ECONOMIC DANGER AREAS
December 6, 2004
The economy appears fundamentally sound for now, but there are many worrisome signs around and almost no reason to think that it will do better than expected, says Bruce Bartlett, a senior fellow with the National Center for Policy Analysis.
Among the danger areas are inflation, interest rates and the budget deficit, explains Bartlett.
- While the Consumer Price Index is still well behaved, all the early warning signs of inflation are up: commodity prices like gold have risen sharply, the dollar is down on foreign exchange markets, and industry's capacity to produce is reaching the limit to what can be achieved without significant new investment.
- Economist Richard Berner of Morgan Stanley predicts continued monetary tightening by the Federal Reserve, which will probably raise its basic interest rate from 2.0 percent to 2.25 percent next week.
- Partly for the reasons just mentioned, we can probably expect rising interest rates for the foreseeable future; Fed tightening raises rates at the short end of the yield curve, while inflationary expectations raise them at the long end for things like 30-year mortgages.
Meanwhile, the budget deficit's been completely ignored by the White House and Congress for the last four years. To a certain extent, this was justified by the recession and the need to fight the war on terror. But there has also been the creation of a new drug entitlement program and vast amounts of pork barrel spending the president has made no effort to restrain, says Bartlett.
There is no reason to panic yet, says Bartlett. Economic growth and productivity are still strong, which should keep stocks rising, and most economists expect unemployment to continue falling. But there are risks out there that should not be ignored.
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