I don't see interest rates going much higher. The impact of globalization has altered the supply/demand equation this time 'round.
On the demand side of the equation, the collective debt of governments in the U.S. and the consumer will be a huge drag on the economy if rates are increased too far: Bush has hit the wall on stimulus from tax cuts; the stimulus from consumer refinancing high with low interest mortgages has been spent; there is little if any room left for expansion of credit card debt; and a tightening Fed would further curtail demand and slow the economy. In short, I don't see domestic demand being the problem. Rather, it is globalization that has the greatest impact on demand. The economic growth in India, China, eastern Europe, South America and the Far East is responsible for the increased demand (and increased prices at home) for natural oil, gas, metals and 'softs' and foreign domestic demand for manufactured goods is also growing. Adding further to the demand problem, some of these governments have elected to spend significant percentages of their US dollar accounts building strategic oil stock piles rather than buy ever more US treasuries.
On the supply side, and from a manufacturing and labor market perspective, we get cheap textiles, clothing, software, transportation, appliances, radios TVs etc from K Mart, Walmart, Sears etc who import from manufacturers who have outsourced to regions and countries with cheap labor and lower taxes etc. Multinationals of the developed world drive this globalization, its in their interest for it to continue and there is just no way of stopping it-even GM is making cars in China now. This out sourcing phenomena is not just limited to China or India. Its global and also takes in Eastern Europe, South America and the Far East. Both America and Europe are having trouble with employment because to avoid high labour costs, multinationals are opening up in where ever labor costs, taxes and operating cost etc are low. This trend to outsourcing jobs will continue, keep a lid on wages and for that matter job growth in north america and Europe.
On financing the deficits, foreign buyers have now publicly balked at buying more treasuries without a higher return. On the other hand, higher rates at home will further weaken an already weak economy. It seems for the first time, although monetary and interest rate policy has slipped away from US control, high interest rates are bad for everyone at home and abroad. |
