Thursday, November 07, 2002

Make Greenspan Breathe Easier-Kick Saddam's Butt-The Fed dropped interest rates 50 basis points (that's half a percent for all of you in Rio Linda), they are spooked that the economy's spinning its wheels. Usually, they do things in 25 point chunks, a 50 point move is an exclamation point. There are two key reasons why the economy's been sluggish the last year-the first is an increase in the price of oil and the second is a unease about the future caused by 9/11 and accentuated by the accounting scandals. Part of the oil price increase is due to the oil market figuring a rumble with Saddam was in the not-to-distant future; the price is bid up expecting a disruption of supplies from the Gulf. Getting the war over with will remove that cloud from the market. The second problem, market uneasiness, will be aided by a fairly clean win in Iraq. The rest of OPEC will see that the US means business and won't back down when faced with European multilateral wimpiness or vague threats about the Arab Street. Oil prices will come down, the post-9/11 queasiness will lessen, and our friend the aggregate supply curve will shoot outward, aided by lower oil price and lower cost of capital. With interest rates down to 1.25%, the Fed has pretty much shot the monetary policy wad, verging on a old-fashioned liquidity trap, where the markets are unresponsive to additions to the money supply. We're left with either fiscal policy or "non-governmental" means of moving the economy along. I don't think we can expect much more in the way of help on the tax front, the Republicans might be able to make the tax cuts permanent (they are officially phased out in 2010), but don't expect much other than maintaining what was passed in 2001. However, having a solid success in Iraq will shut up a lot of the Euroweenies and their allies around the world, will lower oil prices and give the world economy a boost of confidence. Right now, Tommy Franks can do more to boost our economy than Alan Greenspan can.

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