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Long-term interest rates
stayed about the same (mortgages 6.00%, 10-year Treasury 3.84%) as markets
quarreled over the meaning of a new mountain of data.
The Labor Department said
Friday that the unemployment rate in April declined to 5.0%, and payrolls
lost only 20,000 jobs. For all the attention paid to this report each
month, it often wildly mis-describes the economy; this one was so weird
that not even economic optimists are crowing. In authentic news, claims
for unemployment insurance jumped 35,000 to a cycle-high 380,000, total on
benefits to a five-year, 3-million high.
The Fed’s post-meeting
statement laid it out: “Economic activity remains weak.” Those who
expected the Fed to identify a cycle-end, a rebound in sight, were
mistaken. 1st quarter ’08 GDP arrived at a .6% gain, but adjusted for
inventories contracted about 1%. The GDP measure of inflation was
excellent, surprisingly stable.
Factory orders had a good
month, plus 1.2%, driven by overseas demand. That foreign-market support
for big business explains the sensation of two economies, big healthy,
consumer not.
As the economy stumbles, the failure of political leadership has been
matched by shortcomings in the professional financial class. Specifically,
in the 45 days since the Bear Stearns liquidation the Fed has received
extraordinarily unfair and unfounded criticism, the worst from people who
should know better.
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The Fed has been the only
public agency to respond adequately to this crisis, yet talking-heads
every hour rip it for its Bear action, its wider effort to provide
liquidity and credit to the system, its inattention to inflation, and its
rate cuts.
Above all other things the Fed
today is raked for its failure to “defend the dollar.” It is true that in
the near term international money runs uphill to high interest rates,
especially if paid by low-inflation nations. The ECB has held the eurozone
cost of money at 4.00% versus the Fed’s 2.00%, and a 10-year German Bund
trades 4.12% versus our 3.85% -- no wonder the euro has become a
collector’s item.
The Fed’s critics insist that
its rate cuts are the cause of dollar decline. This argument is an
ancient, gold-standard relic. If your nation ran a big trade deficit, and
your currency weakened, and you began to hemorrhage gold, the only cure
was to jack your rates to slow your economy so that your people could not
afford to buy imports. In the modern, post-gold world (since 1972), trade
deficits have tended to self-correct: the currency of the excessive
importer lost purchasing power, and imports fell.
The rate-critics fail in
endgame. Let’s suppose the Fed had raised its rate last week a percent or
two. The dollar would have rocketed. Defended! For a while, until an
already caving economy caved altogether, at which point the Fed would have
to cut rates deeper than in the first place, triggering a dollar dive
worse than the original.
© 2008 - Economic Notes is published weekly by the Economics Department of
Universal Lending Corporation. |
When we hit economic bottom
and begin recovery, the dollar will find better ground.
Trade flows are the real cause
of structural dollar trouble, and our trade deficit in turn has two
sources not imagined in classical economics: “managed trade” and oil.
The historical method to
engineer a trade surplus (and allegedly to protect domestic industries)
has been to tax imports by tariff. The Japanese invention after WWII was
the “non-tariff” trade barrier: while pretending to embrace free trade, it
was un-Japanese to buy foreign products. Likewise un-Malaysian, un-Korean,
un-Taiwanese, un-Chinese -- all very much unlike the balanced trade
conducted by Europe and Latin America. Our Pacific Tiger “partners” resist
our exports by willful avoidance having nothing to do with currency or
price advantage, running constant surpluses with us in the range of 7% of
their GDPs. Oblivious, we pursue free trade, and are fleeced.
The second source of dollar
trouble, oil... I do not know of a nation ever more dependent on importing
a single commodity than we are (Rome and grain?). Do the math: 13.5
million barrels per day at $100/bbl = $492 billion this year.
And you jackasses want to
blame the Fed for a weak dollar?
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