of the current financial turmoil.

I hate to pile on, perhaps in a repetitive fashion given Jim's post, but a mere three weeks ago, Donald Luskin was asserting "Things today just aren't that bad." And, pulling a comment out from mid-September, we have this definitive statement: "But in the final analysis let's just stick to facts. We are not in a recession."

I'm not saying I know we are in a recession -- the NBER BCDC decides that [0], [1]; but I think the case is getting pretty strong. The consensus was for a decline of 100,000 jobs. The actual was 159,000 jobs. Figure 1 shows the September release data, as well as releases for every other month going back to the January 2008 release.

I was surprised by this item from the BBC:

Chinese trade surplus at new high

Wednesday, 10 September 2008

Weren't as strong as some of us thought.

I was surprised; so were market observers. From Bloomberg:

From Justin Fox, regarding House Republicans' plan:

...that of the House Republican Study Committee, seems to be a joke. It calls for a two-year suspension of the capital gains tax to "encourag[e] corporations to sell unwanted assets." But the toxic mortgage securities clogging up bank balance sheets are worth less now than when they were acquired. Meaning that no capital gains tax would be owed on them anyway. If you repealed the tax, banks would have even less incentive to sell them because they wouldn't be able use the losses to offset capital gains elsewhere. Seriously, where do these people come up with this stuff?

As the Congress was debating how much power and how many hundreds of billions to the US Treasury, I was pondering who would be in charge of all that come January 20th.

One could look at the photographs of the economic advisers on each side, but I thought I'd try to be slightly systematic and search the web (not a recommended research technique for my students!). Here is the WSJ:

I'll just take the market's view here; using the futures prices from the CME (via ino.com), prices will fall about another 16% from June (or 17% in log terms):

Figure 1: Log Case-Shiller 10 city price index, (red), CME futures prices (red squares), and CPI adjusted SP Case-Shiller 10 city price index (dark blue). CPI-All rescaled to 100 2008M01-08M06. NBER defined recessions shaded gray. Dashed line indicates start of plotted futures data. Source: Standard and Poors' [xls], ino.com - real estate (accessed 21 Sep 2008), St. Louis FRED II, NBER, and author's calculations.

The latest reading from ino.com for the Case Shiller US composite futures indicates a nominal bottom in May 2010, with a reading of 151.6 (or a bottom of of 151.4 in May 2011 if you want to nitpick.

There's a lot of commentary -- more comprehensive and up to date than I can provide -- on the crisis and the attempts to resolve the logjam in the financial markets.[0], [1] But I still have a couple of thoughts about the causes, and the implications, of the process that has resulted in so much turmoil this week.

First, what is the source of the crisis? Is it as is asserted here in this statement from John McCain Friday?

In the wake of global financial events, a couple of articles have caught my attention in terms of implications for the dollar. First was this Reuters account of a People's Daily editorial, suggesting "diversification". But it's hard to discern the underlying message given the low signal to noise ratio in official publications. Today's article in the IHT is a little more informative, not just about what's going on in China but in Asia (where a lot of that "saving glut" was alleged to come from):

In Asia, bloom is off the U.S. rose

Only on a day like yesterday does an over 1 percent decrease in industrial output move to third page. But this item (and this hilarious article h/t Economists View) reminded me to update the indicators used by the NBER BCDC. Their trajectories are, in general, not too comforting.

Consider first the series that prompted the investigation. In Figure 1, I show (in logs) industrial production and manufacturing production; the former is the one considered by the NBER BCDC.