Saturday, April 13, 2013

Is the US economy finally recovering?

This will be little more than a note. I just read a post by Professor David Glasner at on the "bursting" of the "gold bubble." My gut tells me that there is a gold bubble. My own analysis is that, at the zero-lower bound, a scramble for decent returns by investors is making them inflate the price of gold, bonds and stocks. I think even with that rationale about the gold price, there is still a bubble on top of that. And it's hard to read stocks because they could rise in price because of a recovery or the search for returns as the yield curve compresses (sorry for the technical language)... let's say the extra returns that investors demand for holding either long term or riskier securities are declining (in my own interpretation of the data) when we face the zero-lower bound in a general depression. But there may be room for optimism:

Note that, even though short-term treasuries are still hovering around zero, corporate bond yields have recently jumped up (not that this is the only case since we entered near-zero territory), gold prices have been declining lately, and the stock market is rising, as measured by both the Dow Jones Industrial Average and the S&P 500. The price of gold has not declined a lot and it might just be randomly bouncing up and down at a currently higher level; the bond yields might just be experiencing normal fluctuations and the robust growth stocks may not be based on an improved macroeconomy, but this still could be a real indicator of change that's in the wind.

If this is true, what does it mean for my own quasi-IS-LM model? It means that the Wicksellian equilibrium interest rate has been restored.  Obviously if employment gains don't pick up, I'll abandon hope again and start rending my garments and covering myself with ashes.  But for now, I'm getting more hopeful. 

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