Weatherdem's Weblog

Bridging climate science, citizens, and policy

Interest Rates, Inflation, Housing Starts and OPEC

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The Federal Reserve cut its federal funds rate to a record low yesterday: it will hover between 0% and 0.25% for the forseeable future.  I don’t think this action will do anything very meaningful since there was very little room downward for rates to move anyway.  The Fed has cut the rate for a solid year and a half, which followed a steady rise in rates in an attempt to recover from “Bubbles” Greenspan’s rate cuts in the firt half of this decade.  Bernanke’s current approach looks too similar to Greenspan’s for me to have much confidence that it will manifest it’s supposed intended response: a rise in economic activity by a majority of Americans.  The last thing our economy needs right now is for another bubble to grow and pop.

Consumer prices in November fell by a record amount (don’t you love all the records the Republican economy is setting?).  Prices fell 1.7 percent, surpassing the previous record decline of 1 percent set in October. It was the largest one-month decline dating to February 1947.  Part of it really is good news: energy prices were the main driver, which means some money is freed back up to pay for other goods and services.  If prices continue to fall, we’ll see how devastating deflation can be.  The early signs aren’t good: companies that saw their profits slipping fired workers instead of taking a hit; workers (consumers) haven’t seen a real increase in wages in 20+ years, they’re carrying massive debt on their credit cards, and they tapped all the equity on their homes, which means they have no more money to spend; fewer sales mean fewer profits which means more fired workers.  Fewer employed consumers means less buying.  And so on.  Compounding all of this more recently was the 2005 Bankruptcy Bill, which mandated that borrowers pay off their credit cards before their mortgages, which led to more foreclosures than those just from the sub-prime lending fiasco.  Put all of this together and the picture moving forward isn’t pretty.  That’s why it will be necessary for President-elect Obama, as well as state and local officials, to initiate and sustain projects that will re-employ workers.  That’s the only way out of this mess.

The Commerce Department reported last Friday that retail sales dropped by 1.8 percent in November. The decline was the fifth straight monthly drop, a record stretch of weakness.

In other economic news, the Commerce Department reported that construction of new homes fell in November by 18.9 percent, the biggest drop in a quarter-century. The steep decline pushed construction down to a seasonally adjusted annual rate of 625,000 homes, the slowest pace on records dating to 1959.  The Cons goal has been to make American life just like it used to be.  How’s that looking now?  Are home sales at 1959 levels a good thing?  From the article: “Builders continue to be discouraged by the prospects of a housing turnaround amid what’s likely to be the worst recession in decades, spurring rising unemployment and foreclosures.”  Things aren’t likely to change any time soon.

Keep in mind that Bush’s Treasury Department has largely wasted $300 billion by giving it to banks so they can buy up their competition.  No bad assets were taken care of, no jobs were created.  The economy will be the worst since the Great Depression and the “Compassionate Con-servative”, who has utilized the most expansive definition of executive power in our history, does nothing.  This will be a good lesson for Americans to learn: we can take action early on in a crisis and pay a little bit or we can delay action until the crisis grows out of control and pay a whole lot more.  Most Americans will end up paying a very high price for Bush’s actions.

Finally, in a move that should shock absolutely no one, OPEC decided to cut their production by 2.2 million barrels per day.  OPEC decided just a short time ago to decrease output by 2 million barrels per day.  So since oil has backed of its speculation-fueled record high price in July, OPEC has cut production of oil by 4.2 million barrels per day.  That’s a very significant cut: it’s 1/6th its total production.  Moving forward, America needs to promote hybrid and all-electric vehicles.  OPEC countries have no love for the U.S. and we’ve transferred too many billions of dollars to them as it is.  If we as a country can make oil more irrelevant, we should do so.  Our security and the state of our climate would benefit from such moves.

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