stox

Tom Lehman TLehman at lor.net
Sat Feb 19 06:04:29 PST 2000


Doug--I could dig out my late fall prediction about gasoline prices. :o) Out here in the ex-urbs where gasoline prices are usually cheaper we are paying on average $1.55 a gallon for regular no-lead with or without additives.

Gasoline prices have got to put a crimp in the economy, and, $1.80 a gallon regular gasoline can't be too far off for many of you.

Tom

Doug Henwood wrote:


> Chris Doss wrote:
>
> >Any comments on this?
> >
> >NEW YORK (Reuters) - U.S. stocks crumbled on Friday, dragged down by
> >technology issues, after a report showing an inflation-free economy
> >failed to ease growing worry that interest rates may keep rising.
>
> Judging from Greenspan's comments the other day
> <http://www.bog.frb.fed.us/BoardDocs/HH/2000/February/Testimony.htm>
> he seems really serious about reining in the stock market. Some
> excerpts follow. Thanks to Enrique for pointing out Paul Kasriel's
> dissection of these often odd remarks
> <http://www.ntrs.com/rd/rd35/pos2000/pos_econ_17feb.html>.
>
> Doug
>
> AG:
>
> >Yet those profoundly beneficial forces driving the American economy
> >to competitive excellence are also engendering a set of imbalances
> >that, unless contained, threaten our continuing prosperity.
> >Accelerating productivity entails a matching acceleration in the
> >potential output of goods and services and a corresponding rise in
> >real incomes available to purchase the new output. The problem is
> >that the pickup in productivity tends to create even greater
> >increases in aggregate demand than in potential aggregate supply.
> >This occurs principally because a rise in structural productivity
> >growth has its counterpart in higher expectations for long-term
> >corporate earnings. This, in turn, not only spurs business
> >investment but also increases stock prices and the market value of
> >assets held by households, creating additional purchasing power for
> >which no additional goods or services have yet been produced.
> >
> >Historical evidence suggests that perhaps three to four cents out of
> >every additional dollar of stock market wealth eventually is
> >reflected in increased consumer purchases. The sharp rise in the
> >amount of consumer outlays relative to disposable incomes in recent
> >years, and the corresponding fall in the saving rate, has been
> >consistent with this so-called wealth effect on household purchases.
> >Moreover, higher stock prices, by lowering the cost of equity
> >capital, have helped to support the boom in capital spending.
> >
> >Outlays prompted by capital gains in excess of increases in income,
> >as best we can judge, have added about 1 percentage point to annual
> >growth of gross domestic purchases, on average, over the past five
> >years. The additional growth in spending of recent years that has
> >accompanied these wealth gains as well as other supporting
> >influences on the economy appears to have been met in about equal
> >measure from increased net imports and from goods and services
> >produced by the net increase in newly hired workers over and above
> >the normal growth of the work force, including a substantial net
> >inflow of workers from abroad.
> >
> >But these safety valves that have been supplying goods and services
> >to meet the recent increments to purchasing power largely generated
> >by capital gains cannot be expected to absorb an excess of demand
> >over supply indefinitely. First, growing net imports and a widening
> >current account deficit require ever larger portfolio and direct
> >foreign investments in the United States, an outcome that cannot
> >continue without limit.
> >
> >Imbalances in the labor markets perhaps may have even more serious
> >implications for inflation pressures. While the pool of officially
> >unemployed and those otherwise willing to work may continue to
> >shrink, as it has persistently over the past seven years, there is
> >an effective limit to new hiring, unless immigration is uncapped. At
> >some point in the continuous reduction in the number of available
> >workers willing to take jobs, short of the repeal of the law of
> >supply and demand, wage increases must rise above even impressive
> >gains in productivity. This would intensify inflationary pressures
> >or squeeze profit margins, with either outcome capable of bringing
> >our growing prosperity to an end.
> >
> >As would be expected, imbalances between demand and potential supply
> >in markets for goods and services are being mirrored in the
> >financial markets by an excess in the demand for funds. As a
> >consequence, market interest rates are already moving in the
> >direction of containing the excess of demand in financial markets
> >and therefore in product markets as well. For example, BBB corporate
> >bond rates adjusted for inflation expectations have risen by more
> >than 1 percentage point during the past two years. However, to date,
> >rising business earnings expectations and declining compensation for
> >risk have more than offset the effects of this increase, propelling
> >equity prices and the wealth effect higher. Should this process
> >continue, however, with the assistance of a monetary policy vigilant
> >against emerging macroeconomic imbalances, real long-term rates will
> >at some point be high enough to finally balance demand with supply
> >at the economy's potential in both the financial and product
> >markets. Other things equal, this condition will involve equity
> >discount factors high enough to bring the rise in asset values into
> >line with that of household incomes, thereby stemming the impetus to
> >consumption relative to income that has come from rising wealth.
> >This does not necessarily imply a decline in asset values--although
> >that, of course, can happen at any time for any number of
> >reasons--but rather that these values will increase no faster than
> >household incomes.



More information about the lbo-talk mailing list