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Posts Tagged ‘Unemployment’

After reaching a three-decade low of 55.3 in November, the Reuters/University of Michigan preliminary index of consumer sentiment rose to 58.5 from 57.3 in March, based on an average of sixty one estimates, and it is hoped than an improvement in confidence may help sustain a recovery in consumer spending, which accounts for 70% of the U.S. economy.

The Commerce Department said yesterday (April 16th) that builders broke ground at an annual rate of 358,000 on single-family homes in March, which although unchanged from the previous month, suggests that the housing market may have reached bottom, and The National Association of Home Builders/Wells Fargo confidence index also rose this month to its highest level since October.

James O’Sullivan, who is a senior economist at UBS Securities LLC in Stamford, Connecticut said, “The economy has started to show signs of improvement. Given all the policy action and mortgage rates coming down, we are starting to see less pessimism”.

Federal Reserve Chairman Ben S. Bernanke said just one day before the report was made public that, “the signs of stability make for a potential first step toward a recovery from the downturn that started in December 2007″.

Other encouraging news is that reports by the Philadelphia Fed and New York Fed earlier this week showed manufacturing shrinking at a slower pace this month, and according to the Labor Department, the number of Americans applying for first-time jobless benefits unexpectedly dropped last week to the lowest level in almost three months.

By flooding the financial system with money, Federal Reserve Chairman Ben S. Bernanke is seemingly betting that the country’s highest jobless rate in 25 years, combined with the most idle factory capacity on record, will hold down inflation, and it’s textbook Keynesian economics.

If Bernanke’s gamble pays off, then he and the whole Obama administration will be viewed as saviors, but if instead, Milton Friedman’s theories prove correct, and the country lurches from the present financial crisis into rampant inflation, then they will not be so kindly remembered.

Several statements that have recently been made by experts suggest that Bernanke is batting on a very sticky wicket, and many of them have stated on record, their belief that reflation is still in its early stages, and they have pointed out that there are already signs of growing inflation.

John Brynjolfsson, who is the chief investment officer of the hedge fund Armored Wolf, said in a recent TV interview, “We’ve got at least nine innings of reflation ahead of us, ultimately ending with probably double-digit inflation”.

Allan Meltzer who is the Fed historian, and a professor of political economy at Carnegie Mellon University in Pittsburgh says, “If history is any guide, then the effort will end in tears and inflation will get higher than it was in the 1970s”.

Consumer prices rose at a year-over-year rate of 13.3% at the end of the ‘70s, mainly because political pressure from Richard Nixon’s White House prevented Chairman Arthur Burns from removing liquidity as quickly as was then necessary.

Former Fed economist John Ryding, who is the founder of RDQ Economics LLC in New York, concurs with Melzer and says that the central bank will be slow to withdraw all the excess cash it has injected into the financial system. “They pay lip service to inflation being a monetary phenomenon, but they’re too much concerned with the Keynesian explanation of inflation”.

The signs that are said to be pointing strongly to inflation are;

• A swelling Fed balance sheet that has climbed $1.2 trillion in the past year to $2.09 trillion.

• M2, which is a broad measure of the money supply that includes checking accounts and money-market mutual funds, rose in the last six months at an annual rate of 14% which is up from 6.3% a during the last decade.

• Copper is now at a five-month high and platinum reached a six-month peak on April 9th and there are those that expect oil prices to double from the present price of $52 a barrel now.

Moreover, Ken Mayland, who is the president of ClearView Economics LLC says he sees, “oil prices increasing to “$80, $90, $100 before the end of next year. All that money is going to find a home”.