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September 25, 1992
Bad economic data has mortgage rates back under control today, but during an awful midweek, the markets tested highs not seen since May.
The spike in rates was traceable to more hoorah in Europe, a minor outbreak of Clintonitis, and a normal trading event: traders had not tried a bear raid in weeks, and it was time to see what some short selling would do.
Durable Goods Orders fell only .1%, and the surprise 414,000 gain in Initial Jobless Claims suggests grim news to come in the big jobs report due Friday, October 2.
The only bright spot, Housing Starts up 10.4%, was offset by a 1.6% decline in New Buliding Permits, and a 3.2% slide in Existing Home Sales.
Our current economic difficulty has two aspects seen only once before in this century, during the Great Depression.
(There is a third one: in years ending in two, people named Herbert shouldn't bother to run for reelection.)
This unique, two element combination is the persistence of this recession, and its balance sheet trouble.
Persistence is easy: it's a ten dollar word for "long." However, mention an accounting term like "balance sheet," and you risk a snoring audience. Don't give up yet.
All recessions in this century are traceable to overextended production capacity, excessive buildup of inventories, or a Fed response to accelerating inflation, or a combination of the three. The cure to all three ills was lower interest rates, followed by rapid growth in borrowing and rapid growth in the money supply.
This time, as in the Depression, excessive leverage ("too many debts," in English) is the culprit. There are two limits on how much money anybody (or corporation) can borrow: income with which to make payments, and assets against which to borrow.
By 1990, both limits had been hit. A routine recession developed and got a routine response from the Fed: lower interest rates.
To hte surprise of the Fed, nothing happened. Debt was cheaper, and therefore income could support new borrowing
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