The net that shall enmesh them all
Edited, Written, and Published by J.C. Nossiter
Thursday, August 12th, 2004
The Fed raises interest rates to cool over-heated economies that threaten us with inflation, that scourge of bankers and bond investors. Borrowers, at least those with fixed-rate loans, actually benefit from mild inflation, but they tend to have less influence on economic policy. Is the Fed Chairman worried about inflation, even though the economy is stalling, not over-heating? According to the Bureau of Labor Statistics (bls.gov), prices rose .3% in June, an annual rate of 3.6%. Two-thirds of that increase was due to soaring energy costs, the euphemism for our friends at OPEC jacking up the price of oil. The financial pages print much solemn cant about uncertainty in Venezuela and Iraq, production bottlenecks, and inventory problems, but the fact is that oil production is controlled by the OPEC cartel, and the cartel sets prices at the level of its choosing.
Take out oil and prices rose .1% in June, an annual rate of 1.2%. That’s the equivalent of no inflation at all. Mr. Greenspan isn’t raising rates because of rising inflation, because there is none. So what could he be thinking? The Chairman already demonstrated an unhealthy tendency to politicize the Fed when he endorsed the Bush tax cuts for the wealthy in the face of our giant government spending deficit. For a champion of fiscal responsibility, that was the equivalent of a life-long teetotaler going on a bender.
Mr. Greenspan’s latest move can only be politically motivated as well. President Bush insists, in the face of all evidence, that we’re in the midst of an economic recovery. Were Mr. Greenspan not to raise interest rates at this juncture, it would be an admission by the Fed that there is no recovery taking place, giving the lie to Mr. Bush’s economic cheerleading. The emperor isn’t wearing a stitch of clothing, but don’t count on Alan Greenspan to say so.
The Afternoon Affront
Let’s say Mr. Kerry wins the election in ’04, after the planned series of Fed interest rate increases in the face of a slowing economy. That could saddle our new President with a nasty recession that may take years to recover from. If you’re a Republican looking ahead to ’08, who’s already written off G.W. Bush on the grounds of fatal incompetence, you couldn’t ask for a nicer gift from Chairman Greenspan.
©J.C. Nossiter 2004
