|
March 4, 1994
Eight may soon be back in the mortgage vocabulary. However, the rise in long term rates is excessive, and has probably reached at least a temporary top.
The Fed has not tightened so far today, but may at any time. In fact, the market would be reassured if the Fed would proceed, and pre-empt inflation fears.
Trouble started on Tuesday. The Purchasing Managers' Index itself was helpful, weakening from 57.7 to 56.6. However, the inflation component of the report exploded upward from 59.8 to 67, meaning 67% of all purchasing managers paid higher prices in February than in January.
On the same Tuesday, the Commerce Department revised the rate of economic growth in the 4th quarter of 1993 from 5.9% to 7.5%, the fastest 90 days of growth in ten years.
Additional damage was done by Mr. Clinton on Thursday afternoon, when he announced the last step necessary for trade sanctions against Japan.
Trade war. It's better than a shooting war, but you wouldn't know it from the bond market bodies lying around.
Misbehavior, one nation unto another, used to consist of tariff barriers. I want to protect my shoe industry, so to sell us your shoes, you have to pay a 50% tax at my border. In retaliation, you slap a 55% surcharge on the steel we send to you. A spiral like this got out of control in 1930, and contributed to a depressing little air pocket in world economic growth.
Our disagreement with Japan is different from the old style trade war. Japan does not have overt tariff barriers. Instead, it has bureaucratic and social barriers to imports.
These barriers are well-known, have been in place for a generation, and have defied negotiations. These barriers work, too. Last year, Japan ran a $140 billion trade surplus against the world. Not just with us lazy Americans: everybody got skinned (our share was only $60 billion).
A few years ago, when our economy was flush, we would negotiate, lose, shrug, and try it again next year.
Times have changed. Money is scarce, and we don't need what amounts to a $60 billion tax each year from some Japanese IRS. Mr. Clinton is right to want to fight, and to realize that Japan will never concede unless we make them.
Times have changed in Japan, too. Over-management of its economy has caused the loss of half the value of its stock market, nearly bankrupted its banking and insurance system, and built 'way too much manufacturing capacity.
Also, the government of Japan is close to paralysis. It is easy to allocate winnings. It is hard to allocate pain.
No matter how justified we may feel, starting a trade war against a proud, confused, and leaderless nation in financial peril is mighty risky. There's got to be a better time, or way.
|
