11/12/01: Commentary: Three Steps To Economic Recovery
SUSIE GHARIB: In tonight's commentary, a simple question: why can't the Fed
fix the economy? There isn't a simple answer, according to our commentator.
Here's John Makin, Resident Scholar of the American Enterprise Institute.
JOHN MAKIN, COMMENTARY: The U.S. economy is in recession. Growth is
negative and employment is falling at the fastest rate since 1980 when President
Jimmy Carter imposed damaging credit controls on the economy. How can the
economy be collapsing after the Fed has slashed short-term rates to two
percent? Because this is a different recession. The usual recession is purposely
caused by the Fed when it raises interest rates to slow down demand growth and
control rising inflation. The economy recovers when the Fed allows rates to fall.
But this time supply overheating, too much investment in plant and equipment,
not demand over heating, caused the recession. Lower interest rates won't help
and falling prices are hurting profits and forcing more layoffs. We are at the start
of a serious recession rather than close to the end of a V-shaped recession, as
many are hoping. What should investors do in this environment? There are three
things. First, don't heed the siren call to buy stocks because recovery is just
around the corner. It isn't. Second, global deflation means lower interest rates, so
buy government bonds, either in the United States and Europe. Deflation and
falling interest rates will push bond yields down by about another percent,
providing a nice capital gain to their owners. Finally, don't panic. The global
economic contraction will be sharper than expected, but once we get through it,
probably some time during the second half of next year, there will be many
opportunities for those who have wisely held cash or low risk government bonds.
I'm John Makin.
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