It’s a currency war, it’s a trade war.  It’s every kind of war that can be fought safely behind a desk.   Are you ready for the latest dust-up, the assault on China?

The first shots came from of a rare bipartisan show of unity in the US Senate, which passed a bill requiring new tariffs on Chinese goods if they do not allow the Yuan to appreciate in value.  63 Senators went along with the measure, including 17 Republicans.  It seems like a popular direction to go, but Boehner has said he will prevent a similar measure in the House.  Obama said weakly that diplomacy is a better approach.

Doesn’t sound like the war is on after all.  But support for it is growing.

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The Nobel Prize in Economics for 2011 has been given to Thomas Sargent and Christopher Sims for their work on how central bank policy shapes an economy dynamically. There’s always a bit of politics in this Nobel Prize, and this year is no different. The two recipients more or less proved that economics can be used for a central bank, and even a government, to shape the future. Expectations guide how people make decisions, and they aren’t always rational.

If that sounds obvious, it’s partly because we’re living in a world that these two helped define. It helps to take a step back to a time when economics was inherently backward looking, going over old data as it comes out and adjusting to meet the world that was measured a month or several ago.

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What will it take to get the economy moving again?  If you don’t know, relax – no one does, even at the highest levels of power and policy making.  Wait … that’s more of a reason to panic than to relax, isn’t it?

That’s not to say that the Federal Reserve isn’t trying, and their heroic efforts deserve praise.  But if you want to know how strange everything has gotten look no further than the simple fact that the Fed is far more interested in deficit spending and “stimulus” than the government itself.  That’s completely backwards from what we have seen historically.  Here’s a quick guide to the problem and what the Fed is trying to do to fix it.

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