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Economic Decline Beyond
Argument? |
Week of Monday,
July 7th, 2008 |
The immediate credit market
response to a wave of new economic data is as-was, lowest fee mortgages
6.50%, 10-year T-note just under 4.00%.
However, last week marks very significant change: economic decline here
and in Europe is now beyond argument, and the decline is fighting
inflation for the Fed and ECB, neither of which needs to raise its rate
further.
Evidence. The twin surveys by supply managers ("ISM") in late June showed
manufacturing at breakeven (50.2), and a surprising slide in the service
sector (to 48.2 from 51.7). Friday's much-anticipated payroll report had a
loss of 59,000 jobs in June, and about that many lost in revisions of
prior months. The ominous number, new claims for unemployment insurance,
broke upward to 404,000 last week, the first time above 400K since the
Katrina spike, and a recession level.
The stock market is obviously processing tough news, led by auto sales:
sales collapsed 18.3% from June '07 to June '08. Chrysler off 35.9% and
Ford minus 27.8% could be dismissed as punishment for bad management.
Toyota off 21.4%? Toyota?
Ireland, Portugal, and Denmark have already posted negative GDP quarters
this year. The June supply-manager survey in Spain cratered to 40.6, and
the UK sank to 45.8 from 49.5; manufacturing is contracting now in France,
Italy, and Austria. Germany's export machine is the only forward motion in
the Eurozone.
We will hear less from the crowd yapping for central-bank rate hikes,
although they will seize on every temporary economic uptick, and on each
inevitable but lagging rise in inflation. As their cry for policy error
fades, politicians will fill the gap.
President Nicolas Sarkozy of France, an able and tough man, this week
demanded that the ECB ease: "You can double, triple interest rates and
that will not bring a decrease in the price of a barrel of Brent."
Wrong! The world is in a commodity price shock because supply cannot
expand as fast as demand in an overheated global economy. If the high
prices of the commodities themselves fail to break demand, and to brake
inflation, then it is the duty of the world's central banks to break
aggregate demand. Inducing recession is the only mechanism that will bring
down the cost of a barrel of Brent. And it will.
Mr. Obama mentioned last week that economic stimulus may be needed, and
"then the Fed could fight inflation." This cognitive dissonance has
ancient beginnings, recently deviling Ronald Reagan. The massive Reagan
tax cuts in 1981 collided with Mr. Volcker's recession, which made the
inflation fight harder and longer than necessary. (The Supply Side fable
lives on in some minds, but not in reality.)
The worst public-policy prescription: Congress and the Administration
flooring the gas pedal at the same moment the Fed is on the brake. The
result forces the Fed to put a second foot on. Aid the worst-hurt families
(food-stamp equivalent for winter heating, extended unemployment
benefits...), but allow the economy to slow. No more stimulus.
For Independence Day we have one hopeful estimate of future events
unfolding in sequence. Ambrose Bierce warned against misuse of syllogism
("If one man can dig a post hole in 60 seconds, then surely 60 men can dig
the hole in one second"), however, things are lining up nicely.
As Europe follows us into the tank, and then Asia, commodity prices will
break, and credit losses will spread there, too. The great dollar outwash
will reverse as foreign interest rates begin to fall, and cash will head
here for safety. As commodities and the dollar reverse, so will inflation,
first here, relaxing the grip on the American throat. Then the Fed will
begin a gradual tightening process, new regulation on credit-creation in
place, and we can get on with a lovely global recovery on sound footing.
Nothing troublesome ahead but another Asian overheating someday, and in
the meantime figuring out what we'll use for energy.
2008 ISSUES
RETURN HOME |
provided by:
Ashley Hickmon
Loan Consultant
Crestline Mortgage
303-669-8454 |
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thehickmonteam@crestlinemtg.com
Economic Notes is published
weekly by the Economics Department of Universal Lending Corporation as a
service to Colorado Real Estate professionals. © 2008, all rights
reserved.
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