Thursday, December 22, 2005


Fed Bank President: Pie to arrive post-election

Jeffrey Lacker, President of the Federal Reserve Bank of Richmond, gave a speech today that left me shaking my head. First of all, Lacker is the sort of person that has almost ideal credentials for this sort of position. He has a modest education, not the New England Ivy League degree that leads some graduates to become arrogant or obsessed with theory over pragmatism. He has taught at a Midwestern Ivy college. Economics, even. And, most important, he came through the ranks of the technical elves at the Fed. He doesn't originate in the Boesky/Milken or Ken Lay school of finance. He doesn't seem to be a crony, a Randian, or someone beholden to brokerages or financial houses. I assume he's a Republican, but he doesn't give to either party that I can find. So, he doesn't trigger my BS detector. One of the really bizarre features of the talk was the presence of a Chinese ideogram behind his head. As symbolism, this was not well thought out. Lacker is very optimistic about the economy for 2006. Housing may cool a but, but business investment will rise. Core inflation (i.e., excluding volatile things like energy) is stable. Only ca. 1.2% annualized on personal consumption expenditures. Expectations of inflation are well-contained (i.e., workers don't think they can get raises). And the gorilla in the closet [*], multifactor productivity, is good. Businesses, having bought computers and software in the 1990s, have learned to use them. He sees employment as rising. He doesn't see the flat yield curve (similar returns on short term as long term bonds) as a sign of a recession. There's no reason it should be. But why would anyone put money into ten year bonds if they can get the same rate of return on 3 month bonds? One reason alone: if they see interest rates falling. I turned it off before the end. According to news reports, he mentioned only one of the twin deficits, in current account (mostly trade) and explained why he thinks it is sustainable (the US is regarded as a good place to invest; not exactly a satisfying explanation). He didn't mention government deficits. I don't think the deficits are sustainable. I see inflation expectations in rising gold prices. Admittedly, these are manipulated by gold bugs and their inflation expectations. And the reduction in refinery capacity thanks to Katrina has created demand pull inflation. Try buying roofing shingles. Last I checked, the Home Depot site wasn't even quoting them. I hear they're rising in price by 2% a month. And the US as an investment destination-- well, if you put your money in Brazil or China or Europe in 2000, you're a lot richer. If you put it in the US, you aren't. Granted, the Pacific has its tsunamis and Latin America has its revolutions and Europe has Blair, Merkel, Berlusconi, and Chirac/Sarkozy. But if America looks safe compared to that, the world really is in trouble. I did figure out one thing. If China gets out of line, the US can let the Middle East less Saudi Arabia collapse into chaos. That would totally screw Europe and Asia. Of course, after their economies collapse, so would ours. Anyway, Lacker says the good times roll in the USA through much of 2006, leaving the pie to arrive in the nation's face after the next election. If Bush actually does cut and run, he could actually get away with Grand Theft America. [*] not because it's gay. Just because it's very important, and because figuring out what it is is not so easy.
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