Growing budget gap threat to economy, top Fed official says

[question everything]

NEW YORK – A swelling U.S. budget deficit threatens the economy, a top Federal Reserve official warned yesterday, even as other policy-makers noted that strong growth would eventually trigger a rise in interest rates.

In his first major speech since taking the key central bank post, New York Fed President Timothy Geithner said the budget gap was all the more worrying, given the nation's large current account deficit, which requires an unprecedented amount of financing.

"The current deterioration in the U.S. fiscal position and the acute decline in the net national savings rate represent risks to the financial system and the economy as a whole," Geithner told a regional bankers' association.

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Find this article at:
http://www.signonsandiego.com/uniontrib/20040326/news_1b26fed.html

[brokensymmetry]

1. Geithner is an optimist.

No, really. Take a look at the PPI for January - up 0.6%. Annualized, that makes a 7.2% inflation rate, which means that prices will double every ten years. The present low interest rates are nice, but historically, rates are about 2.8% above inflation - so that should put them up to 10%. Which makes those folks with adjustable mortgages face a rather challenging future, doesn't it?

Also He also noted that U.S. inflation was very low and the outlook was for only very modest price rises ahead, but offered little in the way of hints on monetary policy.


With the current monetary policy, with the price of basic commodities in every area sharply higher, and with the use of a declining dollar to help the balance of payments, inflation is well-nigh certain.

Mr. Geithner is spreading propaganda. Sadly, he isn't even very good at it.

[shoopnyc123]

2. Could you explain more on this?

I'm not so good with the numbers thing...

[brokensymmetry]

3. Sure!

The problem is compounding. Suppose you went out to buy a burger - let's suppose it costs $1.00. If there's 10% inflation, it will cost $1.10 next year. The year after, it would cost $1.21. And the year after that, it would cost $1.33.

It turns out that if you divide the number 72 by an interest rate, that's how many years it takes for an amount to double. That's where I came up with the 10 years for prices to double.

The reason people get scared about inflation is that it just keeps escalating. So if we got 7.2% inflation for 20 years, prices would double, and then double again - for a total increase of four times. So, if a person retired on $2,000 per month in 2004, by 2024 they would be living on the equivalent of $500 per month.

Anyway, if you look at the government numbers, like the Producer Price Index and the price of various commodities - things like copper, silver, soybeans, or whatever - the price of those goods is way up. And that means that the companies that produce the things we use - cars, clothes, pizza, or whatever - will ultimately pass the costs along to us. Those (few!) workers who are really in demand will get pay raises to keep up. The rest of us will find it ever harder to make ends meet.

Another part of the problem is that people are buying really expensive houses because of the low interest rates - right now, they can just barely afford them. But the lowest rates are available in ARMs - Adjustable Rate Mortgages, where the interest rates can go up. And if the overall market for rates increases, the house payments will go up. Which means...people lose their houses.

So, there you have it. A challenging future. Hope that helps!