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February 18, 2005
Fed Fixin' To Dramatically Raise Interest Rates?
We knew it would come, but how quick the tides or recession will rise, is anyones guess.
Core inflation: biggest gain in 6 years
"The sustained growth of consumption, itself dependent upon the growth of household debt, was the determining factor behind increases in gdp from 2000 onwards—in limiting the precipitous descent of the economy in 2001, in stabilizing it in the winter of 2001–02, and in stimulating the growth that has taken place since. In national accounting terms, the increase of personal consumption expenditures was responsible for almost all of the gdp increase that took place between 2000 and the first half of 2003."
...
"The Fed’s turn to ever-easier credit brought a semblance of order to the non-manufacturing economy, further rises in profitability for the construction industry and retail trade, and the continuation of an epoch-making expansion of the financial sector. But it did so, in large part, by means of—and at the cost of—inflating the value of financial assets across the board, far beyond the worth of the underlying assets that they represent. The ensuing bubbles have provided the collateral required to support ever-greater borrowing so as to keep consumption rising and the economy turning over. The outcome has been that us economic growth in the past three years has been driven by increases in demand generated by borrowing against the speculative appreciation of on-paper wealth, far more than in demand generated by increased investment and employment, driven by rising profits."
...
"As equity prices, from the mid-90s onwards, started to outrun underlying corporate profits and gdp, housing prices began to bubble up too. From 1975, when data first becomes available, through 1995, housing prices increased at an approximately similar rate to consumer prices, so remaining roughly steady in real terms. During the first half of the 1980s, the housing price index fell about 5–10 per cent behind the cpi, before catching up to it again by 1985; then, between 1985 and 1990, it rose about 13 per cent above the cpi, before falling back again to its level in 1995. Real housing prices in 1995 were thus the same as they had been in 1985 and 1979. But between 1995 and the first half of 2003, the rise in the home price index exceeded the increase in the cpi by more than 35 points—historically, an unheard-of rise in real housing costs."
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"A high dollar in general, and East Asian purchases of dollar-denominated assets in particular, have been indispensable for the American recovery, such as it has been—allowing a hyper-expansionary us monetary policy without upward pressure on interest rates or prices. Should the dollar continue to fall, us equity and bond values will come directly under stress and inflation will increase. But if the price level rises, so will the cost of borrowing, threatening the low interest rates that have been the ultimate foundation for the cyclical upturn. Any significant rise in interest rates would put an end to the enormous wave of mortgage borrowing that has driven consumption. It would also make it more difficult for the government to finance its enormous—and growing—budgetary deficit without raising interest rates and thereby jeopardizing the recovery, while adding to the downward pressure on asset values. Indeed, given that the rest of the world owns $7.61 trillion worth of us assets—40 per cent of the us government’s tradeable debt, 26 per cent of us corporate bonds, and 13 per cent of us equities—a significant decline of the dollar has the potential to set off a rush to offload these, unleashing a violent downward spiral of currency and asset prices. If the Bush Administration gets its wish, in other words, it may regret ever having made it."
--- taken from the New Left Review 25, ROBERT BRENNER: NEW BOOM OR NEW BUBBLE?
Posted by jmarston at February 18, 2005 10:16 AM