Readers take on the economy
Readers take on the economy
Untitled DocumentReaders opine on inflation and economy
Here are a couple of emails from fellow readers sounding off on the economy and inflation.
“How is it that the fed chairman thinks that raising interest rates lowers inflation? What a crock! High oil prices cause inflation. Everything you own came on a truck. Look around, do you see items that you have made, or do you see things that came to a store near you on a truck? It is time to start drilling oil in and close to America, until oil drops to $60 a barrel.”
And this comes from a regular reader and correspondent to the blog.
“I am seeing a lot of threads blaming the Fed for the mess. I think accusers need to be specific. Yes … the FOMC probably should have raised rates a bit sooner than they did, but hindsight is always 20/20. I think more of the “heat” recently should have be placed on the Fed’s banking regulators who are supposed to be auditing the banks balance sheets looking for risk, their SIVs packages for reselling. The bank regulator should also monitor the three so-called independent ratings companies. They could probably do a better job then Congress … or least I would like to think so. The majority of the economic blame clearly lies with the private banking/finance areas and their lack of assessing risk. Now, as 3 years ago, there’s a real disconnect between what the Fed’s are doing and what the private banking/finance sector is doing. This time in opposite fashion.
“Let’s use the 1/4 mile freight train as a metaphor for the US economy. The engine is the US Consumer (2/3’s spending), and the fuel/coal is the US cash flow combined with the interest rates, and the various railroad cars represent manufacturing, service sector, housing, food, transportation, education, environment and other major components of a growing society. Let’s say Bernanke represents the engineer and the banks/finance titans of Wall Street represent the brakeman sitting back in the caboose. You need both, they work together, but their skillsets, job responsibilities and goals may be a bit different although overall objective is similiar. Keep the train and goods and services ( and profits) moving. The brakeman cannot see what’s up ahead but trusts in the engineer who sends signals back and forth to the brakeman thinking he knows what’s up ahead. The engineer is expected to maintain a slow and steady path, anticipating the tracks direction and speed and quality of rails and adjust the engine speed. The brakeman is expected to know what’s in each rail car, load requirements and adjust braking, in each car accordingly. The two work normally work in concert. The brakeman is rewarded with more profits by maximizing efficiency and speed and keeping the slack out between the cars. The Feds can’t control individual cars, they can only manage the overall train input by regulating the engine speed and forward inertia is also defined by the brakeman. Unlike the engineer who has to stay in the locomotive up front, the brakeman’s job is to walk along the top of the train, examining each car, checking for shifting loads and looking for slack or other such problems with individual cars and relay that information to the engineer.
“As a society we are placing a fair amount of blame on the engineer for the progress of the train, and it’s true that the ultimate responsibility resides with the engineer, but the brakeman has a lot of responsibilities too … just not nearly as visibly important. Bill Gross calls the brakeman the Shadow Banking system. What we saw in 04-05-06 … was the engineer (FOMC) looking up ahead and seeing the rails down a gentle slope of inflation and picking up speed, so they raised the interest rates, taking the foot off the accelerator … and sent back the signal telling the brakeman “slow down”. Clearly the brakeman didn’t know or WANT to know what was in the housing railcar.
“The banks/finance and even the bond sector didn’t respond to the engineer’s (Fed’s) signal, so the US economy picked up speed, and the inertia of the weight of housing and commodities, needed additional braking. The brakeman felt they were making good time and good profits and that the engineer was being too conservative, hence the Greenspan’s reported conundrum of rates going up … but the overall long term rates didn’t. Just like a train, the US economy is huge, has massive weight and inertia. The brakeman/banks and even bond sector thought they knew the tracks and the roadmap as well as the engineer, so they continued to let the train pick up speed. Well we had our minor train wreck where the housing car has nearly jumped off the track — at the least, it’s lost a wheel and it’s load is still shifting. The brakeman still cannot see what’s in the railcar.
“Now, much to the chagrin of the brakeman (Wall Street/banks), the brakeman is once bitten twice shy. The Feds are trying to put more fuel into in the engine by lowering rates, trying to gather inertia.but it may not be enough to keep the train from slowing to a stall or stopping (recession) heading into the current economic headwinds. The auctions, and lowering of rates have gotten the train moving again and we have Bernanke, seeing ahead, sensing the track layout has changed … and that the track slope is upward, so he is applying more fuel to add more speed … and he’s sent the signal to the brakeman, “hey, ease off the brakes”. But once again, the brakeman is not listening, since they “lost control” once before now … they are just flat out applying the brakes in the form of higher rates, tighter scrutiny of loan apps, reducing lines of credit.
“What this tells us is the US economy needs both, but they need to work together in concert. Is there a solution for better signaling between the two, I certainly hope? They did it before … they need to keep the train/US economy moving again.
“Inflation is likely not going to be a factor in the short term if the brakes are held on in housing, manufacturing, retailing, commercial. They are just slowing the train down. True, food, energy and other “railcars” needs some individual brakes applied, but overall, until the banks ease up on the other rail cars, we are going nowhere fast.
“Maybe it’s time for the “little train that could.”