Porpoise Economics By Tom Adkins American Daily | March 17, 2005 http://www.americandaily.com/article/7149 Get ready to dive into the ocean of the unexpected. Already treading water, looking for the next wave? Well, take a look around. There are barracudas. Sharks. Whales. And of course, porpoises. Porpoises? In an economic metaphor? Sure. Watch them. They leap out of the water. Then dive below. Then leap out again. And dive again. And so on. In fact, "porpoising" is a name given to the dangerouse overcorrection pilots often make when landing a plane. As they descend, winds push the plane around. Sometimes, if a plane is pushed too low, a pilot will correct too high. The plane stalls, and the pilots overcorrects low. Then, the pilot overcorrects high again to compensate. Crashes often result. Get ready for a decade of "porpoise economics," where America is about to endure a series of over-and-under-compensations as the Federal Reserve finds itself battling between creating honest money and satisfying those who support our national debt by buying bonds. Let's start with our #1 most notorious commodity. Oil No matter who is President, what war is raging, and regardless of how many Toyota Priuses Americans buy, oil prices will keep rising. Why? Several reasons. First, we are still using more energy that the year before. But so are many other nations. As trade barriers fall, and democracy spreads, markets open and the global economy kicks into higher gear. Contrary to European socialist dreams, capitalism is rampaging through the globe. And there is only so much oil out there. But it's not just the oil. It's refining capacity. For instance, if the United States arranged a deal where OPEC diverted every supertanker in the world to our ports, the price of gas would hardly budge. Why? Because we've just about reached our refining capacity. We aren't building any more refineries. So, we can't make any more gasoline. Normally, we can handle peak seasons by stocking up in the off-season. But OPEC tried to jack up prices by holding back production. Now, there's no inventory. Oops. And just to toss in a wild card, Argentina has been taken over by communists who want to re-nationalize their oil businesses. Tax Cuts and Social Security Congressional Republicans are losing their guts and apparently their minds, balking about making the Bush tax cuts permanent. They've forgotten that tax cuts are what brought the economy back to life, and incidentally, generated higher government revenues. Big mistake. If those taxes are brought back, the economy will hit the brakes in a matter of weeks. And the Bush Administration has followed up with a pathetic sales pitch of Social Security privatization. Bush offered a wussie's way out by promising to "listen to everyone." That's not leadership. That's a political couch potato. People want leaders to state your case and pick a fight. Right now, the only people fighting are liberals. They may be wrong, but they are fighting harder. Meanwhile, Congress keeps spending two and a half trillion dollars a year, about four percent of that on credit. And the apparent Social Security "compromise" seems to be a tax hike. Alan Greenspan The combination of the 2000 recession and 9/11 forced Alan Greenspan to coax interest rates down to proper levels that should have been in place years earlier. Now, Greenspan is watching the economy head back into respectability. History shows his hair trigger prefers to err on the side of higher rates. Apparently, Greenspan doesn't believe strong economies exist without inflation despite the fact that weak economies almost always grow in a high interest rate atmosphere that usually feature inflation, while strong economies almost always don't. After all, the word "productivity" entered Greenspan's lexicon about two years ago, although it's the primary reason our economy thrived in the face of attacks from so many quarters. Bonds Meanwhile, those bond investors are a mixed-up sort. They want yields, but they want low inflation. It's not a paradox, it's an impossibility. Bond yields rise when inflation is on the horizon. They fall when inflation is at bay. Normally, longer term rates are more expensive than shorter term rates. That's why adjustables are lower than fixed-rate mortgages. But bond buyers saw there was very little risk of long-term inflation, while getting prodded by Greenspan's short-term inflation fears as the economy kicked back into gear. The result? Little difference between long and short term rates. Of course, it only takes one or two inflationary signals, and jittery bond traders scatter for cover. Right now, oil prices are creating some inflation. But commodities-based inflation is very different than money-chasing-goods inflation. It has the same effect as higher interest rates: it slows down the economy. And there is a wild card here as well. Twenty years ago, FNMA dominated the wholesale mortgage market. Today, wholesale lending is rampant, with all sorts of private companies getting in on the act. Billions of private mortgages are traded hourly. They don't always pay attention to the wishes of the Fed. Greenspan and Bonds Last year, most economists predicted Greenspan would seek a 2.25% Fed Funds rate by 2005. They were right. Now, most think he's looking for a 4.25% rate by the end of this year. They are still probably right. The Fed has mentioned numerous times that they would like to see the Fed Funds Rate higher, apparently more concerned about propping bond values to foreign investors than creating honest money, which is the prime directive of the Federal Reserve, incidentally. Trade Deficit Bond buyers see Greenspan's inflation, and they also see the trade deficit as driving the price of bonds higher. With lots of American dollars in their pocket, bond buyers AND bond sellers believe this creates a drain of dollars in America, and that we want those dollars back. This is a mistake, of course. They forget that wealth creation has made far more dollars to replace the void of vacating dollars. And in a market of no inflation, this means bond yields will rise (thus, interest rates will rise) for absolutely no reason. There is no real inflation. The Forces Here's how it shapes up. The economy is growing, and we're making more money. But that is causing a strain on oil prices, adding to inflationary scares, and spooking bond investors into higher bond prices, which means higher interest rates. That will slow the economy down. But productivity gains keep inflation low, rewarding those who bet on modest inflation and a growing economy. Still, rates are rising artificially, as Greenspan reacts to perceived inflation. While long term mortgage rates rise, short term loans are likely to rise less or even stabilize. But business rates will probably rise, slowing the economy. Yet the burden of higher taxes is definitely going to slow the economy. So, which predictors are right? All of them. Porpoises How does all this add up to "porpoising"? As economic factors become more powerful and less controllable, the Fed will overcorrect each time some statistic rears its ugly head. When will we start "porpoising"? It's already happened. The late 90s were the result of the Fed properly sitting on the sidelines as wealth creation flourished with low inflation. But then, Greenspan got all excited about "irrational exuberance," and jacked up rates. The economy screeched to a halt. Still, it took 9/11 to kick Greenspan in the pants, and he finally relented by cutting the Fed Funds rate. Worse, he dropped the rates incrementally, "following down" the economic slump as investors waited for the "bottom." Now, the economy is barely climbing out of the recession and Greenspan wants to clobber it again. If the combination of higher rates, higher oil prices and Congressional timidity holds up, we will see a slump follow, just in time for the elections. That will be the third time this has happened under a Republican Administration. And so will continue a tradition of over and under correcting, tormenting the average American to no end as the economy alternatively skyrockets and sputters. Porpoise economics. You'll see it for a decade. It's all wet. ------------------------ Yahoo! Groups Sponsor --------------------~--> In low income neighborhoods, 84% do not own computers. 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