Page 1 of 2 Self-inflicted US misery By Julian Delasantellis
If you're under age 40 or so, you may associate the word "misery" with the 1990
Rob Reiner movie of the Steven King novel by that name. In it, a writer of
romance novels, Paul Sheldon (James Caan), is held prisoner by a crazed fan,
Annie Wilkes (Kathy Bates), and subjected to unspeakable tortures when he tries
to escape - tortures far worse in the novel than the movie.
The story is a particular favorite of us writers; it's what we think of if,
after giving a talk to a local community or business group, we get approached
by that guy from the back with the burning eyes wearing the heavy fur-lined
down jacket in July who has waited three hours to ask if we agree with his
contention that the latest move in stock index futures margins directly results
from secrets
taken out of Solomon's Temple by Pompey Magnus in 63 BC.
But if you remember the late 1970s, you may recall that misery was half of the
so-called "misery index", the non-standard economic indicator put together by
those who didn't understand economics in order to explain to those who
understood it even less just how bad things were at the time.
Constructed by just adding together the then current rates of unemployment and
inflation in any nation of the capitalist world, the high rates of the period,
especially from 1979-81, reflected a circumstance that the Keynesian economic
consensus of the period believed impossible - unemployment was supposed to be
the cure for inflation, and vice versa. Like a forest fire occurring
simultaneously with a flooding rainstorm, high levels of unemployment with high
levels of inflation were just simply not supposed to be.
But what was thought could never happen did; in the US the misery index reached
just under 21 in 1980, and it was this, far more than the national humiliation
of the Iran hostage crisis, that swept Jimmy Carter out of office in that
year's Presidential election. The new president, Ronald Reagan, gave his
Federal Reserve chairman, Paul Volcker, (who had actually been appointed by
Carter in 1979) free reign to fight inflation, and, eventually, this commenced
the long slow contraction in the misery index, which bottomed out at just over
6 in 1998, before it then set off on another long, slow rise.
Until recently. At just under 9 for April, the US misery index is now at its
highest level since 1993.
You might think that the United States Federal Reserve Board, the primary
agency for economic management in the world's largest economy, might want to do
something about this situation. However, from reading the recently released
minutes of the last Federal Reserve Board meeting, it seems that chairman Ben
Bernanke et al have a somewhat different response to the threat of
simultaneously rising rates of inflation and unemployment, sometimes called
"stagflation".
"Don't ask me - we're just here for the tour." When last we left Dr Bernanke
and his band of merry mirthmaking monetary minstrels on April 30, they had just
engineered their ninth interest rate easing of the current cycle that began
last August, bringing the Federal Funds Target Rate down to 2%, and the
Discount Rate to 2.25%. Along with the actual rate moves, the Fed also followed
tradition and released a 300 word "statement", replete with economic
gobbledygook, that sought to explain the rationale for the Fed's current
action, and perhaps give some hints as to what their actions will be in the
future.
Sometimes, the message that the Fed is trying to deliver is clear - at least to
the financial markets; the statements are, fully by design and intent,
incomprehensible to the general public. This was not the case this time. Some
Fed watchers said the statement, by continuing to highlight the weak economy,
indicated more upcoming potential cuts, possibly at the Fed's next meeting on
June 24 and 25. Some, upon reading between the lines of the statement like
old-time Kremlinologists, said that the Fed's concern for rising inflation was
now taking precedence, and that this rate cut would be the last for a while.
(For a previous discussion of the implications of the Fed statement, see
Bernanke takes one more gamble, Asia Times Online, May 2, 2008.)
Gone are the days when the US Fed kept all measure of information about its
inner workings and debates eternally hidden from public view, when the Fed
actually kept, as in the title of William Greider's 1987 book about the Fed,
the "secrets of the temple". Now, minutes of Fed board meetings are released a
few weeks following the meeting; the Fed continues to argue, probably with good
reason, against release of the minutes simultaneously with the statement, for
the very real possibility exists that, in reporting on the minutes, a wire
service error in transcription or punctuation could take 1,000 points off the
stock market in 10 minutes.
On Wednesday, May 21, the minutes for the late April meeting were released.
Surely, within its just under 7,000 words would be the answer; was the Fed
still concerned about unemployment arising out of the continuing economic
slowdown, or was inflation now its predominant worry? If it was the former,
then future meetings would most likely see a continuation of the rate cuts, but
if it was the latter, it meant that the Fed might even soon begin rate hikes,
something it has not done since the summer of 2006.
The general consensus in the financial press was that the minutes showed that,
barring strikingly unforeseen circumstances, that the last cut in this easing
rate cycle had been seen. The Financial Times' headline for the minutes story
stated that "Fed signals rate cuts unlikely"; the Wall Street Journal's Real
Time Economics blog noted that, in the wake of surging oil and other commodity
prices, the Fed was now "seeing the world as it is".
The Fed's concern for inflation was obvious. Besides raising its forecast for
consumer inflation in the US this year to 3.25%, from January's prediction of
2.25%, the minutes noted that:
Headline inflation in the United States
was elevated in March. Although the increase in food prices slowed in March
relative to earlier in the year, energy prices rose sharply.
There,
that's it. Inflation's on the rise, and fighting inflation is the core of the
Fed's mandate. Not only are the rate cuts over; surely, rate hikes can't be far
off.
Unless you've got higher inflation and lower economic growth probably leading
to higher unemployment. Disco, leisure suits and polyester might not have come
back, but, at least another true relic of the late 70s early 80s has - the
misery index!
Along with the upping of the inflation forecast, the Fed took full point off
its January median prediction for GDP growth this year, and is now looking for
a mere 0.75% growth rate. Simultaneous to the inflation warnings, the minutes
continue to bulge with further dour developments in the economy.
"Although industrial production rose in March, production over the first
quarter as a whole was soft, having declined, on average, in January and
February. Gains in manufacturing output of consumer and high-tech goods in
March were partially offset by a sharp drop in production of motor vehicles and
parts and by ongoing weakness in the output of construction - related
industries ... economic growth had remained weak so far this year. Labor market
conditions had deteriorated further, and manufacturing activity was soft.
Housing activity had continued its sharp descent, and business spending on both
structures and equipment had turned down. Consumer spending had grown very
slowly, and household sentiment had tumbled further. Labor demand continued to
weaken in March. Private payroll employment fell in March at a rate similar to
that in January and February.
The reduction in jobs was again widespread, with losses registered at firms in
the construction, manufacturing, and professional and business services
sectors. Employment at firms in the nonbusiness services sector, which includes
health care, continued to rise. Aggregate hours of private production or
nonsupervisory workers moved up in March but posted a decline for the first
quarter as a whole after having contracted slightly in the first two months of
the year. The unemployment rate rose to 5.1 percent in March, significantly
above its level a year ago, and the labor force participation rate was little
changed ... Measures of consumer sentiment fell sharply in March and April; the
April reading of consumer sentiment published in the Reuters/University of
Michigan Survey of Consumers was near the low levels posted in the early
1990s."
What about American housing, where the downturn began? In contrast to the balmy
balderdash you might have just heard from your local real estate agent,
stepping out of her cream-colored Mercedes SUV in her happy purple pantsuit
with the giant silk chrysanthemum in the lapel, the Fed says things in that
sector could use some cheering up as well.
"Residential construction continued its rapid contraction in the first quarter.
Single-family housing starts maintained their steep downward trajectory in
March, and starts of multifamily homes declined to the lower portion of their
recent range. Sales of new single-family homes declined in February to a very
low rate and dropped further in March. Even though production cuts by
homebuilders helped to reduce the level of inventories at the end of February,
the slow pace of sales caused the ratio of unsold new homes to sales to
increase further. Sales of existing homes remained weak, on average, in
February and March, and the index of pending sales agreements in February
suggested continued sluggish activity in coming months. The recent softening in
residential housing demand was consistent with reports of tighter credit
conditions for both prime and nonprime borrowers."
What about conditions in the financial markets, the propagation medium that is
spreading the crisis from out of the housing sector to the general economy?
Alas, according to the Fed, if you see a financial market trader, moving up
from the Bruno Magli's on his feet past the Hugo Boss on his body, the Daniel
De Fasson silk around his neck, on his face he still wears quite the frown.
"Conditions in US financial markets improved somewhat, on balance, over the
inter-meeting period, but strains in some short - term funding markets
increased. Pressures on bank balance sheets and capital positions appeared to
mount further, reflecting additional losses on asset-backed securities and on
business and household loans. Against this backdrop, term spreads in interbank
funding markets and spreads on commercial paper issued by financial
institutions widened significantly. Financial institutions continued to tap the
Federal Reserve's credit programs."
But surely, according to this guy I just heard on Fox News, the entire economic
slowdown is just blather concocted by the liberal
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