The Wall Street Journal on the Economy

A few weeks back I published this piece stating my own doubts about the whether or not the economy really is in the crisis that the CW has it in. If the powers that be are wrong and they have overreached in their response, they can turn a mild recession into a disaster from unnecessary stimulus. It is important to examine those consequences since one way or another there will be plenty of stimulus. What I present now is another economic view that mirrors that of mine, and more importantly an analysis of the consequences if we are right...

I don't try and find anaylsis of the economy that is similar to mine for any sort of an ego boost or some such thing...really...

It is hard to imagine any time in history when such rampant pessimism about the economy has existed with so little evidence of serious trouble.

True, retail sales fell 0.4% in December and fourth-quarter real GDP probably grew at only a 1.5% annual rate. It is also true that in the past six months manufacturing production has been flat, new orders for durable goods have fallen at a 0.8% annual rate, and unemployment blipped up to 5%. Soft data for sure, but nowhere near the end of the world.

It is most likely that this recent weakness is a payback for previous strength. Real GDP surged at a 4.9% annual rate in the third quarter, while retail sales jumped 1.1% in November. A one-month drop in retail sales is not unusual. In each of the past five years, retail sales have reported at least three negative months. These declines are part of the normal volatility of the data, caused by wild swings in oil prices, seasonal adjustments, or weather. Over-reacting is a mistake.

The article goes on to point out something that I didn't know that is vital to this discussion: housing is just less than five percent of the overall economy. That's important because the only real evidence that the economy is in trouble is squarely on the shoulders of the housing crisis. The housing market is in crisis without a doubt, however it is still yet to be determined how much of an effect that will have on the economy as a whole.

It is beyond question that those in power believe wholeheartedly that we are in an economic crisis. The Fed has cut rates by nearly 2% and now the President and Congress have agreed on a stimulus package. If the economy is merely softening, then what we all should be worried about is the out of control stimulus not the current state of the economy.

The article is tempered in their analysis of the potential pitfalls of their supposition. I won't be. It would be an unmitigated disaster if I am right. If I am right, there would be out of control inflation leading to out of control interest rates, that could possibly put the economy in its first period of stagflation since the 1970's. That's because the out of control inflation will lead to out of control interest rates which would slow down the stimulus that everyone is creating. In other words, not only could this stimulus backfire and lead to inflation, but that could be disastrous and slow down the economy as well.

Stagflation is a period of high inflation and recession concurrently. It is quite a problem and resolving it is no less tricky, especially in this political climate. That's because solving one end perpetuates the other. That means that if you tackle the inflation portion, you will perpetuate the recession portion, and vice versa.

That is the potential problem with to so called overreach. By solving a problem that wasn't there in the first place, you create a problem that also wasn't there in the first place, and it is unclear if you resolve the other problem. The problem with politicians responding to economic crises during election cycles is that their responses are almost always political in nature. They look at the politics of the situation not the economics. That is what the Fed chairman is for. That individual is supposed to look at the economics of the situation. The Fed chairman appears to be being pulled by bond, stock, and commodities traders, and he is cutting rates because they are screaming for rate cuts. If anyone has seen the pits in any exchange, they know full well that it is the opposite of rational thought.