Dumb Data Sets Rates .
By JOHN CRUDELE
August 4, 2005 -- IS there really a conundrum regarding today's interest rates, as Alan Greenspan has complained? Or is the Fed chairman just missing the reason he's been unable to force borrowing costs higher?
The answer came out last week and in a minute I'll share it with you. But first some background on Greenspan's predicament.
In what has to be the most embarrassing boondoggle ever to have faced any nation's central bank, the U.S. financial markets have repeatedly thumbed their noses at the Fed.
Since June of 2004 the Fed's policy-making Open Market Committee has raised the so-called federal funds rate nine times — with imperceptible results.
The tenth increase probably will come next week unless tomorrow's employment figures are so bad that another hike would be politically impossible.
And even though it has become more expensive for banks to get money overnight from the Fed, the rate at which you and I borrow is still incredibly and dangerously low.
The result, of course, is an overheated housing market where people are probably paying prices that they will come to regret. This phenomenon has also come to be known as The Bubble.
So, what is Alan Greenspan missing? And the Fed?
One explanation is that as the Fed was publicly raising interest rates, it was at the same time, making so much money available to the banking system that borrowing costs were destined to remain low.
Good theory, but debunked by the fact that the nation's supply of money has been growing only moderately and this should have helped to force rates higher.
Then there's the other theory, as suggested in yesterday's Wall Street Journal. It goes something like this: the bond market has been keeping rates low because of confidence, bordering on arrogance, about inflation. And this has been diluting the Fed's tightening effort.
OK, the bond market isn't cooperating with the Fed. But why? I've been around this block before — the economy isn't as strong as people think.
Last week's report showed that our economy grew at a moderate pace of 3.4 percent in the second quarter of this year.
But more important — and this was missed by many — the government admitted that many of its GDP reports over the previous two years overestimated growth.
In all, the economy grew at $100 billion less than Washington had previously announced.
This has happened before: the government just didn't see enough income on corporate and individual tax returns to verify the earlier economic growth predictions.
One hundred billion dollars! And even those revised numbers are probably bloated since the government constantly underestimates inflation, which boosts growth.
So there's your answer. There isn't a conundrum after all, just some bad bookkeeping from our government.
jcrudele@nypost.com
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Jim Willie, CB's opinion -
It is my contention that economic growth via the GDP will be corruptly engineered to report 2.5% to 3.5% growth for as far as the eye can see, almost regardless of reality, except during any unmistakable recession, even if growth is flat. My contention is that US GDP growth is around 1.0% to 1.5% and no more right now, as most growth is improperly adjusted price inflation, plain & simple. |
