Stockman Scott's Political Debate Porch Message Board

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Politics : Stockman Scott's Political Debate Porch

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To: stockman_scott who wrote (5349)	8/29/2002 1:12:14 PM
From: lurqer	Read Replies (1) of 89467

Hoping for things to stabilize soon So do we all. Some end of August musings. We're used to thinking of Wall Street as filled with adversarial contests. There’s the bulls vs. the bears, the brokerages houses vs. the fund managers and the small fry vs. Da Boyz. Other contests exists on the economic front. One that I’m watching with interest has to do with timing. The classic CB response to an economic downturn is to cut interest rates and pump up the money supply. For the typical bear correction within a secular bull market, this works. The increased availability of cash and credit soon rekindles economic growth and the CB can then cut back on the money supply and raise interest rates. The downturn following a major mania is different. The overhang of oversupply is orders of magnitude worse (see Message 17916649 ). And therein lies the problem. Surely easy credit will always have a simulative effect. But until the overcapacity is absorbed, economic growth will not ignite – only smolder. Meanwhile, the expanding money supply starts chasing the goods and services available in the economy – i.e. inflation. Slowly at first like a heavy train just getting started, inflation gradually builds. But also like a heavy train once it “gets going”, its momentum is not easily stopped. The FIG (Future Inflation Gage available at businesscycle.com ) is designed to predict inflation some 9 to 11 months out. The increase in this indicator is more than worrisome. Remember the Fed started its pump priming in January ’01. So far the overcapacity in a number of key economic areas is still thwarting its efforts. If I’m reading the “tea leaves” correctly, the Fed has at most two quarters left to “get things going”. Otherwise, inflation will force its hand to curtail the money supply. If it does, the sputtering economy tanks, if it doesn’t inflation heads for double digits. So in this case the tug o’ war is a matter of time. Can the Fed get economic growth ignited before inflation forces a change in policy? If we measure from Jan ’01 to the end of the first quarter of ’03, that’s 9 quarters – sort of like a 9 inning ball game. Next week will be the top o’ the eighth, and the August FIG will be released. It'll be interesting to check the “box score” as we head into the last two “innings”. lurqer

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