According to Merrill Lynch ("The Chartbook" by Bruce Steinberg as of Feb. 23) M2 growth is currently 7.4% (ML source: Federal Reserve Board).
ML is averaging over an earlier period:
stls.frb.org
Note the lower right hand figure (12.2% over the last 3 months) if the graph itself doesn't scare you out of your shoes. When there is an economic slowdown you don't have an acceleration of money supply. At best it's flat or declining.
We have accelerating money growth and declining productivity(source: Stephen Roach msdw.com "and the productivity offset is waning as it normally does in a downturn."). It's easier for the money to go into final prices than to output.
What about the current account deficit? For 2000 a deficit of $435 billion is projected (Bureau of Economic Analysis). Dollarizing the world economy.
Money creation mostly stimulates other economies, so you are showing that it is futile for the FED to pump. This is another reason that created money doesn't go into domestic output, so there is no profit improvement implied by it. Money creation is elastic because we aren't the efficient producers. The strong dollar will begin to fail as our unit labor cost rises. Why will it rise? Strikes. The demand for compensation is already all out of control. It won't show up yet, but the ECI may surprise people. Some of the created money keeps the economy propped up just enough to embolden labor to make non-negotiable demands or negotiable at a rate in excess of the 10% per annum the last two years' worth of settlements have brought. You may have noticed in the last three years union contracts settlement details are not being made public. It is intentional. That way the truth doesn't make it to the stats which the labor economists know would force FED to be tighter. FED knows this, but FED must err on the side of ease because employment is a holy cow in this country.
You say unemployment hit a two year high of 4.2%. In comparison to any other point in US history that's lower. We haven't even begun to get into trouble. That awaits the blossoming of inflation which is more than evident in the supermarkets. We are still in the denial phase where individuals prove there is no inflation by selecting out components in the CPI and then concluding that once the components are eliminated, there isn't any inflation.
Additionally consumer confidence has dropped a lot, from >110 to <90 (University of Michigan).
So what?
Raw material prices won't increase in a decelerating global economy (world GDP from 4.1% in 2000 to presumably 2.5% in 2001).
Why not? You make the school of demand management error. You think rising prices are demand for a commodity in excess of supply. That's instantaneous price. What gives commodity prices trend? You should take a look at the Commodity Index. It's breaking out.
Capacity utilization is at 78%, close to the 1991 recession bottom of 77%.
Why is capacity utilization relevant? This is more demand management theory. You should study this figure in the '70s. Capacity is very difficult to measure. Capacity to produce what? Buggy whips? Capacity can be low and still you can have structural inflation. It all depends on whether the capacity is that of the low cost producer. If the US was, foreign demand for goods wouldn't be so high.
These are no ingredients for inflation above 2.5%.
Just when inflation is developing you get the strong conviction from those who finally were converted to the denial school. Inflation is so entrenched that labor settlements must rise, because people aren't making it. Similarly, corporations must raise prices regardless. A lot of economists claim they can't do this. Why not? They'll lose share. To whom? Foreigners? If so, then they must raise prices to survive. This is what happened during the '70s.
Let's say inflation backs off because things improve. The whole point of what I've said is that inflation won't back off to the extent it was running previously. The FED has put a rising floor under prices and interest rates. The economy and stock market fluctuate around this rising floor inversely, suppressing the major trend, which puts us back into the cyclicality a la '70s. |
