Wednesday, May 04, 2005

What Can't Go On, Won't

I think we are starting to experience this already. This morning I heard again that the federal reserve (Alan Greenspan) has already started raising interest rates.

Stirling Newberry

That there will be another recession is a metaphysical certainty, because while the Republican Congress may be willing to vote just about anything through for George Bush, the business cycle answers to a higher authority. The question is when, how good the rest of the expansion is, and how bad the recession is that follows.

The last few years have been very, very, very kind to corporate profits, if not to the rest of us. This is why they sit on edge, rallying by 1% one day, and falling 1% on the next. It seems that they turn one way looking at corporate profits, which, thanks to the generous nature of the Republican Congress for those afflicted waifs that are found in corporate board rooms, have been very good. On the other hand, they worry that energy prices will slow the US consumer. We have trickle-down profits, but “vacuum up” spending: if the consumer stopped spending beyond his means, not only would the US be in trouble, but all the other nations that depend on the US consumer to be fat, dumb and happy would be, as well.

The balance is this: if oil prices do not go down, then the Federal Reserve will tighten more. Alan Greenspan and the Federal Reserve minutes make this very clear, the current level of energy prices are far too high to sustain a continued expansion. However, we also know that energy prices are not going to be allowed to drop substantially. Partially because there is so little spare capacity that there is not much downward room, and partially because it is strong demand that is driving oil prices.
posted by Cynthia   Permalink| Comments(0)|

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