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The Sounds of Silence


JACKSON HOLE, Wyo. -- Interior. Top-secret building somewhere in San Francisco. 8:29 a.m. Friday, Sept. 4.

Fed Chairman

Alan Greenspan

(G), Treasury Secretary

Robert Rubin

(Boyish Diffidence) and Japanese Finance Minister

Kiichi Miyazawa

(Second Chance) are huddled around a 13-inch government monitor. The

U.S. employment numbers hit the tape.

The headlines scroll. Nonfarm payrolls surge 429,000 (the biggest gain since February 1996, notes the


). The unemployment rate sinks to 4.3% -- an expansion low -- from 4.5%. Hourly earnings jump 0.5% to bring year-on-year wage growth to 4.2%. The index of aggregate hours rises 0.3% which, with a (modest) 1.7% productivity assumption, suggests a third-quarter GDP number near 4%.

Boyish Diffidence

arms folded across chest, hand to chin, to no one in particular: The fundamentals of the U.S. economy are strong, due in part to the sound policies we've been following. The prospects for growth with low inflation and low unemployment continue to be strong. The key is to continue on the right policy path, particularly to maintain our fiscal discipline.

looks toward ceiling, begins pacing The world is currently working its way through a difficult period. It is important that other countries pursue sound policies to promote growth and stability.

turns toward Second Chance It is particularly important that Japan, the second-largest economy in the world, move ahead with actions to put its economy back on track so that it can be a source of strength in Asia and around the world.

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thinks to self Am I the only one trying to help this market? We are still going public in November, right?


still staring at screen: On one hand . . .

Boyish Diffidence

interrupting: Wait! I almost forgot to say that it is even more important to receive full IMF funding so that the IMF will have sufficient resources to respond to crises and support reform.

to G Please continue.


measuredly: On one hand, the U.S. economy is still performing impressively. On the other hand, trouble in other economies is demonstrably restraining demand for American goods and services, and those troubles could intensify and spread further. On the other hand, tight labor markets and strong domestic demand introduce the possibility of a pickup in inflation. And on the other hand, a number of factors likely will serve to damp growth in aggregate demand, helping to foster a reasonably smooth transition to a more sustainable rate of growth and reasonable balance in labor markets.

realizes that makes four hands I have nothing else.

thinks to self Ease? Right. I've been dropping hints about the


since it had a six-handle.

Second Chance

stiffening: We are still pursuing the possibility of effective forex intervention at the right timing.

thinks to self We are still pursuing the possibility of effective forex intervention at the right timing.

to others And with a lot of luck -- and a little public money -- we can get the


back to 18,000 by year-end.

thinks to self Damn it. I meant to say that last thing to myself.



Boyish Diffidence

to Second Chance: We cannot help you. Certainly not right now, and probably not in the future. Do you know that?

Second Chance

long pause: I hope Russia's problems do not have a major impact on the world economy.



Boyish Diffidence

irritated: People want to know that something positive is happening in your country. The whole world would be better for it. When are you going to give your economy a good hard kick in the ass? And why not begin serious work on the banks already?

Silence. . .

Learning Curve

True or false: The yield curve has never before inverted without correctly predicting an economic slowdown.

True if you listened to that smug

Stein Roe

whippersnapper on


this morning. False if you have access to data.

The curve inverted between December 1965 and February 1967. No slowdown followed. The curve nearly inverted between May 1995 and February 1996. No slowdown after that, either. In fact, activity accelerated smartly in the wake of both episodes. Hourly earnings growth accelerated to 5.7% from 4.4% during the year after the 1965-67 inversion, and it accelerated to 4.0% from 2.9% during the year after the 1995-96 near-inversion.

Said whippersnapper also talked a lot about the curve now signaling recession (this is a hot topic in all circles). Hard numbers will help here, too.

Take a look at the table below.

It outlines a

New York Fed

model designed to predict recessions (and it works well). Specifically, it estimates the probability of recession four quarters in the future as a function of the difference (spread) between the 10-year Treasury note and the three-month Treasury bill.

Said spread sits at 0.133 percentage point right now. According to the model, there is a 20% to 25% chance that a recession will hit this country in the next year.

That is not insignificant. But the economic fundamentals are such that we are still a long ways away -- recent share-price declines and all -- from an outright decline in output in this country.

Side Dish

Trivia answer: "Low" (one of the subheads

yesterday) is the third track on the "Out of Time" CD. ... As to the notion that the Fed can't fight the market, one reader wonders, "Perhaps none of these bond traders were around in 1994?"