September 19, 2005

Interest Rate Hikes: After This Week, Enough Is Enough

Filed under: Economy,Taxes & Government — Tom @ 3:15 pm

AP seems to think that the consensus is that the Federal Reserve will raise interest rates another quarter point this week.

This MarketWatch piece (requires registration) begs to differ, claiming that analysts have no idea what the Fed will do.

In a rambling post, Larry Kudlow hopes that if there is a quarter-point hike, that’s the end of it.

Steve Forbes (requires subscription; see second topic of article) thinks that rate hikes aren’t the prescription:

Last month the U.S. Federal Reserve once again raised short-term interest rates and indicated that even more hikes may be on the way. Yet inflation–low by 1970s standards–persists, like a cold that won’t go away. Commodity prices, most notably oil, are still high. Gold, the best barometer of monetary disturbance, remains well above $400 an ounce, signaling that inflation will stay with us.

Jacking up the nominal cost of money is not the way to douse inflation–in the late 1970s and early 1980s interest and inflation rates were both in double digits. Removing excess money is the solution. The process is simple: The Federal Reserve’s open market desk should sell bonds from the Fed’s portfolio, thereby removing cash from the banking system and the economy. When gold dips below $400 an ounce, stop the process.

I think any further hikes beyond the one that may happen this week fights a core inflation (excluding food and energy) monster that probably isn’t there (or is in hiding), and poses a real danger to on-the-edge homeowners and others with variable-rate loans. Raising Uncle Sam’s cost of borrowing doesn’t help things either.

UDPATE: The rate hike happened, with indications of more to come. Given the media-driven drop in the Consumer Confidence Survey, that should be the end of it, Mr. Greenspan.

Germany in Apparent Electoral Deadlock: Not Good News

Filed under: Economy,Taxes & Government — Tom @ 10:32 am

Germany, with its serious problems with “pensions” (what we call Social Security), cannot afford to have a weak government, but that appears to be where it’s heading.

Both major candidates see themselves in charge:

German election ends in deadlock

Germany slid into political chaos on Sunday night as the election produced a hung parliament, with both chancellor Gerhard Schröder and his challenger Angela Merkel claiming victory and the right to form a new government.

The result is unprecedented in German post-war history and caused bafflement in Berlin as Ms. Merkel, who seemed set for an easy win just weeks ago, was left claiming a pyrrhic victory after an uninspiring and gaffe-ridden campaign.

In contrast, although the result was less than glorious for Mr. Schröder’s Social Democratic Party, he defied unanimous predictions that he would be out of a job by Monday.

The latest results gave Ms. Merkel’s Christian Democratic Union 35.2 per cent of the votes, a 0.9 percentage point lead over Mr. Schröder but her party clearly failed to win a majority for its preferred coalition with the liberal Free Democratic Party.

But in spite of the CDU’s poor performance its second worst result at a general election Ms. Merkel still appeared likely to become chancellor, though she might have to govern with the rival SPD in the first “grand coalition” since 1966.

Economists said such a coalition would make it difficult for Europe’s largest economy to adopt the structural reforms needed to overcome stagnation and record unemployment.

Here’s the “I’m in charge, no I’m in charge” part:

….. “We face the difficult task of building a government,” Ms. Merkel said. “But we will throw all our strengths at it because we must go down a path of reforms.” Mr. Schröder’s gamble in calling the election a year early clearly misfired, as his Social Democratic Party won 34.3 per cent, its worst result since 1990.

Yet a jubilant chancellor refused to concede defeat on Sunday, attacking journalists and pollsters who had predicted a landslide CDU victory and promising his supporters at the party’s Berlin headquarters “a stable government for the next four years under my leadership”.

….. Analysts said the most likely outcome remained a grand coalition under Ms. Merkel, if the CDU retains the largest number of seats in the house after the final count. But it could take days, if not weeks, for both parties to exhaust other options.

Today’s Wall Street Journal (requires subscription) called this “a least common denominator government.”

German business leaders are also not pleased:

One executive at carmaker BMW said: “This is exactly what the country didn’t need a long period of uncertainty and negotiations. We will all be losers.”

Nikolaus Schweickart, chief executive of Altana, the pharmaceutical and chemical group, declared: “This election result is a disaster for German business, in the short term and in the long term. A grand coalition seems to be very likely because there is no other realistic alternative. But a grand coalition means deadlock.”

I have to admit that a result like this one in Germany makes me feel a little better, or at least less badly, about the two-party situation we have here in the US.

As for Germany, it can ill afford even few years of drift. The world needs an economically healthier Germany facing up to its problems and leading the rest of Western Europe out of its malaise, but barring a big surprise, we’re not going to get it. I would expect even more migration of production and services out of the country than we’ve seen in the past decade or so, leaving a more imbalanced population that will find it even more difficult to care for its retiree population.

John Fund’s column today at (may require registration) perfectly posed the lesson for the US (last two paras; bolds are mine):

The late economist Mancur Olson argued that the downfall of democracy would be its tendency to calcify into special-interest gridlock. Germany’s extensive welfare state has created millions of voters who fear the loss of any benefits. Combine that with voters in eastern Germany who cling to outmoded notions of state support and you have an formidable challenge to bring about real reform.

“The lesson for America is do not go down the road as far as Germany has,” says Horst Schakat, a German who created a series of successful businesses in California for 30 years but retired to his native land in 2001. “You may find yourself unable to go down a different but correct path once too many people have become dependent on the state.”

UPDATE: A Betsy’s Page echo, as she comments on Mark Steyn’s brilliant but not optimistic post-election column (Steyn column requires registration): “I sure hope that Americans don’t make the terrible mistake of becoming more and more like these failing European countries because it takes a very long time for a country to be so destroyed economically that the people are willing to accept some cut back in the government’s social spending. It is very discouraging to see thse countries selfishly embrace their own economic paralysis.”

Katrina Debit-Card Abuse Update: Some Merchants Refuse Cards

Filed under: Consumer Outrage,Taxes & Government — Tom @ 6:15 am

Original Post: This Weekend’s Unanswered Questions (091705): Special Katrina Debit-Card Abuse Edition

I suspect the merchants’ lawyers may lose sleep worrying about a lawsuit from a disgruntled card abuser, but it’s nice to see retailers, many of whom are surely also relief donors, taking a stand:

Retailers take a swipe at Katrina card use

Some stores across the country are refusing Red Cross-provided hurricane-relief debit cards because they do not approve of the goods being bought.

…. Retailer Vicki Haniford said she has begun refusing the cards at her store in Illinois. “[Last] Saturday, I had 14 transactions go through from about six different people totaling a little over $1,000,” she E-mailed. “They purchased jewelry and a TV with a DVD player. I called the Red Cross and they said unfortunately these people made bad choices when purchasing, but there was nothing they could do.

“This is totally and morally wrong,” she says. “Many hard-working Americans donated money to the disaster victims so they could have food and clothing, not buy outrageous items.”

Another reader told me: “My daughter works at an entertainment store in a suburban Atlanta mall. [Last Sunday], an apparent hurricane refugee came in the store and purchased a personal PlayStation and two games for a total of about $360, using a Red Cross debit card.

“They couldn’t refuse the sale, but subsequently store policy changed.

The Red Cross, whose official line on the matter is still “it’s out of our hands once we issue the cards,” had better promise not to do something stupid like this again, or they will hear the ugly sounds of wallets closing nationwide.

Sept. 19 5PM: Outsede the Beltway Jammer.

Positivity: Other Katrina Heroism Stories

Filed under: Positivity — Tom @ 6:03 am

Still more Katrina heroics (last third of link):