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Technology Stocks : WDC/Sandisk Corporation -- Ignore unavailable to you. Want to Upgrade?

To: orkrious who wrote (19738)	3/19/2001 9:16:32 PM
From: puborectalis	Read Replies (1) \| Respond to of 60323

Infineon was spun off from Siemens last year.............Kudlow remarks..Kudlow to Fed: Cut Aggressively By Lawrence Kudlow Contributing Editor Back to Previous Page Mar 19, 2001 03:10 PM The Federal Reserve doesn't have to target the stock market and run the risk of creating a moral-hazard bailout precedent in order to justify a 75- to 100-basis-point fed funds rate cut at its meeting tomorrow. Instead, the central bank merely has to take note of key financial and commodity indicators to realize that the economy still suffers from a shortage of high-powered cash in relation to rising demands for that cash. Namely, gold prices have dropped back below $260, the CRB futures index has plunged 15 points to 215 from 230 about the time of the last rate cut, and the King Dollar exchange-rate index has moved all the way back to 116, close to its recent high, from 108 registered last January. These indicators are all expressing deflationary pressures. Additionally, the short end of the Treasury curve is still inverted while the near-term inflation-indexed TIPS rate that matures next July 2002 has dropped to nearly 2 percent. As a measure of the economy's current real interest rate, this TIPS yield is a reasonable proxy for what the real fed funds rate should be. Presently, the 5.50-percent funds rate less the 150-basis-point 10-year TIPS spread (measuring inflation expectations) leaves a 4-percent real fed funds rate. This calculation implies that the funds rate is 200 basis points higher than the nearly 2-percent real short-term TIPS rate. Consequently, the Fed could easily take the funds rate down to 3.5 percent. Another way to look at the shortage of liquidity is by comparing the 3.2-percent 12-month growth rate of the adjusted monetary base -- a proxy for high-powered money supplied by the Fed -- with the 7.8-percent M2 growth rate -- a proxy for money demanded by the economy. When base growth exceeds M2 growth, monetary policy could be called inflationary. But when base growth falls below M2, monetary poilicy can be characterized as deflationary. Regrettably, this has been the case for about 15 months. The M2/GDP velocity ratio has been relatively stable over the past five years (largely tracking the relative stability of gold). As a result, M2 growth can be used as a rough measure of future nominal GDP growth. One way to look at this is that transaction and investment demands are seemingly consistent with a desire to expand nominal GDP growth (total spending in the economy) at a near 8-percent rate. However, because the Fed is supplying cash at only a 3-percent annual pace, its policy is bringing down the overall nominal growth rate. The central bank is not funding the economy's desire to grow. This cash-shortage effect holds true even in the shorter run. M2 growth over the past three months has expanded at nearly a 12-percent rate, but base growth has been a lower 8-percent annual pace. Hence, while money aggregates are picking up, they are unevenly balanced. My guess is that balance will not be restored until the Treasury yield curve is normalized and upward sloping from three months all the way out to 30 years. The only way to correct this imbalance is a capital fed policy that significantly increases liquidity and brings the fed funds rate much further down. One of the reasons for the deepening slump in corporate earnings is the capital fed-induced squeeze on nominal GDP growth. In round numbers, money GDP growth on a quarterly basis has collapsed from an 8-percent annualized rate a year ago to 3-percent growth in the fourth quarter. Think of money GDP as a proxy for corporate sales revenue. As the Dells and Intels and Ciscos keep lowering their revenue and earnings forecasts, they are reacting to the economywide squeeze on nominal GDP growth. Until the Fed starts financing a decent rate of nominal GDP growth, it will not be possible for America's businesses to replenish their sales revenue and their profits. So, a thorough analysis of the need for more aggressive Fed easings can start with forward-looking commodity and financial indicators, then move through the monetary aggregates, then link to nominal GDP and profits. This monetary view of the economic slump does not, of course, include the need for growth-incenting tax-rate reductions that would raise investment and work-effort returns. That is the job of fiscal policy. Hopefully, help is on the way. But certainly the Fed can fulfill its growth-inducing monetary role without any fear of reigniting inflation. Right now, we have deflationary money. The Fed must act aggressively merely to get us back to stable money. Then the economy and the stock market will recover.