27 Aug
2010
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Jobless Claims, 2Q GDP Down

First time jobless claims declined by 31,000 to 473,000.  It was their first decline in 4 weeks.

In other news, second quarter GDP estimates were revised downward to 1.6%, which, to give some perspective, is positively awful.  Emergence from recessions is typically marked by 4% – 8% growth rates.

The second quarter runs from April – June.  In case you don’t recall, during this time the public was inundated with news of the broad based recovery and strengthening economy.

Now that about half the press and one quarter of academic economists have woken up to the fact that we’re really in a full-fledged depression, confirmed by the events of the third quarter, one wonders what the 3Q growth rate will be?  We can hope it remains positive rather than “double dipping.”

Other considerations:

There was an FOMC (Federal Open Market Committee) meeting in Jackson Hole, Wyoming this week.  Today Bernanke announced that the Fed would energetically fight “deflation,” the specter of falling prices.  (Don’t ask what’s wrong with falling prices; they’re bad cause the Fed says they’re bad, so you remember it!)

Interbank interest rates have been held between 0-0.25% for nearly 2 years now.  The inevitable result of such policies is a “bubble” – as in dot-com bubble, housing bubble, oil bubble, etc.  The talk now in the financial press is the “bond bubble.”  Yields on fixed-income securities are minuscule.  Being that our Federal Government is in a truly dire debt situation and being warned to protect its AAA rating by Moody’s, it only makes sense that interest rates must rise to provide incentive to invest in these increasingly risky securities.

Interest rates also must rise if we want to encourage lending.  In risky times such as these, banks are not going to take trifling rates of 3%, 4%, or even 5%.  Why?  The amount of uncertainty introduced by Congress and the Presidency of Obama has made forecasting extremely difficult.  No banking institution that is interested in self-perpetuation is going to be caught underwater with loans at well below market rate once the Fed increases rates – which it must sooner or later.  Think about it: if you could make a loan for 4% over 5 years, but that same loan would cost you 5% in only 2 years, would you do it?  You’d be signing up to lose money, plain and simple.

Traditional methods to “fight recession” (a completely idiotic formulation that perceives government as external to other economic affairs) including fiscal and monetary stimulus are all but spent.  The Fed has hits its ultimate constraint – 0% interest rates.  Short of dropping money from the sky, there’s not much left for the Fed to try.  The administration’s 45% approval rating and Democrat Congress’ ~20% approval rating all but prevent it from passing another stimulus, a.k.a. partisan pork handout, bill.  It’s worth stating that both these traditional methods have utterly failed at averting economic catastrophe over the past 2 years.

What’s left to try is what government hates – shrinking public spending, reducing taxes, and freeing up the private sector.  This means unions have to take wage cuts, entitlement programs must raise their age requirements or cut benefits (likely both), and hundreds of (mostly useless) government agencies must be cut completely or else have their budget halved.  Sound impossible?  It is, and always has been, a matter of political will.  Besides, the alternative is the defaulting on our debts, hyperinflation, and decline.

The problems inherent in our economy are complex, intertwined, and require careful and deliberate unraveling by smart policy makers who understand how an economy actually works.  These policy makers also must understand that recovery comes from liberty, not statist scheming, tinkering, and control.  Until our government determines a credible exit strategy and a politically practical way to reduce our long term public expenses, unemployment will remain high and America will remain weak.

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