You have to first understand the true Paulson plan. Right now the dollar has to be weak. It's a question of proportion if things get out of hand I think it would be the Feds plan to jump start our economy rather than fight the dollar in an old fashioned way- you can't win that battle. Lowering rates would take care of the falling dollar. By spurring our economy and increasing output. Not by throwing millions of Americans into debt with their adjustable mortgages. I'm asking you to think like Big Ben, like it or not it's a different Fed, using a different playbook.
huffing glue, maybe. but I think your analysis is correct. And it might solve the 'conundrum' and raise long term rates too.
Rate hikes are good, rate cuts are good, its all good on wall street. They can spin everything as good, I think they spun the trade center bombings as good, said it will create jobs for the rebuilding. I know they said the war in Iraq was good. It would also create jobs for american companies to help in the rebuilding, they just forgot to say you would have to risk your life. Hey its all good!
I like the GDP revise today it certainly looks like we are pointing towards a soft landing. The fly in the ointment as i see it is worker productivity. In the 1990's big gains in corporate efficiency brought on by high tech spending & global trade was THE key factor in holding down inflation. You don't hear much about worker productivity lately from the Fed whereas Greenspan used to talk about it all the time. Why no mention from Big Ben? Well because the news is not very good. In 2003 we reached a PEAK rate of 4% productivity growth As of the third quarter we were down to 1.9%. This takes a little time to work it's way through the economy but it's the slowest rate in 9 years! The newest reports we have read suggest a rate of 1.3% and that rate WILL be revised even lower early next year when the Labor Dept. incorporates recent hours worked info from 2005 and 2006 (a lot of overtime- not new hires). Productivity slow down means the economy has less room to grow without generating inflation ,this is showing up in the labor market that continues to TIGHTEN even as economic growth SLOWS. The result labor costs are spiking. And just at a time when most companies productivity gains are to weak to offset a pay raise to the workforce. October hourly pay was up a whopping 4% from the year before. The Fed then is in a bind. As economic activity reaccelerates as we think it will after the midyear cycle slowdown the labor markets will tighten further-- Quite simply running at absolute employment is BAD for inflation. So whereas commodity-based inflation and oil has retreated and that has caused inflation to appear to have peaked - the end result may be quite a bit more inflation than the Fed can be comfortable with. Big Ben will have to continue his rate raising cycle and that will put us in a risk of recession in mid to late 2007. BH for SI.
Everything is still perfect, in the land of perfect, were every piece of economic data is just what the Dr ordered, the possibility of rising rates is now a good thing.
Getting back to reality, a weak dollar, up to a point -- and we may be close to that point-- is a disadvantage in times of heavy public debt. We heard the rhetoric from Snow when he was at treasury, always in conflict with action. It was very clear, at that time, that Treasury wanted a weak dollar in spite of rhetoric, and that fellow Greenspan was willing to go along (he was afterall a lame duck) . Now Paulson is there. Have to guess that thinking will be the same but rhetoric continues opposite to action. On the other hand, bernanke seems to be more genuine. Could this mean there will be a tug-of-war between Treasury and the Fed?
The dollar's fall is not much related to US economic performance. Despite the weakness in housing, the overall US economyis doing well. The $ wekness is rather due to expectations that the ECB is going to raise its interest rate based on their talk. But the ECB never takes significant action. They just talk. So the FED and US Treasury should do what the ECB does so well. Just talk the dollar up. This way they are going to avoid a potential dissaster that the hot money can cause on the value of the dollar. Keep in mind that the hot money is moving away from the energy and commodity trade and int the short $ trade.
Hey Manolis- I like the way you think. I was firmly in your camp regarding why the dollar was weak... lately my resolve on the US economy has been getting a little wobbly- durable goods number etc. This continued weak dollar policy year after year losing 15%-20% on our currency it's got to come back and haunt us at some point. And that is going to be a very , very painful day. And a good day to be in gold.