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EJ
06-28-06, 11:11 AM
The (Still) Coming Slowdown (http://www.industryweek.com/ReadArticle.aspx?ArticleID=12213&SectionID=3)
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% (http://www.gillespieresearch.com/cgi-bin/bgn/?ref=234993) 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 (http://tinyurl.com/mx8e5) 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 (http://www.bankrate.com/brm/news/mtg/19991007.asp) 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 (http://joongangdaily.joins.com/200606/23/200606232124543809900090109011.html).
(http://joongangdaily.joins.com/200606/23/200606232124543809900090109011.html)
The economy, if Ben gets his timing right, should be quite cool in time for the 2008 elections.

jk
06-28-06, 11:28 AM
real rates may be negative, but even nominal [let alone real] wages are hardly moving. real wages are diminishing. people have to fund payments out of income. along with gas prices, heating and cooling prices, electricity, higher insurance rates [i made no claims, but my homeowners ins went up 20% although i live almost 1500 miles from new orleans], mortgage payments will be reset on close to $2Trillion in ARM's over the next two years. this has got to have some effect, doesn't it?

nikki
06-29-06, 10:52 AM
What will the evidence be that credit and lending has indeed been tightened? I still get loads of credit card offers in the mail, homes are still selling at a healthy clip (although down from all-time high levels), lots of ads for reducing my mortgage payment, etc. Will credit tightening be reflected by a dropoff in all of the above instances, or do we just have to take regulator's word for it? There is still tons and tons of credit available out there, it seems, and while we've heard warnings about the risks, if these lenders are just repackaging and reselling these risky loans, where is the incentive for them to stop when it's easy, almost risk-free money?

nikki
06-29-06, 11:04 AM
Acutally, Michael Shedlock (Mish) over at his blog has a posting (http://globaleconomicanalysis.blogspot.com/) on this yesterday that I didn't see until just now.

Jim Nickerson
06-29-06, 03:25 PM
Acutally, Michael Shedlock (Mish) over at his blog has a posting (http://globaleconomicanalysis.blogspot.com/) on this yesterday that I didn't see until just now.

This goes along with Henry Kaufman's perception http://www.itulip.com/forums/showthread.php?p=830#post830

Shedlock and Kaufman's opinions suggest there are more rate hikes coming.

nikki
06-29-06, 08:14 PM
So then was all the rallying today for naught? It's hard to believe that with a straight face they can say the economy is meaningfully slowing down and that inflation is contained. That implication alone was quoted by several traders as bullish for oil and all commodities, so the conundrum deepens...it is my thinking that when volatile things such as food and energy are volatile only one way (up) for an extended period of time (years), they simply must trickle down to the core level, and it's a joke that manipulation of the numbers hides this fact. Obviously the concept of an increasing money supply overshadowing the cost to borrow it is not a novel concept, as is indicated by all of these recent articles. Is this the elephant in the room, or what? And earlier in June, wasn't there some talk about new lending standards being introduced soon?

jk
06-29-06, 08:39 PM
the fed doesn't dare drive the economy into recession if it can help it. it could in the past, but in the past debt levels were not what they are today. there is a serious risk of recession turning into deflationary depression, the only solution to which would be big time inflation. so they drive interest rates up a bit to try to slow inflation down, but they're afraid to drive it down too much. everything can go up and keep going up, except the value of a dollar. that has to go down. the dow can go to 36,000 and make that book title come true. of course, should that occur gold will be selling for $7000-10,000/oz or more.