Wednesday, August 06, 2003

Stirling over at "It's Still the Economy, Stupid" has an interesting blog today on the US's so-called "recovery".
The three props of the economic stabilization - the word recovery is inaccurate to the point of being mendacity - have been cheap oil, cheap money and cheap government. The problem is that these three pillars are mutally exclusive in the long run. Cheap money comes from low interest rates, particularly residential real estate. Cheap government from massive tax cuts. Cheap oil came from the hope of US stabilization of Iraq and being able to quickly pump the very inexpensive to produce oil out of the ground.

Without the cheap oil - which is now clearly not coming in time - either the cheap money or cheap government pillar has to crumble. Either interest rates must go up in order to borrow, or the government must raise taxes dramatically. Since even the OMB - a department that produced numbers in January that can only be politely called fascinating fiction - admits that 23% of the current increase in the estimated deficit between then and now comes from what they euphemistically term increased costs of "tax relief" - the clear choice between cheap money and cheap government is now at hand.
Indeed both oil and money have been getting progressively more expensive since mid-June. The 1-year T-bill is up from 0.95% almost two months ago to 1.24% on Monday; the 10-year has jumped from 3.20% to 4.35%; and Brent crude oil is up from $26.16/barrel to $30.22 yesterday.

Of course, there's always shooting for a $600bn federal deficit for 2005!


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