Sunday, January 13, 2008

Pay Me Now .... Or .....

The economy seems to be slowing. How much is anyone's guess at this point. I'm really ambivalent about the solution and I think this guy has it right:

The trouble is that the economy's not in trouble because interest rates have been too high. Quite the opposite has been true: the price of money's been too cheap for too long and the excesses that flowed from that state of monetary affairs are correcting. The idea that the Fed can keep consumers spending at a sufficient rate to keep GDP from sinking seems a bit far-fetched. Then again, don't underestimate the power of the central bank. We may yet see a fresh season of zero-percent-financing deals and commentary that fuses helicopters with monetary policy.

It's any one's guess is Joe Sixpack can be convinced to keep spending as if the economy's booming. No doubt the Fed will try. But it's tougher this time and Congress may have to lend a fiscal hand too. A fresh round of tax cuts, any one?

Even if all this works to keep the U.S. out of a deep recession, the cost is likely to be steep in terms of future inflation. Somewhere, somehow, some day, the bill must be paid. The warning signs are certainly clear: a falling dollar; rising prices for gold, oil and other commodities; and consumer prices that are moving higher as well, to name a few. Of course, this is an election year and short-term gain will be sacrificed on the altar of long-term pain. It's an ancient tradition, and it's not about to stop here.
Another point not often mentioned by econ writers is the war. The huge amount of spending on stuff that contributes nothing to society is an enormous drain. Government deficits eventually must be paid back, one way or the other. At some point, there will be a huge economic correction. Will it be this time? Who knows.

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