Wednesday, July 20, 2005


The Economic Elephant

From Molly Ivins, talking about Rove, but she could as easily be talking about the economy: Now it's getting funnier and funnier. There is an elephant in the living room and we're sitting around having a conversation about whether there's an elephant in the living room. From Rex Nutting at MarketWatch Contrary to supply-side theory, a huge infusion of cash into U.S. corporations in the past few years has not led to a large increase in investment. It appears that it was not high taxes that restrained investment in the future, but executives' uncertainty about the prospects for a decent rate of return. The same uncertainty holds true globally. Oil producers are floating on cash, but have not stepped up investments in their domestic industries. China and Japan are saving, but the savings are going into U.S. Treasurys, not factories and schools. Investment in Europe is "tepid," in the chairman's words. Global savings are being siphoned into U.S. real estate. Overproduction is the specter haunting the world now. Greenspan doesn't know the answer, but at least he's asking the questions. And from Irwin Kellner of MarketWatch: The faster the increase in home prices, the slower the rise in the consumer price index. That's right, the CPI is being held down by the method that the Bureau of Labor Statistics uses to calculate the housing component of this key index.Rather than include the price of a new or an existing home the way it includes prices of cars, computers and clothing, the government instead uses what it calls the rental equivalent. And nowadays, the more housing prices go up, the more rents hold steady or decline.Since this sector makes up almost a quarter of the CPI, its trend has a major influence on the overall measure of what many would call the cost of living. So. The United States is incapable of producing anything the world wants to buy. The world, stuck with more and more dollars, is buying US real estate, thereby driving up prices (yes, most of that is probably commercial rather than residential real estate, but land valuation produces some degree of interaction between the markets). The rising prices make the government think that inflation is much lower than it really is. The official figures lull lenders into keeping rates far lower than they should be, thereby facilitating the creation of a housing bubble. Parenthetically, this also sucks money away from investment in new (energy-saving, environmentally-friendly, cheaper, easier-to-use) products, meaning that the technological component of growth rates will decline, which will exacerbate budget deficits as well as leaving the US in an even worse position to compete globally. When up becomes down, that's clear evidence there's an elephant in the room.
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