World power swings back to America

The American phoenix is slowly rising again. Within five years or so, the US will be well on its way to self-sufficiency in fuel and energy. Manufacturing will have closed the labour gap with China in a clutch of key industries. The current account might even be in surplus.

The making of computers, electrical equipment, machinery, autos and other goods may shift back to the US from China. Photo: AP

By Ambrose Evans-Pritchard, International Business Editor

5:53PM BST 23 Oct 2011

Assumptions that the Great Republic must inevitably spiral into economic and strategic decline - so like the chatter of the late 1980s, when Japan was in vogue - will seem wildly off the mark by then.

Telegraph readers already know about the "shale gas revolution" that has turned America into the world’s number one producer of natural gas, ahead of Russia.

Less known is that the technology of hydraulic fracturing - breaking rocks with jets of water - will also bring a quantum leap in shale oil supply, mostly from the Bakken fields in North Dakota, Eagle Ford in Texas, and other reserves across the Mid-West.

"The US was the single largest contributor to global oil supply growth last year, with a net 395,000 barrels per day (b/d)," said Francisco Blanch from Bank of America, comparing the Dakota fields to a new North Sea.

Total US shale output is "set to expand dramatically" as fresh sources come on stream, possibly reaching 5.5m b/d by mid-decade. This is a tenfold rise since 2009.

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The US already meets 72pc of its own oil needs, up from around 50pc a decade ago.

"The implications of this shift are very large for geopolitics, energy security, historical military alliances and economic activity. As US reliance on the Middle East continues to drop, Europe is turning more dependent and will likely become more exposed to rent-seeking behaviour from oligopolistic players," said Mr Blanch.

Meanwhile, the China-US seesaw is about to swing the other way. Offshoring is out, 're-inshoring' is the new fashion.

"Made in America, Again" - a report this month by Boston Consulting Group - said Chinese wage inflation running at 16pc a year for a decade has closed much of the cost gap. China is no longer the "default location" for cheap plants supplying the US.

A "tipping point" is near in computers, electrical equipment, machinery, autos and motor parts, plastics and rubber, fabricated metals, and even furniture.

"A surprising amount of work that rushed to China over the past decade could soon start to come back," said BCG's Harold Sirkin.

The gap in "productivity-adjusted wages" will narrow from 22pc of US levels in 2005 to 43pc (61pc for the US South) by 2015. Add in shipping costs, reliability woes, technology piracy, and the advantage shifts back to the US.

The list of "repatriates" is growing. Farouk Systems is bringing back assembly of hair dryers to Texas after counterfeiting problems; ET Water Systems has switched its irrigation products to California; Master Lock is returning to Milwaukee, and NCR is bringing back its ATM output to Georgia. NatLabs is coming home to Florida.

Boston Consulting expects up to 800,000 manufacturing jobs to return to the US by mid-decade, with a multiplier effect creating 3.2m in total. This would take some sting out of the Long Slump.

As Cleveland Fed chief Sandra Pianalto said last week, US manufacturing is "very competitive" at the current dollar exchange rate. Whether intended or not, the Fed's zero rates and $2.3 trillion printing blitz have brought matters to an abrupt head for China.

Fed actions confronted Beijing with a Morton's Fork of ugly choices: revalue the yuan, or hang onto the mercantilist dollar peg and import a US monetary policy that is far too loose for a red-hot economy at the top of the cycle. Either choice erodes China's wage advantage. The Communist Party chose inflation.

Foreign exchange effects are subtle. They take a long to time play out as old plant slowly runs down, and fresh investment goes elsewhere. Yet you can see the damage to Europe from an over-strong euro in foreign direct investment (FDI) data.

Flows into the EU collapsed by 63p from 2007 to 2010 (UNCTAD data), and fell by 77pc in Italy. Flows into the US rose by 5pc.

Volkswagen is investing $4bn in America, led by its Chattanooga Passat plant. Korea's Samsung has begun a $20bn US investment blitz. Meanwhile, Intel, GM, and Caterpillar and other US firms are opting to stay at home rather than invest abroad.

Europe has only itself to blame for the current “hollowing out” of its industrial base. It craved its own reserve currency, without understanding how costly this “exorbitant burden” might prove to be.

China and the rising reserve powers have rotated a large chunk of their $10 trillion stash into EMU bonds to reduce their dollar weighting. The result is a euro too strong for half of EMU.

The European Central Bank has since made matters worse (for Italy, Spain, Portugal, and France) by keeping rates above those of the US, UK, and Japan. That has been a deliberate policy choice. It let real M1 deposits in Italy contract at a 7pc annual rate over the summer. May it live with the consequences.

The trade-weighted dollar has been sliding for a decade, falling 37pc since 2001. This roughly replicates the post-Plaza slide in the late 1980s, which was followed - with a lag - by 3pc of GDP shrinkage in the current account deficit. The US had a surplus by 1991.

Charles Dumas and Diana Choyleva from Lombard Street Research argue that this may happen again in their new book "The American Phoenix".

The switch in advantage to the US is relative. It does not imply a healthy US recovery. The global depression will grind on as much of the Western world tightens fiscal policy and slowly purges debt, and as China deflates its credit bubble.

Yet America retains a pack of trump cards, and not just in sixteen of the world’s top twenty universities.

It is almost the only economic power with a fertility rate above 2.0 - and therefore the ability to outgrow debt - in sharp contrast to the demographic decay awaiting Japan, China, Korea, Germany, Italy, and Russia.

Europe's EMU soap opera has shown why it matters that America is a genuine nation, forged by shared language and the ancestral chords of memory over two centuries, with institutions that ultimately work and a real central bank able to back-stop the system.

The 21st Century may be American after all, just like the last.

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8844646/World-power-swings-back-to-America.html

First look at US pay data, it’s awful

OCT 19, 2011 

EMPLOYMENT | WAGES

Anyone who wants to understand the enduring nature of Occupy Wall Street and similar protests across the country need only look at the first official data on 2010 paychecks, which the U.S. government posted on the Internet on Wednesday.

The figures from payroll taxes reported to the Social Security Administration on jobs and pay are, in a word, awful.

These are important and powerful figures. Maybe the reason the government does not announce their release — and so far I am the only journalist who writes about them each year — is the data show how the United States smolders while Washington fiddles.

There were fewer jobs and they paid less last year, except at the very top where, the number of people making more than $1 million increased by 20 percent over 2009.

The median paycheck — half made more, half less — fell again in 2010, down 1.2 percent to $26,364. That works out to $507 a week, the lowest level, after adjusting for inflation, since 1999.

The number of Americans with any work fell again last year, down by more than a half million from 2009 to less than 150.4 million.

More significantly, the number of people with any work has fallen by 5.2 million since 2007, when the worst recession since the Great Depression began, with a massive taxpayer bailout of Wall Street following in late 2008.

This means 3.3 percent of people who had a job in 2007, or one in every 33 30, went all of 2010 without earning a dollar. (Update: the original version of this column used the wrong ratio.)

In addition to the 5.2 million people who no longer have any work add roughly 4.5 million people who, due to population growth, would normally join the workforce in three years and you have close to 10 million workers who did not find even an hour of paid work in 2010.

SIX TRILLION DOLLARS
These figures come from the Medicare tax database at the Social Security Administration, which processes every W-2 wage form. All wages, salaries, bonuses, independent contractor net income and other compensation for services subject to the Medicare tax are added up to the penny.

In 2010 total wages and salaries came to $6,009,831,055,912.11.

That’s a bit more than $6 trillion. Adjusted for inflation, that is less than each of the previous four years and almost identical to 2005, when the U.S. population was 4.2 percent smaller.

While median pay — the halfway point on the salary ladder declined, average pay rose because of continuing increases at the top. Average pay was $39,959 last year, up $46 — or less than a buck a week — compared with 2009. Average pay peaked in 2007 at $40,764, which is $15 a week more than average weekly wage income in 2010.

The number of workers making $1 million or more rose to almost 94,000 from 78,000 in 2009. However, that was still below some earlier years, including 2007, when more than 110,000 workers made more than $1 million each.
At the very top, the number of workers making more than $50 million rose in 2010 to 81, up from 72 the year before. But average pay in this group declined $4.5 million to $79.6 million.

What these figures tell us is that there was a reason voters responded in the fall of 2010 to the Republican promise that if given control of Congress they would focus on one thing: jobs.

But while Republicans were swept into the majority in the House of Representatives, that promise has been ignored.
Not only has no jobs bill been enacted since January, but the House will not even bring up for a vote the jobs bill sponsored by President Obama. His bill is far from perfect, but where is the promised Republican legislation to get people back to work?

Instead of jobs, the focus on Capitol Hill is on tax cuts for corporations with untaxed profits held offshore, on continuing the temporary Bush administration tax cuts — especially for those making $1 million or more – and on cutting federal spending, which mean destroying more jobs in the short run.

At the same time, nonfinancial companies are sitting on more than $2 trillion of cash — nearly $7,000 per American — with no place to invest it profitably. This money cannot even be invested to earn the rate of inflation.
All this capital is sitting on the sidelines waiting for profitable opportunities to be invested, which will not and cannot happen until more people have jobs and wages rise, creating increased demand for goods and services.

More of the same approach we have had for most of the last three decades and all of the last ten years is not going to increase demand, create more jobs or enable overall prosperity. In the long run, continuing current policies will make even the richest among us less well off than they would be in a robust economy with government policies that foster job creation and the capital investment that grows from increased demand.

On top of this are the societal problems caused by something the United States has never experienced before, except during the Depression — chronic, long-term unemployment.

Having millions who want work go years without a single day on a payroll is more than just a waste of talent and time. It also can change social attitudes about work and not for the better.

The data show why protests like Occupy Wall Street have so quickly gained momentum around the country, as people who cannot find work try to focus the federal government on creating jobs and dealing with the banking sector that many demonstrators blame for the lack of jobs.

Will official Washington look at the numbers and change course? Or do voters need to change their elected representatives if they want to put America back on a path to widespread prosperity?
(Editing by Kevin Drawbaugh)

http://blogs.reuters.com/david-cay-johnston/2011/10/19/first-look-at-us-pay-data-its-awful/

What is the US-Europe turmoil's impact on Asia?

Thursday September 22, 2011

What is the US-Europe turmoil's impact on Asia?

Can Asia stand alone and be decoupled from the West?

WHY should Asian stock markets react negatively if America does not create any new jobs? This is the question on everybody's lips, especially those who have argued that Asia can stand alone and Asian growth has decoupled from American growth.

But the news on Sept 5 that most Asian stock market indices dropped appreciably because America did not create jobs in August, must in fact mean that Asia cannot stand alone and is not decoupled from the West. The West can still influence what happens in most Asian economies including Singapore, Malaysia, the Philippines and Thailand because these Asian economies are linked to America and Europe through the real and financial economy.

The real economy in many Asian economies are dependent on and in fact compete for greenfield investments in the form of foreign direct investments (FDI) from America and Europe. They are also dependent on America to absorb the manufactured exports from the multinational corporations (MNCs) operating from Asia. Asian stock markets and bond markets are also open to foreign portfolio investments that are managed by foreign hedge funds.

In fact, it has been said the peaks and troughs of Bursa Malaysia are determined by foreign portfolio investments and the floor of the Bursa Malaysia is maintained by government investments in government-linked companies (GLCs) listed on Bursa Malaysia.

A man looking at a stock quotation board outside a brokerage in Tokyo. The Nikkei 225 index added 0.23% to 8 ,741.16 points yesterday. — Reuters

The foreign ownership of stocks in Bursa Malaysia, for example, is quite high and amounts to about 22%. Recently the bond market in Malaysia got a boost because of the large inflow of foreign portfolio investments into the bond market, including the sukuk bond market.

The Asian banking system is also linked to the West as there are numerous branches of foreign banks in Asia and an increasing number of Asian banks are setting up branches in the West to participate in the financing of trade. The financial links are then kept alive by the banks and the capital markets.

If America does not create jobs then it means that the recovery from the recession is slow and this means that incomes will not grow and hence consumption will not grow in America.

Most of the exports of East Asian countries are destined to the USA and Europe although there has been some growth in exports to China. If American consumption does not grow then the demand for manufactured goods from countries like Malaysia will fall. If this happens investor confidence in the Malaysian economy might turn negative. If American jobs do not grow, then American GDP will not grow and may even fall if the recession gets worse.

It has been found that Asian economies are very sensitive to changes in the GDP of the USA. A study by, for instance, Bank of America (BoA) Merrill Lynch found that if the US GDP declines by 1%, it will have the impact of reducing GDP by 1.7% in Singapore; 0.8% in Malaysia; 0.4% in Thailand, 0.3% in the Philippines and Indonesia. It is clear then that the more an economy is dependent on trade as a percentage of its GDP, the more it is affected by an economic crisis in the USA. The sensitivity of GDP growth to changes in the GDP of the USA is then a function of the trade dependence of the Asian countries. Singapore, for example, is more trade dependent than Indonesia and hence its GDP is more sensitive to movements in the GDP of the USA.

If Asian countries are not able to keep up their export momentum, their incomes will drop and their companies may not generate more profits.

In fact profits might fall and this may lead investors to sell the stocks of the companies negatively affected by the fall in exports. If incomes go down as a result of the drop in external demand then savings will drop and the amount of funds available for margin financing of stocks might fall. Tighter loan conditions or credit conditions may persuade investors to move out of the market and this may cause stock prices and the market index to fall.

So American jobs mean an increase in aggregate demand for manufactured goods from Asia and this translates into increased incomes and increased demand for Asian stocks.

If Asian exports decline then the demand for Asian currencies will decline and this will trigger a depreciation of the local Asian currencies, which will mean that foreign portfolio managers will not be attracted by the prospects of an appreciating local currency.

If the money supply declines as a result of the drop in exports, then interest rates will rise and this will cause the price of stocks and bonds to tumble because there is an inverse relation between asset values and interest rates.

The rate of job creation in a crisis economy such as America, which is linked to the real and financial economies of Asia, has therefore a significant effect on the stock market performance of the dependent Asian economies.

In August, for example, foreign investors sold more than RM3.8bil worth of Malaysian stocks because of the fall in the S&P credit rating of America and the European debt crisis because of the expectation that the external demand for Malaysian exports will decline. As a result, the FTSE Bursa Malaysia KLCI Index fell 6.6% in August.

The writer is a visiting senior research fellow at the Institute of South-East Asian Studies (ISEAS) in Singapore.

US Double Deficit

U.S. Collapse 2012: America's economic decline and De-evolution into bankrupt Welfare State

The crisis is worsening for America's poor.

QE2 is sailing the US into stormy waters

Ambrose Evans-Pritchard
January 11, 2011
The crisis is worsening for America's poor.

THE US is drifting from a financial crisis to a more insidious social crisis. Self-congratulation by the US authorities that they have avoided a repeat of the 1930s is premature.

There is a telling detail in the US retail chain store data for December. Stephen Lewis from Monument Securities points out that luxury shops had an 8.1 per cent rise from a year ago, but discount shops catering to America's poorer half rose just 1.2 per cent. Tiffany's, Nordstrom, and Saks Fifth Avenue are booming. Sales of Cadillac cars have jumped 35 per cent, while Porsche's US sales are up 29 per cent. The luxury goods stock index is up by almost 50 per cent since October. Yet Best Buy, Target, and Walmart have languished.

Such is the blighted fruit of Federal Reserve policy. The Fed no longer even denies that the purpose of QE2 (its second round of quantitative easing) is to drive up Wall Street. Ben Bernanke's ''trickle-down'' strategy risks corroding America's solidarity before it does much to help America's poor.

The number of people on food stamps - worth about $US140 a month - has reached 43.2 million, a record high 14 per cent of the population. The US Conference of Mayors said visits to soup kitchens are up 24 per cent this year. About 643,000 people need shelter each night. Jobs data released on Friday was dire, again. The only reason headline unemployment fell from 9.7 per cent to 9.4 per cent was that so many dropped out of the system.

The ''labour participation rate'' for working-age men over 20 dropped to 73.6 per cent, the lowest since the data series began in 1948.

It is no surprise that America's armed dissident movement has resurfaced. Time magazine's ''Locked and Loaded: The Secret World of Extreme Militias'' describes an underground stint with the 300-strong Ohio Defence Force: citizens who spend weekends with M16 assault rifles and an M60 machinegun, training to defend their constitutional rights by guerrilla warfare.

Raghuram Rajan, the International Monetary Fund's former chief economist, says the subprime debt build-up was an attempt - ''whether carefully planned or the path of least resistance'' - to disguise stagnating incomes and to buy off the poor.

''Cynical as it might seem, easy credit has been used throughout history as a palliative by governments that are unable to address the deeper anxieties of the middle class directly,'' he said.

Extreme inequalities are toxic for societies but there is a body of scholarship suggesting they also cause depressions. They create a bias towards asset bubbles and over-investment, while holding down consumption, until the system becomes top-heavy and tips over, as happened in the 1930s.

Today, multinationals can exploit ''labour arbitrage'' by moving plant to low-wage countries, playing off workers in China and the West against each other. The profit share of corporations is at record highs in America and Europe.

Asia's mercantilist powers have flooded the world with excess capacity, holding down their currencies to lock in trade surpluses. The effect is to create a black hole in the global system.

So we limp on, with large numbers of people trapped on the wrong side of globalisation, and nobody doing much about it.

Would Franklin Roosevelt have tolerated such a state of affairs, or would he have ripped up and reshaped the global system until it answered the needs of his citizens?

TELEGRAPH

http://www.smh.com.au/business/qe2-is-sailing-the-us-into-stormy-waters-20110110-19l6b.html

Doubts grow over wisdom of Ben Bernanke 'super-put': Soaring bourses may have stolen the headlines, but equities are rising for an unhealthy reason.

Doubts grow over wisdom of Ben Bernanke 'super-put'

The early verdict is in on the US Federal Reserve's $600bn of fresh money through quantitative easing. Yields on 30-year Treasury bonds jumped 20 basis points to 4.07pc

By Ambrose Evans-Pritchard, International Business Editor
Published: 7:58PM GMT 04 Nov 2010

60 Comments

Mr Bernanke is targeting maturities of 5 to 10 years with purchases of Treasuries. Photo: GETTY

It is the clearest warning shot to date that global investors will not tolerate Ben Bernanke's openly-declared policy of generating inflation for much longer.

Soaring bourses may have stolen the headlines, but equities are rising for an unhealthy reason: because they are a safer asset class than bonds at the start of an inflationary credit cycle.

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Meanwhile, the price of US crude oil jumped $2.5 a barrel to $87. It is up 20pc since markets first concluded in early September that 'QE2' was a done deal.

This amounts to a tax on US consumers, transferring US income to Mid-East petro-powers. Copper has behaved in much the same way. So have sugar, soya, and cotton.

The dollar plunged yet again. That may have been the Fed's the unstated purpose. If so, Washington has angered the world's rising powers and prompted a reaction with far-reaching strategic consequences.

Li Deshui from Beijing's Economic Commission said a string of Asian states share China's "deep bitterness" over dollar debasement, and are examining ways of teaming up to insulate themselves from the tsunami of US liquidity. Thailand said its central bank is already in talks with neighbours to devise a joint protection policy.

Brazil's central bank chief Henrique Mereilles said the US move had created "excessive dollar liquidity which we are absorbing," forcing his country to restrict inflows. Mexico's finance minister warned of "more bubbles."

These countries cannot easily shield themselves from the inflationary effect of QE2 by raising interest rates since this leads to further "carry trade" inflows in search of yield. They are being forced to eye capital controls, with ominous implications for the interwoven global system.

In London and Frankfurt the verdict was just as harsh. "In our view, this is one of the greatest policy mistakes in the Fed's history," said Toby Nangle from Baring Asset Management.

"The Fed is gambling that the so-called 'portfolio balance channel effect' – pushing money out of government bonds and into other assets – will lift risk asset prices. The gamble is that this boosts profits and wages, rather than simply prices. We remain unconvinced. How will a liquidity solution correct a solvency problem?" he said.

"A policy error," said Ulrich Leuchtmann from Commerzbank. The wording of the Fed statement is "potentially dangerous" because it leaves the door open to a further flood of Treasury purchases if unemployment stays high. "It is a bottomless pit," he said.

Of course, it is precisely this open door that has so juiced risk trades, from Australian dollar futures, to silver contracts, and junk bonds. Goldman Sachs thinks QE2 will ultimately reach $2 trillion, with no exit until 2015. Such moral hazard is irresistible. It is the Bernanke 'super-put'.

Yet the reluctance of investors to leap back into the US Treasury market as they did after QE1 is revealing. The 30-year segment of the Treasury market is too small to matter, but symbolism does matter. Vigilantes sniff stealth default. "If long bond investors continue to throw their collective toys out of the cot, it risks upending the Fed's policy," said Michael Derk from FXPro.

Mr Bernanke is targeting maturities of 5 to 10 years with purchases of Treasuries. These bonds have behaved better: 10-year yields fell 14 points on Thursday to 2.48pc. However, Mark Ostwald from Monument Securities said foreign funds may take advantage of QE2 to dump their holdings on the Fed, rotating the money emerging markets rather than US assets.

Bond funds are already restive. Pimco's Bill Gross says the great bull market in bonds is over, denigrating Fed policy as the greatest "ponzi scheme" in history. Warren Buffett has chimed in too, warning that anybody buying bonds at this stage is "making a big mistake",

Fed chair Ben Bernanke uses the term 'credit easing' to describe his strategy because the goal is to lower borrowing costs. If he fails to achieve this over coming months - because investors balk - the policy will backfire.

No clear rationale for fresh QE can be found in orthodox monetarism. Data from the St Louis Federal Reserve show that M2 money supply stopped contracting in the early summer and has since been expanding at an accelerating rate, topping 9pc over the last four-week bloc.

The Fed has used the 'Taylor Rule' on output gaps as a theoretical justification for QE, but Stanford Professor John Taylor has more or less said his theories have been hijacked. "I don't think (QE) will do much good, and I also worry about the harm down the road," he said.

It has not been lost on markets that the Fed's purchases of $900bn of Treasuries by June (with reinvested funds from mortgage debt) covers the Treasury's deficit over the same period. The slipperly slope towards 'monetization' of public debt beckons.

Global investors mostly accepted that the motive for QE1 was emergency liquidity, and that stimulus would later be withdrawn. But there are growing suspicions that QE2 is Treasury funding in disguise.

If they start to act on this suspicion, they could push rates higher instead of lower, and overwhelm the Bernanke stimulus. That would precipitate an ugly chain of events for the US.

http://www.telegraph.co.uk/finance/economics/8111153/Doubts-grow-over-wisdom-of-Ben-Bernanke-super-put.html


Note:


Pimco's Bill Gross says the great bull market in bonds is over, denigrating Fed policy as the greatest "ponzi scheme" in history. 


Warren Buffett has chimed in too, warning that anybody buying bonds at this stage is "making a big mistake",

Fed Gets Aggressive After Months of Holding Back

ECONOMIC SCENE

By DAVID LEONHARDT

Published: November 3, 2010

For much of the last year, there were three basic camps on what theFederal Reserve should be doing.

Tim Shaffer/Reuters

Fed Chairman Ben Bernanke.

• 
  

Matthew Staver/Bloomberg News

Thomas Hoenig, president of the Kansas City Fed.

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One focused on the risks of the Fed’s taking more action to help the economy. This camp — known as the hawks, because of their vigilance against inflation — worried that the Fed could be sowing the seeds of future inflation and that any further action might cause global investors to panic.

Another camp — the doves — argued instead that the Fed had not done enough: inflation remained near zero, and unemployment near a 30-year high.

In the middle were Ben Bernanke and other top Fed officials, who struggled to make up their minds about who was correct. For months, they came down closer to the hawks and did little to help the economy. On Wednesday, they effectively acknowledged that they had made the wrong choice.

The risks of inaction have turned out to be the real problem.

The recovery has not been as strong as the Fed forecast. Businesses became more cautious about hiring after the European debt crisis in the spring. State governments began cutting workers around the same time, and the flow of federal stimulus money began to slow. Since May, the economy has lost 400,000 jobs.

Now — six months later, with Congress unlikely to spend more — the Fed is getting more aggressive. (And, yes, the idea that the doves are the advocates for aggression is indeed a bit odd.) Having long ago reduced its benchmark short-term interest rate to zero, the Fed will again begin buying bonds, as it did last year, to reduce long-term interest rates, like those on mortgages. Lower rates typically lead to more borrowing and spending by households and businesses.

Of course, the risks of taking action have not gone away. The new policy could eventually cause inflation to spike. All else equal, a policy that encourages more spending will cause prices to rise. And if investors begin to think that a dollar tomorrow will be worth much less than one today, they may refuse to lend money at low interest rates, undercutting the whole point of the bond purchases. Separately, the Fed, like any bond buyer, could end up losing money on the purchases, worsening the federal budget deficit.

What’s striking about the last six months, however, is how much more accurate the doves’ diagnosis of the economy has looked than the hawks’.

Early this year, for example, Thomas Hoenig, president of the Kansas City Fed and probably the most prominent hawk, gave a speech in Washington warning about the risks of an overheated economy and inflation. Mr. Hoenig suggested that the kind of severe inflation that the United States experienced in the 1970s or even that Germany did in the 1920s was a real possibility.

When he gave the speech, annual inflation was 2.7 percent. Today, it’s 1.1 percent.

The doves, on the other hand, pointed out that recoveries from financial crises tended to be weak because consumers and businesses were slow to resume spending. Around the world over the last century, the typical crisis caused the jobless rate to rise for almost five years, according to research by the economists Carmen Reinhart and Kenneth Rogoff. By that timetable, the unemployment rate would rise for a year and a half more.

Perhaps the clearest case for more action came from within the Fed itself. In June, an economist at the San Francisco Fed published a report analyzing how aggressive monetary policy should be, based on past policy and on the current levels of unemployment and inflation.

As a benchmark, it looked at the Fed’s effective interest rate, taking into account the actual short-term rate as well as any bond purchases to reduce long-term rates. Because the short-term rate was zero and the Fed bought bonds in 2009, the report judged the effective interest rate to be below zero — about negative 2 percent.

And what should the effective rate have been, based on the economy’s condition? Negative 5 percent, the analysis concluded. In other words, the Fed wasn’t buying enough bonds.

All the while, global investors have continued to show no signs of panicking. If anything, as the economy weakened over the summer, investors became more willing to lend money to the United States, viewing its economy as a safer bet than most others.

After the Fed’s announcement on Wednesday, many of the hawks who warned about inflation earlier this year repeated those warnings anew. The Cato Institute, citing a former vice president of the Dallas Fed, said the new program would “sink” the economy. Mr. Hoenig provided the lone vote inside the Fed against the bond purchases.

It’s always possible that the critics are correct and that, this time, inflation really is just around the corner. But there is still no good evidence of it. The better question may be whether the Fed is still behind the curve.

Some economists are optimistic that it has finally found the right balance. Manoj Pradhan, a global economist at Morgan Stanley, pointed out that bond purchase programs lifted growth in Europe and the United States last year — and a broadly similar approach also helped end the Great Depression. “There are no guarantees,” Mr. Pradhan said, “but the historical precedents certainly suggest it will work.”

Others, though, wonder if the program is both too late and too little. “I’m a little disappointed,” said Joseph Gagnon, a former Fed economist who has strongly argued for more action. The announced pace of bond purchases appears somewhat slower than Fed officials had recently been signaling, Mr. Gagnon added, which may explain why interest rates on 30-year bonds actually rose after the Fed announcement.

One thing seems undeniable: the Fed’s task is harder than it would have been six months ago. Businesses and consumers may now wonder if any new signs of recovery are another false dawn. And although Mr. Bernanke quietly credits the stimulus program last year with being a big help, more stimulus spending seems very unlikely now.

Unfortunately, in monetary policy, as in many other things, there are no do-overs.

http://www.nytimes.com/2010/11/04/business/04leonhardt.html?src=me&ref=business