BULLHEAD CITY, Arizona – Not so long ago this town on the Nevada border was in full boom mode.

It was a magnet for people coming to work in the casinos across the Colorado River in Laughlin, plus Californians looking to retire here or have a second home at a fraction of the cost in their own state. Construction workers flocked here to build homes and roads.

All told, successive booms turned Bullhead City from a fishing village just a few decades ago to being a city of more than 40,000 people.

But America’s housing crisis and the most severe downturn since the 1930s stopped the city’s boom dead in its tracks.

“We had booms in the 1980s and the 1990s, but in 2005 and 2006 things went absolutely nuts,” said John “Mac” McCollum. “Then in 2007 all of a sudden the lights went out.”

Many of the construction workers have gone, as have a lot of people who have been laid off at Laughlin’s casinos. Nevada’s casinos have had 20 consecutive months of declining gambling profits.

“Unemployment is on the rise and we’ve had quite a few foreclosures,” said Bullhead City Mayor Jack Hakim. “Families are leaving because there’s no work to be had.”

“It’s going to be tough for a while around here,” he added.

Unemployment in Mohave County where Bullhead City is located is around 10 percent. The median house price here has fallen from nearly $190,000 in January 2006 to less than $93,000 now, a drop of more than 50 percent.

Around 60 percent of McCollum’s sales now are foreclosures.

“Many of the other sales we handle are people trying to avoid foreclosure or at least break even,” he said. “Either way, right now foreclosures are pretty much the only game in town.”

John McCormick of McCormick Development helps run a number of family businesses – a water company, a construction company, a land development company and a real estate broker’s office – and says that many of the people walking away from homes here are either speculators or Californians who bought a second home here.

“If they end up in trouble, it’s so much easier to walk away from a second home than a primary residence,” he said.

The McCormick clan’s land development business has laid out a subdivision north of Bullhead City with 141 empty lots, complete with roads and water mains. But although there have been plenty of people looking, no one is buying right now. The family business owes the bank $8 million on the development, plus has to pay $160,000 annually in property taxes while the subdivision remains empty.

“There’s money out there but a lot of people won’t let it go,” McCormick said. “They just waiting to see if prices will go lower.”

For Bullhead City to come back, both McCormick and McCollum agree that casino business needs to pick up again but – even more importantly – California’s economy needs to recover.

“If California’s market is in the tank, we ‘re in the tank,” McCormick said. “I think we may be past the worst of it now. But nothing big is going to happen any time soon.”

When the Bank of England decided to expand its quantitative easing policy by 25 billion pounds to 200 billion on Thursday, it was essentially hedging its bets.

After Britain's economy shrank unexpectedly in the third quarter, and with two thirds of the City expecting an expansion to the QE programme, simply shutting off the tap of government bond purchases would risk being more of a shock than the economy could bear.

On the other hand, the Bank clearly believes that the worst is over for the economy and that recovery will come soon -- even if it's going to be weak.

Thursday's decision means the central bank will keep buying government debt until February, but at only half the pace of before. This still amounts to around 2 billion pounds a week, not including the much smaller sums of corporate debt that the Bank is buying.

What the decision means for a typical household is harder to calculate. The Bank says that its quantitative easing programme has raised the price of government and corporate
bonds, making borrowing cheaper.

But for average firms and consumers looking for a loan, the benefit is harder to spot.

There is little clear evidence that banks are much more willing to lend than a few months ago -- though the Bank would argue that quantitative easing has been instrumental in avoiding the recession turning into a depression.

In the longer term, the big unknown is the impact that quantitative easing will have on inflation. Sterling's weakness against the dollar and the euro will push inflation up in the short term, and going forward the Bank of England said it faced a balancing act.

While rising unemployment and half-full shops and factories will keep a lid on prices, policymakers know that quantitative easing could exert upward pressure on demand and prices for months if not years after it has stopped.

That's why they took the decision today which could mark the gradual phasing out of this unprecedented policy of asset purchases.

Inflation may not be at the forefront of worries about economy for now, but it’s certainly in the back of many investors’ minds. Not that anyone thinks price increases will be reinforced by the labor market, as per the old “wage-push” theory. A new report from the International Labor Organization showed that wage growth continued to decline around the world in 2008, falling to 1.4 percent last year from 4.3 percent in 2007. The UN group also suggested things have gotten worse this year.

The picture on wages is likely to get worse in 2009 – despite the beginning of a possible economic recovery.   Compared to the annual average of 2008, the real wages in the first quarter of 2009 fell in more than half of the 35 countries for which recent data is available.   The downward trend in wages raises some questions about the extent to which the consumption of workers and their families will be able to sustain aggregate demand for economic production once the effects of government rescue packages peter out.

This trend has not, however, succeeded in calming those spooked by unprecedented monetary and fiscal stimulus from governments and central banks around the world. Indeed, inflation-hedging is creating market niches all of its own. The Treasury, for instance, is expected to bring back 30-year Treasury Inflation Protected Securities, or TIPS, as part of its quarterly refunding announcement on Wednesday. Gorge Goncalves at Cantor Fitzgerald notes:

The Treasury could expand its TIPS offerings and or bring back the 30-Year TIPS to help finance the federal debt needs.  In the latest dealer questionnaire the Treasury asked about potential changes to the TIPS program including the replacement of the 20-year TIPS with a new 30-year TIPS security. 

Bond giant PIMCO, in the meantime, has introduced its own new anti-inflation fund, which it says is composed of a mix of TIPS and municipal bonds. John Cummings, who will manage the fund, offers some insight into the reasoning behind its creation.

With growing U.S. deficit projections and continued economic uncertainty, investors are facing the potential for higher taxes, elevated financial risks and the need to protect the purchasing power of their investments against inflation over time. 

Conflicting signals from Fed speak have central bank watchers back to playing the word game, adding renewed weight to every nuance that can be gleaned from official speeches and pronouncements. There is good reason for the mixed messages. Fed policymakers face a tricky task trying to ensure their commitment to an accommodative stance while also having to assure investors and the public that they will remove the punchbowl before the party gets out of hand.

Eric Lascelles at TD Securities applies a little physical mechanics to the study of Fed chatter.  

The contemplation of signal-to-noise ratios is usually the exclusive domain of electrical engineers. But this subject has become of increasing relevance to economists due to the sheer number of Fed Governors and Presidents who are now proffering their myriad views on a daily basis. It has become increasingly difficult to separate what constitutes a reliable signal of future monetary policy from the inconsequential noise. The monetary policy signal-to-noise ratio is currently very low. This partly explains why expected bond market volatility remains so high – central bankers as a collective are not offering anything close to a clear path forward.

Lascelles errs on the side of dovishness, telling his readers to focus on what Chairman Bernanke has to say.  “The TD view remains that the Fed will surprise many in how long it manages to remain on hold, with a first hike coming in Q1 2011.”

Recent press reports alluded to the possibility that the Fed might be pondering some shift in its language, either removing or moderating its vow to keep rates low for an “extended period.” But former Fed Governor Larry Meyer, now at Macroeconomic Advisors, says all the talk about a verbal baby step toward tightening is just that.

We see an implicit cost-benefit analysis taking place when it comes to considering any discussion on language. The benefits (added flexibility) are unclear, in that a subset of the Committee may feel that the current language is sufficiently vague that it does not stand in the way of an earlier tightening, if warranted by prevailing conditions. On the cost side of the ledger, some members will be very worried about an adverse market impact from dropping either the “extended period” or the “exceptionally low” terms. Taken together, these cost-benefit considerations would suggest somewhat reduced odds that language issues will be prominently discussed at this meeting and an extremely low probability that the language will be changed.

Does that mean that allusions to a rapid eventual exit, first floated by Fed Governor Kevin Warsh, are premature? Not if the Fed feels it needs to dampen inflation expectations, which would be understandable with today’s GDP report reading for the third quarter coming in at 3.5 percent.

Investors will undoubtedly stay tuned.

Ever wonder how the U.S. Treasury Secretary gets through some of the most economically stressful times this country has seen in a while -- does he go for long runs? Sleep two hours a night?

Timothy Geithner has been in the job less than a year, and came in after the economy had slumped into recession. Now unemployment is approaching 10 percent, he's had to navigate through an economic stimulus package, and on top of all that the weakness of the U.S. dollar has other countries questioning whether it should still be the reserve currency.

Enough problems, we imagine, to give anyone a big giant headache and more than a few sleepless nights.

So what does Geithner do under the weight of it all?

"I've been in the middle of this for quite a long time," he said in an interview at the Reuters Washington Summit on Tuesday. (Remember, before this job, Geithner was president of the New York Federal Reserve Bank).

His general approach, Geithner said, is to "focus on trying to make sure you're making the best of a bunch of bad choices."

And to make sure "you are helping the president make sensible decisions," he said.

"I think the basic imperative in these things is just to make sure people understand that we're not going to debate when there's a problem anymore, we're not going to like hope it takes care of itself, we're going to commit to fix it," Geithner said. "And we're going to do what it takes to fix it."

For more news from the Reuters Washington Summit, click here.

Photo credit: Reuters/Jonathan Ernst (Geithner at Reuters Washington Summit)

The Federal Reserve has gone on the offensive to sell its exit strategy to investors and the public, in the hopes that it can stall an increase in inflation expectations. The effort was first launched by Fed Board Governor Kevin Warsh, who argued in a Wall Street Journal editorial, followed by a speech, that when the time came for Fed tightening, policymakers might have to move quickly. Even Bernanke, whose Great Depression expertise usually pegs him as a dove, was particularly meticulous about describing the Fed’s stimulus-withdrawal tools this week, sending the bond market into a tailspin.

But with the unemployment rate rapidly climbing toward 10 percent — and expected to remain up there for the foreseeable future, some economists are telling Fed officials to hold their horses. Paul Krugman, in his blog, makes a vehement case for an ultra-dovish policy stance. He calculates that the ideal fed funds rate given current economic conditions should be, get this, -5.6 percent. In another post, he argues that even if the U.S. economic recovery is more robust than most believe, the Fed should still keep rates at rock-bottom lows for at least two years.

So where’s the case for monetary tightening? For some reason many Fed officials seem to view it as inherently unsound to stay at a zero rate for several years running — but I’m at a loss to understand what model, or even conceptual framework, leads them to that conclusion. One gets the impression of officials who have decided that they want to tighten, and are making up new conceptual frameworks on the fly to justify their desires.

Enter Thomas Pulley, economist at New America Foundation, who argues in the FT that a second Great Depression is still possible. He argues that continued deleveraging and an adverse feedback loop of rising joblessness and foreclosures will likely lead to a renewed contraction in economic activity.

There is a simple logic to why the economy will experience a second dip. That logic rests on the economics of deleveraging which inevitably produces a two-step correction. The first step has been worked through, and it triggered a financial crisis that caused the worst recession since the Great Depression. The second step has only just begun.

America has breathed a sigh of relief since April, as the summer selling season kicked in and the $8,000 first-time homebuyer credit nudged consumers off the fence into the most affordable market in years. These factors, along with easy financing from the Federal Housing Administration, was the first leg up for the “W,” said Lisa Marquis Jackson, a vice president at John Burns.

The onset of the weaker selling months, a building pipeline of foreclosures and expiration of the tax-credit on Nov. 30 will likely bring rising prices upturn to a halt, creating a “false peak” and fresh downturn, the group says. Federal efforts have slowed foreclosures but have not addressed many issues including unemployment and underwater mortgages, leaving a heavy “shadow inventory” set to knock prices to fresh lows.

An extension to the first-time homebuyer credit — bandied about by the Obama administration — may soften, but not prevent another leg down, the John Burns group said.

“We anticipate that foreclosure activity will remain very high at least through 2012, with the majority of future foreclosures coming as a result of job losses,” John Burns, president of the group, said in an outlook.

The second downward thrust to the “W” could also come as the FHA clamps down on credit, they said. Signs of stability in the economy will push mortgage rates higher, meantime.

Once a new, lower bottom in prices is realized in mid-2010, America can see a gradual appreciation thereafter because of weak employment, sluggish economic recovery and continued stress on the banking system, the group predicted.

Economists seems to be having a difficult time sorting through the recent downward trend in jobless claims. On the surface, the news looks good. Benefit applications, which have been trending lower from a 26-year peak of 674k in March, fell to a nine-month low of 521k this week. Continuing claims also eased, and are now hovering just above 6 million.

On the one hand, this suggests the October employment survey could be a bit better following a September disappointment, particularly considering this is survey week for payrolls. At the same time, there are continued reasons to worry. JP Morgan’s Abiel Reinhart had this to say:

Claims are at their lowest level since the start of the year, although the level is obviously still high. To date, the four-week average of jobless claims is down 24,500 from the September payroll survey week, which is good news on the employment front. The downward trend in claims does suggest that payroll losses could moderate again in October. The insured unemployment rate fell to 4.5% from 4.6%. The fall in insured unemployment suggests that overall unemployment is approaching its peak.

Others aren’t sure the story is all that rosy. They worry that, given the time limitations on benefits (and despite their extension as part of Obama’s stimulus), many Americans are simply falling off the jobless rolls because they no longer qualify. Jan Hatzius et al at Goldman write:

A small step — not a giant leap — given the volatility of these data and the ongoing likelihood that the downward drift in continuing claims still represents exhaustions of eligibility for regular benefits more than actual rehiring.

And Ian Shepherdson at HFE:

The level of claims is still far too high, for sure, and it is certainly consistent with further declines in payrolls, but it is heading in the right direction. Moreover, the recent numbers are good enough clearly to point to a materially smaller decline in Oct/Nov payrolls than in September; we tentatively look for about -150K. We don’t expect claims to keep falling this fast; the pace of growth will slow through the year-end and into 2010 as the clunker and inventory kicks fade, but the downward trend will continue.

BofA Merrill Lynch economist Ethan Harris isn’t buying what he calls ”extreme perma-bear stories” about the U.S. economy. A couple of weeks of disappointing U.S. economic data, culminating in Friday’s weak employment report , revived concerns that the economy was struggling to reach recession escape velocity.

In a research note, Harris said the bad news hasn’t changed his forecast for U.S. economic growth of 3 percent-plus over the next two years. He says the economy has a natural tendency to eventually return to full employment once the “negative shocks” are gone. He points to six major economic theories to support his view, including Keynesian, the Austrian school, and the “financial accelerator model,” which counts Federal Reserve Chairman Ben Bernanke among its advocates. 

But he acknowledges there is one well-known economic theory which does not support his forecast:

“The one notable exception to this view is Marxism. In Marxist theory the capitalist world is doomed to ever worsening cycles of boom and bust, culminating in its collapse and the assent of communism. Needless to say, we do not ascribe to this view.”

In case you weren’t depressed enough about the state of the U.S. labor market and the 7.2 million jobs lost since the start of the recession, check out this factoid from JPMorgan economist Michael Feroli:

“We would need payroll gains of 200,000 per month every month for three straight years just to get back to late 2007 levels of employment, and even that calculation ignores the labor force growth over the intervening years.”

Take your pick of bad September job news: the average workweek declined; average hourly earnings increased a paltry 0.1 percent; the broadest measure of unemployment and underemployment rose to 17 percent; and the average duration of unemployment hit an all-time high of 26.2 weeks.

Welcome to the recovery.