Andrew, I encourage you to look at Brad Setzer's blog sometime. He has definitely shown that china has moved out of the long end of the curve and into the short end. It's not at all contradictory for 2 (or even 5) year bonds to have a huge demand, while 10 and 30 sell off. In fact it would be what's predicted by the people that are worried about deflation in the short term and a large deal of inflation in the long term.

Though I did not express it this way last Sep/Oct, I have found a post hoc justification for my feeling that we should have let the whole thing crash.

The economy hasn't reached bottom. It might not for a long while yet. I hold no faith in "green shoots." Instead of pruning the big, dead branches, we've put them on life support, at the expense of the rest (cf. zombie banks, 85% of GDP deficits, "record" profits at certain banks thanks to accounting chicanery, etc.). With the kind of money we spent on TARP and other monetizing strategies (like 0% interest and so forth) we could have eliminated the Fed (part of the problem, not the solution) and created a Bank of the United States. (A real one, not a chartered private institution like in Andrew Jackson's time.) Such a bank could have lent directly to US citizens and businesses, rather than "hoping" the zombies would start lending again.

We have no manufacturing sector to speak of. We are not creating wealth. How many times does it have to be said before people realize the problem? Banks don't create wealth. Insurance companies don't create wealth. (They create the illusion of wealth i.e. bubbles.) Service industries don't create wealth or even the illusion of wealth.

The only way for the US to sustain its economic pre-eminence is to become an industrial powerhouse again. Maybe another Apollo program (at least those spinoffs have some stimulative value, as opposed to war machines). Or the renewable energy equivalent. If we don't, we will surely become a second-rate power.

Bond prices are nonsense. Any confidence in the economy right now is illusory. We are slipping down that slope. And instead of grabbing roots, which is politically "impossible" because of bank, insurance, pharma, medical, and oil lobbyists; we are grabbing at mounds of earth that are useless in stopping the slide.

http://www.salon.com/wires/ap/world/2009/06/23/D990N6G01_lt_mexico_climate_change/index.html (and at sig).

17 percent of 2005, when scientists recommend a 25% cut from 1990 levels. Feh.

Time to start dumping fine dust from airplanes at high altitude. Maybe we can re-create a bit of the Krakatoa disaster. That might cool things down just enough to buy us time for the Boomers to die off and take their "me first" attitude with them. Then maybe we can pass some real legislation - if our experiment in geoengineering hasn't killed us all.

I forgot to mention that last week the 2 year notes had "strong" demand, while the 10 year was "atrocious," so it's too soon to say the narrative has changed.

With all due respect, I think there's a bit of a misunderstanding of how systems of interconnected, self-managing agents have been observed to behave in our known universe - both in the general hand-wringing attempts to predict the future of the Western economic framework, and in this current article Andrew has posted.

The global economy exhibits macro-level behaviors like "bubbles" and "recessions" that are objectively measurable AFTER they are occurring or have occurred. These macro-level trends matter to us, so we tend to focus quite a bit on "explaining" them - with the idea being that if we learn "what makes them happen" we will be able to change our collective behaviors in the future and thus change the probability distribution of these ups and downs in macroeconomic behavior.

However, in terms of what we've actually learned about large-scale, interconnected systems like the "global economy" - and what we've learned from actual, empirical, peer-reviewed mathematical analyses of macroeconomic trends is that we really don't know all that much about what "causes" macro-level behavior. Indeed, it becomes pretty difficult to pin down the definition of "to cause" in this context: if there's 10,000 independent variables - each interacting with each other, as well as the system overall - that together result in system-wide behaviors, how do you decide that a change in one variable "causes" the system to go up or down or move in some way? We can measure correlation between variables and macro-level trends - but that's a far cry from causation.

Which is to say that the mouth-foaming efforts to "explain" what's going on with the global economic system are essentially silly. It makes us feel good to act as if we can understand - and thus control - these interconnected systems that we've created and in which we live our social lives. But there's little or no evidence of that, is there? They have their own system-level momenta and logics and tendencies; some of these we understand, some of them are far past what our linear-based mathematical tools are able to model and/or predict. We don't like to admit that we're fundamentally ignorant of what really drives the behaviors of our economic systems - but we are. We KNOW we are, with mathematical certainty.

With respect to the article, it's essentially irrelevant whether "analysts" predict the global economy will go "up" or "down," in terms of what behaviors it actually will exhibit in the future - we can't all just sit around and close our eyes and really, really, REALLY wish for everyone to get rich and - poof! - it happens. That's religion. In the real world, systems don't depend all that much on what we "think" they will do or are doing - they have longer trends and deeper structures and, looking back, we can sometimes make sense of what happened. Looking forward, we really can't.

That lack of our understanding of a system, however, does NOT automatically indicate that the system itself is behaving in an unusually erratic, stochastic, or "random" (a loaded word) manner. The global economy may - or may not - be more "random" in recent months than in past periods, but the fact that we're not doing well in understanding what it's doing isn't at all related to that degree of stochasticity intrinsic in the system itself. It just means we're kind of dumb about systems behaviors, particularly when we're "inside" the systems in question. It's a question of perspective.

There's a deeply solipsistic tendency for "analysts" to impute on their efforts the implied ability to move the systems they are "analyzing" by some magical force - if "the analysts" all say the market has hit bottom, then surely it must go along with that consensus. . . right? Nope. Unfortunately, the shallow thinking that simplifies the question of causation - and overprivileges the position of "analysts" in systems behavior - tends to crowd out deeper, more sophisticated perspectives on what systems are doing and what patterns of variables are feeding into the deep structural trajectories of the systems themselves. Humans just aren't too good at thinking about systems - we like the "I hit the ball with a stick and the ball flew into the net" kind of systems, simple and linear and well-bounded and utterly non-representative of the vast majority of actual systems in the universe around us. Still, we don't need to deepen our position of ignorance by choosing also to be ignorant of our ignorance itself. . . do we?

There's an entire science of "dynamical systems theory" that really smart people like Dr. Wolfram and Dr. Gell-Man and countless others have worked on for decades - with some notable successes. It's rather odd that it is utterly ignored when it comes to journalistic obsession with writing surface-level trivialities about "The Great Recession." Perhaps it's considered more relevant to debate the pros and cons of "the sky is falling - aaaaaa!" as a "theory of systems-level behavior" - but that's really disappointing. There's plenty of useful analytic tools, and smart people who know how to correctly apply them, out there - I suspect their phones aren't ringing because everyone is asking the "opinions" of the Wall Street simpletons who drove off this cliff in the first place. If none of them saw it coming - at all - why in the world would anyone care what they have to say about the future? Perhaps they have better PR agents than the real scientists, or something. It's a mystery to me.

Fausty