Jon
Preferred Member
Cash: $ 50.02
Posts: 193
Joined: 13 Apr 2005
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| Annoying 2000 comparisons |
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Last night we discussed how the Fed was into repeating history yet again. Tuesday we heard some more flashbacks that made us wonder if we were watching re-runs from early 2000. Sadly, it was not the case.
With the market diving and an inverted yield curve (5.00% 2 year versus 4.96% 10 year Tuesday) there is of course talk of an economic slowdown or recession. I believe some of that talk appeared on these pages more than a few times. There is still a lot of talk, yeah verily, most of the talk, about how strong this economy is and how there is not going to be a recession, no way, no how. The certainty of the comments as they scoff at the idea of recession makes you cringe as you listen.
This is just what we heard in 2000 when the Fed was virtually unchallenged in its characterization of the economy as overheated with a runaway consumer fueled by the mythic stock market wealth effect (Greenspan later admitted he did not really know if a wealth effect really exists). �White hot,� �red hot,� �runaway consumer,� �irrational exuberance� (okay, that one was from 1996, but it was oft-repeated) were bandied about daily as the Fed and its ring-kissers from the economics schools tilted at the shadow of inflation. There wasn�t any inflation, but damn it, it had to be there. Well, we will never know if it would have shown up because the Fed killed off the expansion and sent us into recession before any real sign showed up.
Tuesday we heard many economists saying �full speed ahead,� �no recession coming,� and other famous last words. An economic slowdown of the sort we are likely to now see most probably would have been avoided but for the Fed getting too involved in tilting with inflation. It most certainly needed to get rid of the easy money due to its overly aggressive rate cuts that it left too low too long, but the last couple were questionable at best, and now the Fed is talking of 50 BP and 6% rates even as the economic cycle slows of its own accord and now under the weight of this tighter money (and renewed threats of tax hikes).
The laundry list of slowing economic sectors grew a bit Tuesday when small businesses forecast slower growth ahead. Oh yes, retail sales slowed as well, only kept aloft by the surging gasoline prices that offset declines in other areas. There was also a report that the slowing housing market was slowing the construction industry as well. No rocket science there, but it seems overlooked as sensible people continue to act nonsensically in the face of a slowing economy.
Fed seems to think there is no recourse other than falling on the sword.
There was a lot of sane talk in 2005 about the problems for the economy if housing slowed and gasoline prices remained high. The Fed and its officials recognized the detrimental impact of those was more significant than that of some inflation. After Bernanke opened his mouth too many times and got his chestnuts roasted he has been reformed. Problem is, a reformed anything is at least a pain the neck and at worst downright dangerous. Bernanke and his new edict to his henchmen falls in the latter category as the diving stock market and swooning bond rates tell us.
How is the Fed going to deal with the dilemma now? Apparently it feels it has to go the Viet Nam route, i.e. burn the village to save it. After getting slapped around some because of the foolish comments and loose lips, the Fed apparently now feels that it has to fight inflation first and alone, then consider the other ramifications. Its mandate, however, is not just price stability, but price stability while maintaining high economic growth. If you burn the economy down to stave off inflation, you are not living up to your mandate.
Indeed, throughout its history, the Fed has gotten itself (and by extension, all of us) into trouble when it focuses solely or primarily on prices. The reason is that prices are lagging, and history shows they typically peak shortly after the economy makes its peak. That does not mean the economy is rolling over, just that its expansion days are mostly behind it. Prices follow along, and after the economic peak they too fall IF we don�t get cute and stall out the supply side of the economy ahead of demand.
The key, obviously is to dry up the liquidity that can give rise to inflation without overly harming the economy and its growth path. The Fed had done a reasonable job of this and was indeed at the point it needed to stop. Now this talk about 50BP hikes to come and an unknown number of hikes still needed has sent the market into its �shoot first and get out of town before the Fed wrecks things� mode.
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