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The (Still) Coming Slowdown
June 28, 2006 (Industry Week)
Despite many warning signals, the U.S. economy has not yet slowed down. Not at all. Over the most recent four quarters, inflation-adjusted GDP has risen 3.7%, precisely the same amount it rose over the previous four quarters. There has been no deceleration despite higher interest rates, higher inflation, and higher energy and other commodity prices.
In my view, this is due to changes in the monetary sector. In the past, higher interest rates were accompanied by tighter credit, and vice versa. These days, while interest rates have risen substantially, there have not yet been any restrictions on credit. As a result, borrowers are willing to pay a higher rate of interest, particularly when they know -- even though the Labor Department's Bureau of Labor Statistics does not -- that the rate of inflation has increased enough that real long-term rates are actually lower than they were a year or two ago.
Not until lenders are put under great pressure not to extend as many foolish loans -- similar to what happened in the early 1990s -- will the U.S. economy finally buckle.
AntiSpin: Spot on. Joe Sixpack knows what the Bureau of Labored Statistics either doesn't know or won't report, that inflation is running closer to 7% than the BLS reported 3.4%, so a fixed rate 30 year mortgage is still a bargain at 6.86 percent. Still, higher interest rates are starting to reduce homeowners' willingness to borrow. But until banks stop falling over each other to loan money in crazy ways to people who can never pay it back, the horror stories will continue to collect and things will only be worse when the slowdown finally comes. Note to Ben: Here's how they do it in Korea.
The economy, if Ben gets his timing right, should be quite cool in time for the 2008 elections.
June 28, 2006 (Industry Week)
Despite many warning signals, the U.S. economy has not yet slowed down. Not at all. Over the most recent four quarters, inflation-adjusted GDP has risen 3.7%, precisely the same amount it rose over the previous four quarters. There has been no deceleration despite higher interest rates, higher inflation, and higher energy and other commodity prices.
In my view, this is due to changes in the monetary sector. In the past, higher interest rates were accompanied by tighter credit, and vice versa. These days, while interest rates have risen substantially, there have not yet been any restrictions on credit. As a result, borrowers are willing to pay a higher rate of interest, particularly when they know -- even though the Labor Department's Bureau of Labor Statistics does not -- that the rate of inflation has increased enough that real long-term rates are actually lower than they were a year or two ago.
Not until lenders are put under great pressure not to extend as many foolish loans -- similar to what happened in the early 1990s -- will the U.S. economy finally buckle.
AntiSpin: Spot on. Joe Sixpack knows what the Bureau of Labored Statistics either doesn't know or won't report, that inflation is running closer to 7% than the BLS reported 3.4%, so a fixed rate 30 year mortgage is still a bargain at 6.86 percent. Still, higher interest rates are starting to reduce homeowners' willingness to borrow. But until banks stop falling over each other to loan money in crazy ways to people who can never pay it back, the horror stories will continue to collect and things will only be worse when the slowdown finally comes. Note to Ben: Here's how they do it in Korea.
The economy, if Ben gets his timing right, should be quite cool in time for the 2008 elections.
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