Wednesday, January 28, 2004

BonoboLand? Wait Until the Spring Bandini

BonoboLand? Edward Hugh

"Amid growing hope the world's top economy has hit a sweet spot of accelerating growth and scant inflation, the Federal Reserve was set to keep U.S. interest rates on hold on Wednesday." Now why exactly is it that I don't share this 'sweet spot' sentiment? Or what, come to that is the difference between sweet and sour? And what is the difference between scant inflation and deflation danger? A mere hair's breadth some would say.

It looks as if the Fed is all set to keep interest rates on hold one more time today, and the only real issue seems to be whether and when the keywords "considerable period" will dissapear from the statement (as in how long are you going to hold rates flat?). Fourth quarter GDP results are expected on Friday, and will probably be healthy looking.

One of the thorns in the side of this 'recovery' is of course job growth, another, as I indicated yesterday, is excessive dependence on China, a third could be the complex geopolitical situation (although surprisingly this hardly gets a mention in economic coverage these days). But one more on this list, and maybe this is the mother of them all, must surely be the worsening US Federal deficit situation. The US has achieved quite remarkable growth last year in my book for two reasons: IT leveraged outsourcing, and a hefty Federal deficit swing, from 2% positive to 4% negative in a relatively short period of time. Now this accelerating rate of deficit increase cannot continue indefinitely, with the consequence that what was a massive stimulus will inevitably be converted at some stage into some form of tightening. This week the Congressional Budget Office has again raised the alarm, suggesting that the budget deficit is set to ballon upwards towards nearly 500 billion dollars this year. Now this, in anyone's book, isn't a normal situation. Growth at around maybe 5%, interest rates on hold indefinitely at !%, and an explosion in public debt, with much worse to come just round the corner ( According to the CBO in the decade from 2004 to 2013, the budget shortfall could expand to a total 2.38 trillion dollars -- one trillion dollars more than they were predicting just five months ago). So why then is this such a sweet spot, and why is inflation being termed as scant? ...Continued

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