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September 27, 1991
Interest rates moved hardly at all this week. The crdeit markets are waiting for news of economic performance in September, due in the next ten days or so.
The Second Quarter GNP (AprilJune) was revised for the last time, down again to a .5% rate of decline. Most economists believe the recession ended sometime during that quarter. If it did, it was not with a bang, or even a pop, let alone a boom.
August Durable Goods Orders declined 3.8%, but the drop followed a huge July gain. Existing Home Sales showed weakness in August, off 2.1%. Early September reports had Consumer Confidence down again to 72.7 (from 76.1), and Initial Jobless Claims jumped 27,000.
So where are we? Is this a temporary low point in interest rates, like late 1986? As an economic recovery builds strength, will rates rocket back up?
Or is something else going on?
Evidence is accumulating that yes, indeed, something else is going on. Here is the case.
There is a recovery, but it's a manufacturing sector recovery. You remember: the work Americans couldn't do anymore. Twenty years of devaluation of the dollar has American labor competitive with the rest of the world.
The weak sector services is where most of the inflation has been in the last ten years. The very shape of the recovery is antiinflationary.
Inflation really is lower, probably down to 23% annually. If you add a 4% "real" interest rate premium, 30year bonds should be at 7.00%, a full point lower than now.
There is no sign of renewed inflation. Oh, there is some chance of an oil shock, or maybe scarcity on the farm. But there is no monetary fuel for an inflation fire.
The key measures of money the killer "M's" are 'way below the Fed's own conservative targets. The Fed has the bit in its teeth, and there is no force on the political ranch to rein it in.
The impact of the country's conservative tilt is not limited to the Supreme Court. Conservatives are hard money types. The easy money people are further from power than at any time since the 1950's.
And there is an election only a year away. George Bush may be the only conservative in American history who could get reelected during a recession, but you can bet that the Fed will tend toward ease
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