Thursday, July 01, 2004

James Galbraith, Jude Wanniski and the guys at AngryBear are all upset over Alan Greenspan's modest 25 basis point hike in interest rates this week.

To begin, there is no evidence of a monetary inflation. If that were happening, gold prices would go up. But the price of gold has fallen $35 since it touched $430 earlier this year.

And while growth has returned, the economy remains far from full employment. We have enjoyed just a few decent months of job creation. A million jobs in three months is good news. But we remain about 1.3 million jobs below the actual level of payroll employment four years ago. We're still about 5 million jobs short of what we should have, given population and labor force growth since then.
The problem with this analysis is, of course, that there is no reason to believe that ultra-low interest rates will boost US employment. So much US liquidity leaks out to East Asia via either fixed exchange rates or incredible dirty floating that helicopter drops of cash wouldn't do the trick. The second jobless recovery in a row also tells us that the 'great American jobs machine' is structurally flawed, not simply suffering from a poor conductor.

Ultra-low US interest rates do, however, contribute to housing bubbles in the Northeast, Florida and California, a non-productive global carry trade, and overconsumption which only sets the US consumer up for a harder fall in the future.

The Federal Open Market Committee is a profoundly blunt hammer with which to pound out jobs for the American economy. Best to use something else, starting with Democrats in charge of the Department of Labor!


At 11:49 AM, Blogger Chibi said...

Yeah, I posted over there that I thought the rate rise is perhaps a case of too little too late at this point. About all we've got to show for this extended period of rock-bottom rates is a milder recession and weak recovery, but one hell of a real estate bubble.

I'm trying to gather some statistics on the real estate situation mostly from a California perspective over on my blog if you're interested. The more I discover, the more freaked out I get.


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