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U.S. Recession Revisited

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PostPosted: Mon Jan 14, 2008 1:50 am    Post subject: U.S. Recession Revisited Reply with quote

I've stated before U.S. monetary policy has generally been restrictive throughout the 2000s, given U.S. actual output has generally been below U.S. potential output, in part, because export-led economies absorbed dollars. Also, U.S. fiscal policy was contractionary recently, because large increases in tax revenues shrunk the U.S. budget deficit to $160 billion last year (or roughly 1% of GDP).

The Fed began an easing cycle with an initial 50 basis point cut in the Discount Rate in August and a 50 basis point cut in the Fed Funds Rate in September. The Fed has lowered the Fed Funds Rate from 5.25% to 4.25% within three months in late 2007. It's likely, the Fed will continue to ease and there may be a one-time tax cut in the first half of 2008.

It turns out, the Fed began easing the money supply too late. However, the Fed began easing when U.S. real GDP was above 4% and inflation was elevated (i.e. slightly above 2%). It seemed, the Fed expected fewer dollars to be absorbed by export-led economies, which would stimulate the U.S. economy, while commodity prices, e.g. oil, food, copper, etc. continued to soar in late 2007, which worked against the Fed.

In 2008, commodity prices, which rose 18% in 2007, may be flat or fall, while both U.S. monetary and fiscal policies, along with foreigners absorbing fewer dollars, should be stimulative, to give U.S. GDP a boost. However, domestic prices may continue to rise faster than overall prices, while the weaker dollar raises import prices. Nonetheless, U.S. productivity may offset much inflationary pressure, while real wages, or compensation, rises faster than profits, debt is paid-down, and saving is built-up over the next few years.

Posted by: Arthur Eckart | Sunday, January 13, 2008 at 05:37 AM

The reality of India:

Posted by: Frank Weber | Sunday, January 13, 2008 at 06:18 PM

Frank, most people don't realize the extent of poverty in China, India, and many other developing countries. India has produced a $2,500 car recently, the Tata Nano. Currently, only 7 out of 1,000 Indians own a car. Also:

"China has 23% of the world's people on 7% of the world's arable land. China is down to 1/4 of an acre of arable land per person. That is very close to the limit of how much land is needed to grow crops to feed a person. You can't get much less than that without starving. China must import a billion tons of food annually to feed its population. That's why China has a crisis driven policy to limit their population - a policy of "one is best, at most two, never a third" and "later, longer, fewer", promoting late marriages, long intervals between births, and two child families. With these measures, China's total fertility rate is 1.8, down from 4.8 in 1970. Even with the lower birthrate, as the large group of young people entering reproductive age, China will add another 1/2 billion people by 2020."

Pollution, urban sprawl, overgrazing of livestock, overcultivation, improper irrigation techniques, etc. have resulted in "one-sixth of China’s total arable lands are polluted by heavy metals, and more than 40 percent are degenerated due to erosion and desertification." Also, about 50% of China's labor force works in agriculture (compared to less than 3% in the U.S.).

Posted by: Arthur Eckart | Sunday, January 13, 2008 at 10:33 PM

Below is a related article about China's food prices:

China Makes New Anti-Inflation Move
Monday January 14, 2008 1:28 am ET

BEIJING (AP) -- China's cabinet on Monday sharply increased penalties for price-fixing, expanding an anti-inflation campaign that has failed to cool a surge in politically sensitive food costs.

Food costs soared by 18.2 percent in November, pushing the overall monthly inflation rate to 6.9 percent, its highest level in 11 years.

The surge in food prices has been especially painful for China's poor majority, who spend up to half their incomes on food.

Suppliers of meat, eggs and other food have been ordered to report price increases over 5 percent to the government.

Premier Wen Jiabao warned last week that with global prices for crude oil, grain and other commodities rising, pressure for Chinese prices to rise "is still great."

Local authorities have been ordered to pay subsidies to the poor to cushion the blow of higher food costs.

Posted by: Arthur Eckart | Monday, January 14, 2008 at 08:09 AM
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