Great Depression Online Archive Issue:

Caught Between A Rock and A Hard Place

Great Depression Online
Long Beach, CA
June 10, 2008

Inside This Issue You Will Discover…

*** Friday’s Double Whammy
*** An Ugly Report
*** Caught Between A Rock and A Hard Place
*** And More

Friday’s Double Whammy

We won’t ignore it.  We’ll just report it.  Here’s the gore from last Friday.

AP Business Writer Tim Paradis offers the bloody details…

“Wall Street tumbled Friday, taking the Dow Jones industrials down nearly 400 points, on a pair of alarming economic developments: oil prices that shot up by more than $11 a barrel and approached $140 for the first time, and the biggest gain in the government’s unemployment reading in more than 20 years.”

Yes, it was a painful day with much gnashing of teeth on Wall Street.  Between the spike in oil prices and the unemployment rate, investors were despondent.  And the stock market expressed it.  We’ll parse out the double whammy one at a time, starting with oil prices.

AP Business Writer, Adam Schreck tells us that, “The surged came after Morgan Stanley analyst Ole Slorer predicted strong demand in Asia and tight supplies in the Western Hemisphere could drive prices to $150 by Independence Day, when millions of Americans take to the roads.”

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With oil’s recent launch off the chart, $150 per barrel seems possible to us.  Still, we wanted to know more about Ole Slorer and his power to move markets.  We’ve never met the man.  We’ve never heard of him…until now.  Who is he?  And why did investors get so excited by his prediction?

We did a quick internet search on the guy and all we came up with is the only thing we already knew about him…that he’s an analyst with Morgan Stanley.  Big deal.

But, that’s not all.  There was more behind Friday’s market action…

“Traders also zeroed in on remarks by an Israeli Cabinet minister who was quoted as saying his country will attack Iran if it doesn't abandon its nuclear program.  Transportation Minister Shaul Mofaz added that Iranian President Mahmoud Ahmadinejad ‘will disappear before Israel does,’”

We don’t know what this means.  Do you know what this means?

At any rate, credit for inciting the biggest one-day advance for oil in the history of the NYMEX seems to be shared by Ole Slorer and geopolitical pressure from Israel.  That’s all we could come up with, at least.

Now, the unemployment numbers.

An Ugly Report

“The U.S. lost jobs for a fifth month and the unemployment rate rose by the most in more than two decades, as an influx of students into the workforce drove the biggest jump in teenage joblessness since at least 1948,” reported Shobhana Chandra for Bloomberg.

“Payrolls fell by 49,000 in May, the Labor Department said today [June 6th] in Washington.  The jobless rate increased by half a point to 5.5 percent, higher than every forecast in a Bloomberg News survey.”

“‘This is an ugly report on the labor market,’ said Allen Sinai, chief economist at Decision Economics Inc. in New York. ‘Most of the economy looks in recession.’”

And here’s where things really get interesting…

“Former St. Louis Fed President William Poole said today that the increase in joblessness ‘makes the Federal Reserve’s job much more difficult.’  Given increases in consumer prices, ‘what concerns me is the Fed has not been speaking of the possibility of a necessity of rate tightening policy despite’ the weakening economy, Poole said in an interview with Bloomberg Radio.”

Caught Between A Rock and A Hard Place

For our own benefit, we like to keep things real simple around here.  So what follows, is a simple discussion of the conundrum Poole’s describing.

The Federal Reserve attempts to manage economy growth, employment, and inflation.  Moreover, they’ll tolerate some inflation if it encourages economic growth and employment.  This is the elusive ‘Goldilocks’ scenario, where the economy grows at a moderate pace with both low unemployment and low inflation.  And the Federal Reserve attempts to do all this by controlling the money supply through adjusting the federal funds rate.

The idea is easy enough.  When the economy slows down the Federal Reserve lowers the federal funds rate, which increases the money supply, and encourages jobs creation and economic growth.  Then, when the economy heats up, the Federal Reserve increases the federal funds rate, which tightens the money supply, and keeps inflation in check.

But, alas for central bankers, the world doesn’t always operate with such nice, neat and orderly precision.  And their actions to alleviate one problem can transform it into another.  After years and years of micro-managing the economy the Federal Reserve has managed to place it precisely between a rock and a hard place.

The facts are the U.S. economy is dependant on an ever increasing money supply just to run in place.  And now, even with the money supply engines revving in high gear, the economy has begun to stall just as inflation has begun to heat up in earnest.

The options for Federal Reserve Chairman Ben S. Bernanke are now limited.  And their consequences are grave.  In particular, he can continue down the current stagflationary path, with a slow sluggish economy and rising prices, by keeping the federal funds rate low.  Or, he can whack the economy good and hard, and tame inflation by tightening the money supply.

Who knows?  Perhaps he’ll try and toe the line between the two.  And perhaps by trying to do neither…he’ll do both.

Sincerely,

M.N. Gordon
Great Depression Online

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