The Next Last Stand

Producer prices going down, a Sign of Good or Bad Times? The drop in Energy prices has been discounted even before the Fed meeting. The drop in base materials can only hint at return to normal Pricing, after a long run of inflationary pricing due to subprime financed Construction; the Fed would feel much safer reducing key rates if the Price reductions in this area has reached 6%. I must tell Mr. Levy that the Fed must focus on near-term Inflation, because lower per Unit Labor Costs without sufficient expansion of Productivity means an increased level of Consumption is financed by Consumer Credit; the Upshot is that it is total Inflation until such time as the Debt levels are paid down. The inflationary pressure in the pipeline has actually increased; it is simply hidden.

Here is an article which will explain why a reduction of the Fed funds rate will not translate into cheaper Personal and Commercial Credit rates; it would only increase the Profits margins of Lending institutions. Objective analysis suggests than Commercial loans will get only about 10% of the benefit of a Fed funds rate reduction, with Personal loans getting no benefit at all. There would be hardly any Lift to economic performance from such a Cut in rates. The Trick here lies in the huge Runup in Profits enjoyed by Lending institutions over the past years, and it is time they started to report a couple bad Profits years; to vent the huge Inflationary baggage of the Runup.

The Oil sector is going to break the Bubble of Inflation, not because Americans will reduce Productivity, but that the American people will get mad! Americans hate nothing quite so much as being told their Way of Life is too expensive; simply forcing higher Prices upon them may also be the worst way to inform them as well. An Oil Price of $85/barrel will create about $4/gallon Gasoline, while Heating Costs will increase by about 20%. Do you think this would be good? Americans will turn Mean, and they act with a rigid fanaticism which will get a huge Carbon Tax, a Cutback of fuel consumption between 11 and 24%, and a reorganization of Household finance almost draconian in action. They will unify and attack the Oil prices exactly as they organized after 9/11, and will turn bitter about the assault on their lifestyle; believing themselves trapped inside a Last Stand scene. God help the Speculators who aroused their Rage. lgl