A High-Wire Hobsian's Choice
The business press continuously leaves out the big picture and gives readers nothing but tiny pixels. Last week was a good example. Data galore but no useful analysis about where we are or where the economy is headed.
The big news is the Fed now has all the information it’s gonna get before it has to decide on September 20 whether to raise interest rates to keep inflation under control and risk pushing the economy into recession, or not raise rates and risk inflation. It’s a Hobsian’s choice, high-wire act, somewhere between a rock and a hard place.
But if Ben Bernnke or any other member of the Fed’s Open Market Committee happens to be reading this, let me give you my strong advice: Don’t raise rates again. Last Friday’s report of only 128,000 new jobs in August caps five months of disappointing job numbers. It parallels other evidence of a slowing economy. Real hourly wages continue to fall. Consumer confidence dropped in August.
If you’re still not convinced look at the two sectors of the economy responsible for a big chunk of jobs and economic activity – cars and houses. All post-war recessions prior to the last one started with higher interest rates leading to a drop in new car sales and housing construction.
Well, Detroit is now a huge parking lot of unsold cars. It doesn’t help that so many of them are gas guzzlers at a time when gas costs over $2.85 a gallon. Cash give-backs and low-interest financing will only become harder if interest rates go up.
Meanwhile, existing home sales are now down 10 percent from a year ago June. Inventories of unsold homes continue to grow. Prices haven’t collapsed, but new homes construction is in the pits.
The last recession happened because the stock bubble burst. The Fed got us out of that slump by engineering a housing bubble. But it’s not clear what it does if the housing bubble pops.
If you’re still not convinced, look at the bond market. Unlike all the other cheerleaders on Wall Street, bond traders are paid to be realists. The yield on the benchmark 10 year T-bill has fallen nearly a half percent from what it was in late June. The bond market isn’t worried about inflation. It’s thinking economic downturn.
If foreigners get tired of buying T-bills with all their dollars earned from trade surpluses, then we’re in real trouble. As the dollar drops, everything we import costs more, which fuels inflation. But the economy, meanwhile, is in the tank.
We used to have a word for this. It was called stagflation.