A RECESSION is inevitable. The Global Investor has just concluded the US of A’s economy is based on Fraud, Debt and Bad Behavior. Bush’s economy policy was a lot of Smoke and a very Large Mirror. There is no mystery why housing prices are declining. All one has to do is to read; Income, Poverty and … for 2006 released Aug 28, 2007.
Real wages dropped by 1.1%. One should expect real household income to decrease in the 2007 report. All the definitions used are given as http links in the report.
Global investors have every right to question US of A’s future economic performance however, the remedy is NOT an immediate Fed Funds rate cut. As indicated in the above report, inflation is chewing away the US of A’s consumers’ purchasing power. Yes. I know this report is in the past however, it does show a valid cause and its effect. The Fed has to prove inflation and inflationary expectations will not to be elevated if a rate cut is enacted.
The Fed can wait because of the following observations/my opinions:
- Commerce is still going on as indicated by freight movement, want ads are not empty and banks are still functioning.
- Small Businesses are the backbone of the US of A’s economy and I know there are small business owners who still see money to be made as long as there is an investor willing to put up the dough (mainly banks).
- Small businesses do not rely on the spread between US Treasuries and Commercial Paper.
One data point, such as the PCE Core Deflator less than 1.9, will give the required excuse for the Fed to act, if necessary. However, a rate cut is inflationary. The correct remedy is to encourage capital and labor together.
An interesting event should be noted: The Federal Reserve's ability to use monetary policy for its goal of full employment and price stability has been bypass by debt. In this case; household debt. The financial market has placed mortgages and mortgage back securities as “currency” on par with the US dollar. Unlike the US dollar, these mortgage type products only require that the buyer believed in its value, independent of the value of the US dollar relative to the foreign investors’ native currency. Return of investment capital can be manipulated by a government investment vehicles. Example: China’s sovereign investment funds.
This revelation such not come as a surprise, the Federal Reserve is an artificial construct within the US of A (all central banks are artificial constructs). My previous post indicated the raising and lower of indexes. Example of converting labor into capital is foreign direct investments. Example of converting capital into labor is World Trade Organization concept of economic migration.
The implication of the multi-linear function, used in my theory of global economics, requires gauge invariance. Isoquant analysis used in Neoclassical Theory is an applied economic model to the differential manifold and is therefore unworkable when it is used to explain cross border transactions.
The value added chain is still enforced however, people get mad when they do not feel they are getting ahead. Class mobility becomes a problem due to the fact Capitalism is a form of government. Potential of a person is not consider if that person becomes unemployed. Education is uneconomical in a Capitalist government. Monopolies become government sanction due to the person/group’s dependence of government protecting their interest. Innovation becomes stagnate because it is not in the best interest of the controlling monopolies to spend their monies on change. Capitalism has always destabilized a Democracy.
I’m very biased toward income inequality. I come at this problem from a mathematical point of view: A dynamic system moving around, what I hope, is an attractor/local stable point (say the US of A‘s market). One can also hope that this dynamic system is globally [asymptotically] stable.
A dynamic system is defined by the state space S and a map which is invariant in S (or any subspace of S). S has an arbitrary metric space.
I came across this: The Fed’s Real Reaction Function Monetary Policy, Inflation, Unemployment, Inequality—and Presidential Politics*
By James K. Galbraith Olivier Giovannoni Ann J. Russo August 2007
I agreed with this conclusion (PDF page 22):
Claim: Inequality is outside the scope of monetary policy. To the contrary, we find that pay or earnings inequality in manufacturing reacts to the term structure, and therefore, partly to the rate-setting decisions of the Federal Reserve. Historically, recessions are prefigured by inverted yield curves; rises in both unemployment and inequality result. Inequality has always been the “recipient of shocks,” among them the effects of unemployment and inflation. But we show here that inequality is also a direct product of monetary policy choices. It is not “outside the scope” of the issues with which the Federal Reserve must deal.
