Thursday, August 18, 2005

CROSS EYED ECONOMICS

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By Elaine Meinel Supkis

I happen to think many economics professors are frankly, too stupid to cross a road unassisted. They exist only to marvel at things they cannot understand due to the fact that they don't want to understand. This is why all economic difficulties not only take them by surprise but stump them.

This has dire impacts on us non economic professors. None of these clueless people ever lose their stipends due to their collective inabilities. Unlike the rest of us who are flung down the abyss every time things fall apart, they go merrily on, marveling at the destruction and then, clueless forever, continue teaching.

From Detroit Free Press
The Federal Reserve's commitment to fight inflation might be keeping soaring oil prices from triggering a broader increase in consumer prices, Fed Governor Edward M. Gramlich said in an interview.

"It is a wondrous event for those of us who were here in the '70s," when oil prices caused inflation to surge, Gramlich said Tuesday from his office in Washington, D.C. The Fed's efforts may have "worked in keeping inflation at bay when oil or gas prices have gone up so much." Gramlich, 66, is leaving the Fed Aug. 31 after almost eight years to return to teaching at the University of Michigan in Ann Arbor.

Surging fuel costs pushed the prices U.S. consumers paid in July to the highest level in three months, the Labor Department said Tuesday. Excluding energy and food, prices rose a smaller-than-expected 0.1% for a third straight month, evidence that rising oil costs haven't increased inflation.

Gramlich said he overestimated the potential for soaring oil prices to stoke inflation."I was a little too pessimistic," he said. Since the Fed began lifting interest rates in June 2004 in quarter-point moves, "inflation has stayed low and on target, the economy has recovered and unemployment has fallen." He said, "it's hard to quarrel with the outcome."
This is so stupid. If one looks at only one tree, one can't see the forest on fire. Just yesterday, Walmart was complaining about how their customer base is vaporizing due to high fuel costs! Now couple this story with yet more troubling news: From USA Today:
Single-family home prices are "extremely overvalued" in 53 cities that make up nearly a third of the overall U.S. housing market, putting them at high risk of price declines, according to a study released today.

The report, by Richard DeKaser, chief economist of National City Corp., examined 299 metro areas accounting for 80% of the U.S. housing market. (Chart: High-priced housing faces risks; 299 metro areas ranked)

DeKaser terms a market extremely overvalued if prices are 30% above where he estimates they should be based on historic price data, area income, mortgage rates and population density - a proxy for land scarcity.
Just because we haven't hit the brick wall doesn't mean it isn't there or we aren't headed straight towards it! People remember things backwards which is why so many can't riddle out the past. When oil prices shot up in 1973, it was due to a boycott and war in the Middle East. We had oil shortages but no huge price hikes because of the Nixon wage/price controls! In other words, it was artificially maintained.

As the dollar devalued and the cost of everything rose, Nixon was thrown out of office and Ford tried his Whip Inflation Now efforts and finally, the Fed raised interst rates really high and during this time, the shock of high energy prices didn't hit all sectors the same or at once. For example, the price of heating oil shot up, everyone including me, switched to natural gas, thus preventing a huge bite in our incomes. We had room to move to a better car or better heating system. Back then, the price of oil was way up but not other energy systems, mostly because natural gas and electricity were government regulated and there were intense political pressure to not raise prices. Under Reagan, this changed and now all energy rises in lockstep with the price of oil. I remember earning some good money during the oil price hike convusions. The price of fun stuff like TVs suddenly collapsed when interest rates rose too high. Cars became buyable again. Everything fell in price as desperated retailers struggled to get customers.

Today, like in the early part of the first oil shock of the seventies, interest rates are well below the rate of inflation so everyone is engorging themselves on this cheap money. We also gave up the ghost on the industrial front and now wait passively for our foreign workers to force price hikes on us as they will, in the end.

What will happen is, they will stop subsidizing us suddenly when the cost is too high. Rather than see inflation, we will see an end to selling here. There just won't be anything to sell. In other words, all our retailers will go bankrupt!

The present panic sales to keep market share can't continue forever. Detroit is praying that the price cutting will end as buyers besiege them for cars. This isn't going to happen with rising interest rates. And we have to raise them. The savings rate for America is zero.

Actually, collectively, it is deep in negative territory which is why we are running virtually all our systems in the red. A culture can't do that forever. The home ATM machine is already breaking down and the average American can't take on much more debt. Already, the average American carries $6000 in debts that pay off at nearly or over 30% interest rates. This burden is growing because of the high cost of lending. The average student in college is graduating with a lifetime burden of debt of over $20,000 and in order to continue consuming, must immediately add on more debts, on a perpetual downhill slope that will end in owning nothing.

From the LA Times
But some analysts suggest that costlier energy is beginning to throttle the economy, and the Federal Reserve should consider that as it continues its year-old policy of raising interest rates to curb inflation.

How can expensive energy limit inflation? It can make it harder to boost prices on other goods and services. With more of their budgets going to gasoline, consumers have less to spend on other stuff. And that means sellers must think twice before raising prices — on products as diverse as T-shirts at Wal-Mart Stores Inc. and computers at Dell Inc. — even if higher energy bills are driving up their costs.
Yes, throttling the entire economy prevents general inflation. Translation: using fuel will be very expensive but don't worry, everything will be cheap except everyone will be unemployed! This means we will go into a fricking depression!

Depressions are always much worse than mere recessions. Inflation and recession can be pretty terrible but depressions are hideous. When you fix something by tightening a belt around the neck, you strangle to death.

Take airlines. Even as major carriers suffer rising fuel costs, heightened competition means "they've had one heck of a time raising ticket prices," said Nariman Behravesh, chief global economist at Global Insight, an economic consulting firm in Waltham, Mass. "Every time they try to raise fares, smaller players like JetBlue or Southwest jump in and take market share."

The upshot: "Unlike the past when oil had a huge inflationary impact, this time its inflationary impact is very small and it may have a somewhat deflationary impact," Behravesh said.
So, United Airlines dumps their pensions, all the airlines are facing worker unrest. The remaining workers see their wages cut ruthlessly, they can't buy more but take on mor ruinous debts to keep up the illusions of living a middle class life, the spiral downwards steepens.

Celebrating the destruction of our entire economy because there won't be any inflation this way is not only insane, it is cruel in the extreme. Just as I warn people it is better to pay higher taxes and have a job, so it is better to have inflation and jobs than no inflation and no jobs.

The celebration of the forces of depression baffles me until I realize, not one of these creeps will lose a job or any sleep when the depression starts to grind us down to dust.

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