U.S. economy plays out its own Greek tragedy

The world received a ton of new information this week, most in political cloak, all difficult to interpret. Markets accordingly have "wockety-tonged" all over the place, but the 10-year Treasury note sliding below 2.9 percent says the net effect is heightened anxiety.

The only straightforward stuff was U.S. economic data. Sales of both new and existing homes slid in May, but with no real change in pattern. Weekly claims for unemployment insurance are trickling upward: 11 straight weeks above 400,000, which is far below the 650,000 post-Lehman level, but about the same as the worst of the two prior recessions.

May orders for durable goods improved, but did not offset April’s decline; similarly, the Chicago Federal Reserve’s index in May was again negative, but better than April.

The endless Greek saga reminds me of schoolboy trial by "Odyssey" and "Iliad" fire. Lashed to a mast, but no sirens in sight. Could Odysseus just … go home? The European proceedings are now officially stupid, an argument over verb conjugation: default, defaulting, defaulted.

Each day that the inevitable approaches, stocks sink and cash goes to bonds, then reversing at each new and absurd procrastination.

The moment that Greece finally goes will be anticlimax, as banks and regulators have had 18 months to sort through the web of its debt and credit default swaps. The daily concern in the markets: the next euro-dominoes.

In the global black box of black boxes, China is further along in its first-ever central bank fight with inflation. New signs: slowing real estate sales, a decline in lending, and a spike in bank-to-bank lending rates (5.5 percent to 8.9 percent).

All nations, even ones with 100 years of experience in this sort of thing, are touchy about how much tightening medicine to apply to deal with a little inflation. Yet none has ever beaten China-sized inflation without a recession, and without throwing a lot of people out of work.

China is more likely to flinch than most, as it is in the midst of one of its changes in leadership without a constitutional guide — just a power struggle under the covers between political party, army, bureaucrats, entrepreneurial princes, and ethnic and migrant crowds.

Thirty years ago, less than 20 percent of China lived in cities; today, it’s more than 50 percent. Urban populations are volatile. How China’s first capitalist business cycle plays out may matter more than anything that happens in Europe.

With that backdrop, the aftermath of the Fed’s meeting this week seems almost routine and orderly … almost. The U.S. Federal Reserve did not announce any new action; in fact, it took pains to engrave that it would not do anything until the economy does something.

However, two jarring aspects:

• First, another downward revision in the Fed’s 2011 U.S. gross domestic product forecast: January’s 3.9 percent best-case gave way in April to 3.3 percent, and this week to 2.9 percent — which will require acceleration in the second half of the year.
• Then, rather more disturbing, Fed Chairman Ben Bernanke offered, "We don’t have a precise read on why this slower pace of growth is persisting."

Good one.

"Maybe some… weakness in the financial sector, problems in the housing sector, balance sheet and deleveraging issues — some of these headwinds may be stronger or more persistent than we had thought."

You don’t say?! Housing … d’ya think? Could be? Credit a little … scarce?

All right, enough. Be serious: Bernanke doesn’t have the votes to take new stimulus steps. Regional Fed stalwarts are ready to revolt. Congressional "no-bailouters" and hard-money hard-liners are especially upset that the Fed has interrupted their path to national suicide.

This is a good time for the Fed to get off the stage, to lower its profile in self-protection.

A benefit from that exit: The markets already see, and the nation soon will, that absent the Fed there is nobody on stage.

The hapless Treasury secretary speaks from time to time, but no one listens, and the president has not been seen near a financial issue since his party got pasted last November. Congress … is Congress.

Thus a competition between misgovernment here, and in Europe, and who-knows-what in China, and the net result is safety trades and lower rates, even for mortgages.

Here are the new FOMC projections.

1 Projections of change in real GDP and in inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.

2 Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

Inflation was revised up for 2011.

But core inflation is seen at levels still below the FOMC target.

Charts courtesy of www.calculatedriskblog.com.