German Bunds fell yesterday after the failure of a bond auction — which means that demand from the public was less than 100% of the issue and the Bundesbank picked up the rest. I have never found the failure or success of bond auctions to be a useful indicator of anything at all, despite all the media interest. Deutsche Bank points out that there have been 12 such failures since 1999 and that a failed auction indicates a lack of demand for new issues at the current price, not a lack of demand for German debt per se.

Other than that, not much has happened in the past 24 hours. The Irish are talking about some relief on their European borrowings, and about writing down Bank of Ireland sub debt. S&P has warned about Japan’s debt burden, calling attention to something that we all knew about already.

The Japanese situation does raise an issue for a proponent of fiscal stimulus: if a stimulus does not lead to a self-sustaining recovery, a country can find itself in the position of Japan, unable to risk faster growth and concomitant inflation because of the fear that any increase in bond yields would bankrupt the country. The obvious answer, I suppose, lies in the actions of the Federal Reserve during and after the Second World War, when it held long rates below 2.5% under an agreement with the Treasury. This may seem like a measure that would lead to disaster, but it did not in the 1950’s and 1960’s, when economic growth was strong. This highlights a point I have been thinking about recently: macroeconomics can be weirdly counterintuitive — and that is something that many commentators seem unable to accept. Paul Krugman says that, “the essence of macroeconomics is understanding why… what happens if one group does something is not at all what happens when everyone does it.”

The debate between Republicans — who represent a common-sense-economics approach — and Krugman et al. looks to me like a debate between proponents of Aristotelian physics and quantum mechanics. Yes, quantum mechanics is weirdly counterintuitive and is known not to be a final theory of everything; but the Aristotelian crowd would not be worth listening to at all. I suspect that, if physics had as important an effect on people’s wallets as economics, we would actually be having this debate.

PCE on durable goods rose 0.9% in October, in line with the 0.85% I forecast in my morning note on 2nd November. This is an important leading indicator. In the summer I forecast a recession in the US based on its weakness; that weakness has since reversed, and in consequence the probability of a recession in the US has receded. That was a surprise to me — I think the reason is that I underweighted the importance of supply-chain disruptions after the Japanese quake. I have since constructed my own US leading indicator (which is just starting to roll over).


Durable goods orders -0.7% b.e. Core 0.7% b.e. Oct.
Initial claims rose to 393k, d.e., but the trend remains downward.
Personal spending 0.1% d.e. Oct.
Personal income 0.4% b.e. Oct.
German Ifo rose slightly to 106.6, beating expectations.
UK revised GDP was 0.5%, the same as the previous estimate.

Next 24 Hours:

The schedule is light because of Thanksgiving in the US. Happy thanksgiving to any American readers.