INTEREST-RATE MOVES WARN THE ECONOMY MAY BE BROKEN

[duid12]

http://www.nypost.com/business/2364.htm

August 5, 2003 -- THE U.S. economy may be broken.
That's different from saying that the economy is - or isn't - improving. It is like saying it can't improve. And the idea that the nation's business cycle is "broken" is a lot more troubling than what you are hearing economists and politicians arguing about these days.

First, let me say that I hope I'm wrong about this. But the way in which interest rates have behaved over the past month or so should be causing serious concern that the country has gotten itself into a fix that can't be remedied in any conventional way.

Since the Federal Reserve reduced interest rates in early June, the actual rates that people and businesses have to pay to borrow money have soared like a rocket. The interest rate on 30-year government bonds - which are no longer issued by Washington but still trade - has risen from around 4.20 percent to about 5.50 percent.

That has caused 30-year mortgages, for instance, to rise from an average in the very low 5 percent area to over 6 percent.

Why has this happened? That's a good question, and one for which nobody has an answer.

One thing that my sources and I have been worrying about is that foreigners, for a number of reasons, would suddenly find U.S. markets unattractive. If they pulled their money out, rates would automatically rise.



Or rates could be rising because investors think the U.S. Federal Reserve is being irresponsible in its handling of monetary policy. Certainly the federal budget deficit is already high enough to frighten many investors.

All those possibilities are worrisome. But something else is even more tricky: Interest rates could be rising because of the perception that the economy is improving.

That would be a normal reaction. What isn't normal is that rates would climb by such large amounts in response to such a slight economic improvement.

Here's the problem: The small whiffs of good news on the economy could be stopped dead by the higher rates. In fact, if rates continue to rise like they have been the Federal Reserve might actually be forced to raise interest rates before long.

But the present situation could get even worse than that.

What if rates are rising and the economy really isn't improving? Then you have what I'd call a lose/lose situation - a glass that's three-quarters empty.

So, is the economy improving? Some of the government's statistics say it is. But those stats could be misleading.

Last Friday, for instance, Washington reported that the economy shed 44,000 jobs in July. The employment situation was so bad, in fact, that people stopped looking for work and a statistical fluke caused the unemployment rate to drop.

That's bad enough.

But looking behind the numbers shows an even worse situation. After revisions, there were actually 92,000 fewer jobs available in the economy in July - not simply the 44,000 lost. That's a massive number of missing jobs in just one month.

The optimists look at the nation's gross domestic product, which grew at a reasonable 2.4 percent in the second quarter.

But it didn't really.

Nobody was expecting that 2.4 percent, and for good reason. The government achieved that surprising figure by sharply reducing the amount of inflation it saw in the quarter.

Did you see inflation go down from an annual rate of 2.4 percent to just 1 percent, like Washington did? Without that change, the GDP would have been a paltry 1 percent annual growth. And that growth includes the massive military spending increase related to the war in Iraq.

Such a miserable expansion shouldn't be sending interest rates to the moon. But it certainly would explain the disappointing figures coming out of the job market and would explain the declining confidence of consumers.

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[ayeshahaqqiqa]

1. Yes, the economy is broken

the only thing holding it in place are the lies put out by Bush & Co about "growth". Although foreign investors may well pull out of the US economy, I think they are waiting a bit to make sure the European economy is viable. Japan's is in the tank, and has been for some time.

[izzie]

2. When I was young a Russian prez. made an interesting statement...

And it looks like he was right, he said we would spend our selfs out of the picture or some such words. My father always said building bombs will never build a country.A great society meeds schools, colleges and making things to make the society better for all. We have stopped that and now are 'building' a few very rich men and arms. Bad business.

[izzie]

3. PS I know our army is smaller but we have costly toys for them

n/t

[camero]

4. affects of the deficit

We are getting record deficits, which cause long term rates, like mortgages, to rise.

Short term rates have stayed about the same.

[stevebreeze]

5. couple of things here

First the interest rate rise is due at least some degree to the * tax cuts. Money has been flowing into stocks since before the cap gains and dividend tax cuts were in place. Those tax cuts were clearly intended to pumping up the stock market. The money that has been flowing into the stock market has come in part from money people had been keeping in very safe, but low yielding government bonds. Add to that the increased sale of bonds due to record deficits and you have less money bidding down interest rates for more then normal amount of available bonds. This of course raises interest rates.

Another matter is the just highly touted GDP growth. I was unaware that they had reduced inflation rates so thanks for that. Also affecting the surprise growth is a one-time spike in war related spending. I have hear reports that 1% of the 2.4% growth was due to this increased military spending. It would seem that these two things put together is a lot like the many many false claims we heard about WMD's sounds so good as a sound bite but when examined there is very little substance.


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