Prices are headed up. What a landmark piece of news! The Los Angeles Times reported Wholesale Prices Increase 0.3%. Not exactly a scoop.
Prices increase and decrease in trends. Traders (and the Fed) know this, but the government uses these funny little reports like the colored sign at Homeland Security.
We created a huge ATM network with real estate HELOC’s (home equity lines of credit), allowed the dollar to slide to pathetic levels, subsidized the food producers until we choked on our own gratuity, and gorged on foriegn goods supposedly in the name of cheaper prices, so this recent pop should come as no surprise.
Unfortunately, it didn’t need to happen that way, and Greenspan knows it.
We need to hop back on the bike and continue our ride to economic leadership. Rising interest rates will help us on this path. No I don’t believe it is going to stifle the economy, because the economy never recovered anyway. We are just back to where we were before the year 2000 bubble. Yes, we have another bubble in real estate, but the liquidity has already been sucked out of that cause. People have tapped themselves out of Sunday afternoon movies and shopping excursions already (they can’t afford anything besides their five mortgages).
The best course of action here is to raise interest rates. This will provide some ballast for the dollar. No, the stock market won’t crash, and neither will the bond markets – that would only happen in a closed economy, and the US (and the world) is anything but closed. This may, in fact, provide a big boost to the economy, the one we should be concentrated on instead of pissing and moaning about consumer spending . Business. The reason is two-fold.
First, rate increases start at the bottom, and work their way up. Bond spreads widen, profits are made, and that profit is redeployed capital. Second, and more importantly, a rising dollar will make foreign investors happy, as their balance sheets (in local currency terms), will balloon. But they won’t extract that capital, only to buy dollar denominated investments again later at even higher prices. No, they will keep that profit deployed here, on our turf, and likely leverage it into additional investment as well. Demand for investments puts downward pressure on the cost of capital, so businesses can still fund themselves at reasonable levels.
This (potential) dynamic is good for us. We are supposed to be the great innovators, so everyone should quit speculating on the ramshackle house on the corner, and start putting their minds to work.
As Peter Drucker once wrote:
“The basic economic resource – ‘the means of production,’ to use the economist’s term – is no longer capital , nor natural resources (the economist’s ‘land’), nor ‘labor.’ It is and will be knowledge…..
Value is now created by ‘productivity’ and ‘innovation’, both applications of knowledge to work.”
Now we all know it takes some amount of capital to climb the hump, but I believe rising rates won’t stem its availablility. So, turn off The World Poker Tour (you are the sucker at the table already), pre-sell the single family home build you just invested in (repeat after me: I am not a contractor), and start thinking and doing.