Weimar solution beckons as manufacturing crashes in US Fifth District?
The Richmond Fed's twin indices of manufacturing and services – a very good indicator at the onset of the Great Recession – collapsed this month.
They are now falling at a steeper pace than in early 2008. Current activity in manufacturing fell 16 points from -1 to -17. That is a major shock.
My apologies to those (mostly American) readers who have already seen this, but I was bogged down in Europe all of yesterday.
So here are the charts for British and Continental readers. They cover the Fifth District of the US.
We will find out soon what the US GDP numbers are for Q2. The preliminary reading will no doubt be positive, creating a false sense of relief.
But remember, the GDP data was massively wrong at the inflection point in early- to mid-2008. The first read of Q2 2008 was solid growth of 1.9pc. Only later did it become clear that the US recession began in late 2007, and was much deeper than originally thought.
The Richmond survey is grist to the mill of bears at the Economic Cycle Research Institute (ECRI) and others who insist that the US tipped into recession in the late spring (under the NBER official definition).
If so, we can all have a ferocious argument – yet again – about what to do next to avoid a global depression (if we are not in a "contained" variant already).
Needless to say, I will be advocating 1933 monetary stimulus à l'outrance, or trillions of asset purchases through old fashioned open-market operations through the quantity of money effect (NOT INTEREST RATE 'CREDITISM') to avert deflation – and continue doing so until nominal GDP is restored to its trend line, at which point the stimulus can be withdrawn again.
And the Austro-liquidationists (whom I love during bubbles, and hate during busts) can all hurl shoes at me.
We can also argue about another sneaky idea. If the central banks are able to buy fistfuls of bonds right now without a ripple effect on inflation – and investors are still rushing into the safe havens, Bunds, Gilts, Treasuries, JGBs, etc – why not just quietly write off those central bank holdings and seize the moment to slash public debt by non-inflationary fiat?
Now it really gets dirty. Weimar without Weimar, so to speak; a victimless crime. I have not made up my mind on this. But the topic is creeping onto the agenda, so prepare a stack of old shoes just in case.