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.
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
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
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.
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.
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.
just to toss in a wild card, Argentina has been taken over
by communists who want to re-nationalize their oil businesses.
Cuts and Social Security
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.
those taxes are brought back, the economy will hit the brakes
in a matter of weeks.
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.
may be wrong, but they are fighting harder.
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
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.
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.
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
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.
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.
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
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.
is a mistake, of course.
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
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.
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.
which predictors are right? All of them.
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
will we start "porpoising"? It's already happened.
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.
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.
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. tRO
was published in the Philadelphia Inquirer