Economic worries

There was a Washington Post article that worried me today. The article highlights the ever dim economic paths we have to walk today, largely, I think, because of Bush's economic policies. The highlight of the articles are that because of high energy prices that have been fueling inflation, the Fed will likely raise interest rates to combat inflationary pressures even when it sees a weaking economy, and particualrly housing and labor makets. That having been said, on to the specifics of the article.

Stocks plunged after Bernanke vowed to combat the recent "unwelcome" pickup in inflation, even as he told an international bankers' conference that an economic slowdown "seems now to be underway."

This to me signifies that Bernanke, while strong on fighting inflation, has lost a view on the overall economy. With energy prices higher, the housing market cooling and stagnant wages (only up 0.82 percent since Bush took office five and a half years ago), while inflation is a problem, it should be balanced against other concerns. For most Americans, inflation is important, but takes a backseat in relation to their wage growth and house value. With the refinancing boom coming to an end, consumer purchases cannot increase much unless wages increase or prices decreases. Where the most impact could be made, gasoline prices, the Bush Administration has destabilized the Middle East and fed oil companies tax cuts, which have done a lot for the oil companies' bottom line, but resulted in record high (in nominal terms) gas prices. With a stagnation of wages (the 0.82 percent over five and a half years I mentioned earlier) and a cooling housing refinancing boom, consumer spending is set to fall significantly as households try to deal with their -0.7 percent savings rate. I think that estimate is overstating the true level because of how it is distributed. At least 75 percent of Americans are in debt (negative savings), with the rest trying to make up the debt in savings (I wouldnt be surprised if the rate was more like 80+ percent in debt).

Consumer price inflation has risen this year, largely because of climbing energy prices, Bernanke said. Moreover, he added, measures of "core" inflation, which exclude traditionally volatile food and energy prices, have also moved higher in recent months. The Labor Department's core consumer price index rose at a 3.2 percent annual rate over the past three months and at a 2.8 percent pace over the past six months, he said.

This just illustrates what I said above with more clarity. Energy prices have skyrocketed, as anyone who fills up their car at a gas station can attest to, but other prices are rising too (the 'core inflation rate'). This combined with a stagnating wage means that most Americans are making less in real terms than they did last year. This is America's real problem. High gas prices are actually good in the long term because they force the U.S. to use more efficient and environmentally friendly technology. However, anyone who has seen a Ford, Chrysler or GM ad recently will know, Detroit will not get the more efficient cars to market (instead marketing Suburbans, Explorers and the like) without mandatory higher fuel efficiency standards (beyond the CAFE standards that only apply to the average across all cars made by a manufacturer. This will help the environment and the environment. This benefits us now and in the future.

Fed policymakers "must continue to resist any tendency for increases in energy and commodity prices to become permanently embedded in core inflation," Bernanke said.

This is a noble goal, but without a plan to increase wages, it won't do a damned bit of difference for American workers.

But, Bernanke said, a single economic report, such as one month's employment figures, would not by itself change the Fed's interest rate policy. Rather, because interest rate changes take effect over many months, the Fed would study how such a report affects its forecast for the economy six to 12 months down the road.

As much as I admire Bernanke as an economist, he has the market on his ass to say the "right" things and is full of shit right here. One unfavorable employment statistic won't have him bending over, but one inflation report will. The Phillips curve, which maps out unemployment as a function of inflation saying one will rise if another falls, is dead. It has not been very precient since the 1960s, but policymakers still operate as if it were valid. Then again, we have a president dead set against any gain for the middle- and lower-classes at any expense, no matter how small, to the upper classes. The money rolling around Republican Washington is a sickening corruption, stinking more than the swamps that L'Enfant conquered.