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Michael Brandl > Macro Updates > Archives > June 1, 2003 July 22, 2004 Greenspan Fed Speak. So what exactly did Fed Chairman Alan Greenspan say in his Senate testimony yesterday? Some of it was very interesting…other parts were not. Here is what I found interesting:- Corporate Earnings. Greenspan argued that corporate profits, along with higher, energy prices are to blame for the run up in inflation. He pointed out that corporate profits (as a share of output) rose to 12% during 2004Q1, a level that has not been reached since 1983. In 2003 with costs low, corporate profits rose due to higher selling prices…thus inflationary pressures. In Greenspan’s own words: “between the first quarter of 2003 and the first quarter of 2004, all of the 1.1 percent increase in the prices of final goods and services produced in the nonfinancial corporate sector can be attributed to a rise in profit margins rather than rising cost pressures” An interesting take on things.- Labor Market Conditions. Traditionally when economists look as “wage pressure” as a source of future price increases we look at things like non-farm wages of non-supervisory workers. Greenspan warned that while this stat is rising at 4 ½% rate the problem is more in non-wage labor expenses (health insurance premiums, pension contributions, etc) and wage demands of skilled and supervisory workers. What this suggests is that we may have to spend more time looking deeper at the labor market data to get a grip on what is going on. But Greenspan argued, while these things bear watching they don’t seem to present an immediate inflationary threat. - Interest Rates. As reported widely in the business press Greenspan argued that the Fed cut interest rates due to weakening economic conditions in 2001 and especially in response to the terrorists attacks and corporate scandals. But, now he seems to be saying, these “negative shocks” have worked their way through the system so now it is time to return back to normal. This then begs the question…what is “normal?” Or in Fed Speak what is a “neutral setting” for the Fed Funds target? That is, how high is the FOMC going to push up short term rates? Well, Greenspan said…the low rates did allow firms to restructure their debt and allowed households to refinance mortgages…and that was a good thing…but…we need to return to normal rates. Okay…so again…what’s normal? Well…Greenspan said they will slowly raise rates back to normal levels, BUT they might raise them faster if inflation becomes a problem. So what is normal? He never said. We are left to guess. Maybe these graphs of the Fed Fund Rates might be useful:
Bolivia dodges a bullet . Bolivia, the poorest country in South America is blessed with huge untapped reserves of natural gas. But, Bolivia is poor and land-locked. Thus, to get its natural gas to the market (read: California and the rest of the U.S.) it needs foreign investors and it needs to ship its natural gas via pipelines to get the sea.This is what has been happening over the past several years: foreign investment and the building of pipelines (to Argentina and Brazil as well as to Chile for eventually export to California). While this has been going on Bolivia has controlled inflation, reduced trade barriers, privatized state owned enterprises, reformed its financial sector, eliminated coca production and a number of other things all at the suggestion of the U.S. Despite a slowdown in 2001 and 2002 the Bolivia economy has been expanding in recent years. So, you would think Bolivians would be happy. They are not. Many Bolivians, especially the indigenous population has suffered greatly since the eradication of the coca crops. Eliminating the main cash crop and replacing it with nothing is not a recipe for successful economic development. In addition, some of the indigenous leaders are playing on national pride saying Bolivia should not “give” its natural gas away to the hated Chileans (to whom Bolivia lost its access to the sea in the War of the Pacific from 1879–1884). The indigenous population and the left in Bolivia got so mad over this that they forced elected President Gonzalo Sánchez de Lozada to flee the country in a bloodless coup last October.Since then current President Carlos Mesa has promised to put the natural gas issue to a nation wide vote. Many feared the wackos that had whipped up the indigenous population would use the vote to push for a socialist revolution in Bolivia. It didn’t turn out that way. The voters decided to have the government raise taxes on natural gas exports but exports will go ahead. Hopefully this will give Mesa a mandate and push the socialists back to fringe of Bolivian politics. This overall rising tide of populism turned quasi-socialism across Latin America is worrisome. In Brazil and Bolivia the “populist revolts” have not, in the long run, undone market based reforms nor threatened democracy. At this point anyway. More needs to be done to ensure that market based reforms already undertaken in Latin America are expanded and that the people in these countries get to enjoy the benefits of a well function market economic system. They do not have that yet today through out Latin America. The job of creating true market-based systems in Latin America is not yet finished. It would be a shame if the U.S. and Europe left this job unfinished. The people of Latin America need help in establishing true market based economies. They need better access to Western capital, know-how and markets. If they get these things parents in Latin America can hope for a better life for themselves and their children. If not then socialism is very likely to return to Latin America. That would be a disaster for all involved. All the best, MB |
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