Friday, December 30, 2005

Calculated Risk: Looking Forward: 2006 Top Economic Stories

Calculated Risk: Looking Forward: 2006 Top Economic Stories:
"Like most investors, I expect the Fed to raise the Fed Funds rate 25 bps at each of the next two meetings to 4.75% in March. . . .

"And like many observers, I expect the Fed to start lowering rates later next year as the economy slows. But here is the surprise, I think long rates will start to rise when the Fed starts cutting the Fed Funds rate.

This will be Bernanke's 'conundrum'! As the economy slows, this will reduce the trade deficit and also lower the amount of foreign dollars willing to invest in the US - the start of a possible vicious cycle."

I think Calculated Risk is particularly clear-eyed, in this respect. The transition from Greenspan to Bernanke will raise the anxieties of investors; crisis almost always follows the advent of a new Fed chairman. And, so, March 2006 will mark a moment of anxiety. When the Fed rate is pushed from 4.5% to 4.75% at that time, or not, it will make investors nervous. The Federal debt ceiling will have to be raised in February, and there will be a political stink about that, further raising anxiety. The Treasury will start issuing 30-year bonds again, for the first time in a decade (?); a hiccup in the 30-year issue will make everyone anxious. Other things might add to the maelstrom: bankruptcy at a major corporation, civil war heating up in Iraq, etc.

Politically, Bush's support has been resting up against the dam of Republican partisanship. If you are a Democrat or an independent, you've already come to grips with the fact that the President is an incompetent, corrupt moron; if you are a Republican, you've been hiding from this essential truth. That's the meaning of Bush's persistent ~40% approval ratings. 40%: that's the bedrock Republican "majority". A creeping suspicion that the President is not just an incompetent, corrupt moron, but a weak, incompetent, corrupt moron, is eroding that dam. I don't know that the dam will burst in March 2006, but I think March 2006 will indeed witness a turning point on the economy, and possibly a dramatic turning point, that people notice. An economy that is not even "good" for Republicans will be the beginning of the Perfect Storm.

Update: It is now 2008, and I am looking back. The crack-up in the economy did not come until late 2007, but it looks to be a doozy, and, indeed, the economy's crackup seems likely to finally drive Bush's 30% approval ratings into record territory.

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