Long-term interest rates stayed about the same (mortgages 6 percent, 10-year Treasury 3.84 percent) as markets quarreled over the meaning of a new mountain of data.
The Labor Department said Friday that the unemployment rate in April declined to 5 percent, and payrolls lost only 20,000 jobs. For all the attention paid to this report each month, it often wildly mis-describes the economy; this one was so weird that not even economic optimists are crowing. In authentic news, claims for unemployment insurance jumped 35,000 to a cycle-high 380,000, total on benefits to a five-year, 3-million high.
The Fed’s post-meeting statement laid it out: "Economic activity remains weak." Those who expected the Fed to identify a cycle-end, a rebound in sight, were mistaken. First-quarter ’08 GDP arrived at a 0.6 percent gain, but adjusted for inventories contracted about 1 percent. The GDP measure of inflation was excellent, surprisingly stable.
Factory orders had a good month, plus 1.2 percent, driven by overseas demand. That foreign-market support for big business explains the sensation of two economies, big healthy, consumer not.
As the economy stumbles, the failure of political leadership has been matched by shortcomings in the professional financial class. Specifically, in the 45 days since the Bear Stearns liquidation the Fed has received extraordinarily unfair and unfounded criticism, the worst from people who should know better.
The Fed has been the only public agency to respond adequately to this crisis, yet talking-heads every hour rip it for its Bear action, its wider effort to provide liquidity and credit to the system, its inattention to inflation, and its rate cuts.
Above all other things the Fed is raked for its failure to "defend the dollar." It is true that in the near term international money runs uphill to high interest rates, especially if paid by low-inflation nations. The European Central Bank has held the eurozone cost of money at 4 percent versus the Fed’s 2 percent, and a 10-year German Bund trades 4.12 percent versus our 3.85 percent — no wonder the euro has become a collector’s item.
The Fed’s critics insist that its rate cuts are the cause of dollar decline. This argument is an ancient, gold-standard relic. If your nation ran a big trade deficit, and your currency weakened, and you began to hemorrhage gold, the only cure was to jack your rates to slow your economy so that your people could not afford to buy imports. In the modern, post-gold world (since 1972), trade deficits have tended to self-correct: The currency of the excessive importer lost purchasing power, and imports fell.
The rate-critics fail in endgame. Let’s suppose the Fed had raised its rate this week a percent or two. The dollar would have rocketed. Defended! For a while, until an already caving economy caved altogether, at which point the Fed would have to cut rates deeper than in the first place, triggering a dollar dive worse than the original. When we hit economic bottom and begin recovery, the dollar will find better ground.
Trade flows are the real cause of structural dollar trouble, and our trade deficit in turn has two sources not imagined in classical economics: "managed trade" and oil.
The historical method to engineer a trade surplus (and allegedly to protect domestic industries) has been to tax imports by tariff. The Japanese invention after WWII was the "non-tariff" trade barrier: while pretending to embrace free trade, it was un-Japanese to buy foreign products. Likewise un-Malaysian, un-Korean, un-Taiwanese, un-Chinese — all very much unlike the balanced trade conducted by Europe and Latin America. Our Pacific Tiger "partners" resist our exports by willful avoidance having nothing to do with currency or price advantage, running constant surpluses with us in the range of 7 percent of their GDPs. Oblivious, we pursue free trade, and are fleeced.
The second source of dollar trouble, oil … I do not know of a nation ever more dependent on importing a single commodity than we are (Rome and grain?). Do the math: 13.5 million barrels per day at $100/bbl = $492 billion this year.
And the foolish critics want to blame the Fed for a weak dollar?
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at email@example.com.
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