Post by Rick Warder on Jan 3, 2006 11:40:05 GMT -5
Growing inflation rate causes Wall Street jitters
NEW YORK, NY - According to reports by the Federal Reserve Bank, inflation averaged 4.7% for the year 2008, which Fed Chairman Ben Bernanke called "a little bit on the high, worrisome side." The trend has continued into Q1 of 2009.
Though economists predicted a slight inflationary bump in the first quarter of 2009, this is mostly due to seasonal price pressure, not a long term increase in the cost of living, said Dr. Andrew Shaefer of Chicago University. "Strong business spending should compensate for a slump in personal net worth," Dr. Shaefer said. "After the Christmas season, consumers are maxed out. But companies are burgeoning with cash, and they'll be putting that back into the economy through share buybacks or through capital investments. This should lead to moderate growth throughout 2009."
From 2000-2005, real estate wealth fuelled the American economic expansion. However, as home sales began to slow and the real estate market softened, so did consumer spending.
This did not mean, however, that homes in hot markets have become more affordable for the average buyer. Most of the time, when a real estate market slumps, home prices stay the same, but homes remain on the market longer - unsold. Mr. David Agin, a real estate investor in Oxnard, Calif., cashed out of the market in late 2005, anticipating that demand would level off in Q1 of 2006. "I sold all of my properties toward the end of 2005, since interest rates are rising. And when interest rates rise, mortages become harder to finance," Mr. Agin said. "Now, with interest rates going back down again, the real estate market is worth a second glance."
A recent poll run by the Wall Street Journal revealed that few economists believe there to be a serious chance of recession. On average, of 106 experts, only 15% believe that there will be a recession any time soon; a plurality holds that the expansion will even continue for at least four more years, due to rising productivity. "The rising productivity of the American worker means corporations can take more profits and invest more without raising wages," said Dr. Shaefer. "Growth can remain strong without a serious risk of inflation." If Dr. Shaefer is right, consumers will retain their solid buying power.
However, not all economists seem happy with the news. "It looks like [Fed Chairman Ben] Bernanke is going to boost economic growth in exchange for high inflation," said Dr. Isaac Litchfield, a professor of economics at the University of California at Berkeley. "Inflation is already dangerously high, and since Bernanke is cutting interest rates to spur investment, this creates a potentially explosive combination. I would urge further deficit cuts to reduce the money supply, thus bringing the interest rate back in line with the market's excess liquidity."
Others have called for repealing the tax cuts which were put through by President George W. Bush, which would remove liquidity from the market and also make deficit reductions easier. President Rick Warder said the tax cuts are "here to stay", as shown by the recent passage of the fiscal year 2009 budget.
NEW YORK, NY - According to reports by the Federal Reserve Bank, inflation averaged 4.7% for the year 2008, which Fed Chairman Ben Bernanke called "a little bit on the high, worrisome side." The trend has continued into Q1 of 2009.
Though economists predicted a slight inflationary bump in the first quarter of 2009, this is mostly due to seasonal price pressure, not a long term increase in the cost of living, said Dr. Andrew Shaefer of Chicago University. "Strong business spending should compensate for a slump in personal net worth," Dr. Shaefer said. "After the Christmas season, consumers are maxed out. But companies are burgeoning with cash, and they'll be putting that back into the economy through share buybacks or through capital investments. This should lead to moderate growth throughout 2009."
From 2000-2005, real estate wealth fuelled the American economic expansion. However, as home sales began to slow and the real estate market softened, so did consumer spending.
Facts at a glance:
American withdrawals on the basis of home equity
2005: $887 billion ..........
2006: $552 billion ..........
2007: $363 billion ..........
2008: $221 billion ..........
2009: $227 billion (estd.)
Source: Goldman Sachs LLC
American withdrawals on the basis of home equity
2005: $887 billion ..........
2006: $552 billion ..........
2007: $363 billion ..........
2008: $221 billion ..........
2009: $227 billion (estd.)
Source: Goldman Sachs LLC
This did not mean, however, that homes in hot markets have become more affordable for the average buyer. Most of the time, when a real estate market slumps, home prices stay the same, but homes remain on the market longer - unsold. Mr. David Agin, a real estate investor in Oxnard, Calif., cashed out of the market in late 2005, anticipating that demand would level off in Q1 of 2006. "I sold all of my properties toward the end of 2005, since interest rates are rising. And when interest rates rise, mortages become harder to finance," Mr. Agin said. "Now, with interest rates going back down again, the real estate market is worth a second glance."
A recent poll run by the Wall Street Journal revealed that few economists believe there to be a serious chance of recession. On average, of 106 experts, only 15% believe that there will be a recession any time soon; a plurality holds that the expansion will even continue for at least four more years, due to rising productivity. "The rising productivity of the American worker means corporations can take more profits and invest more without raising wages," said Dr. Shaefer. "Growth can remain strong without a serious risk of inflation." If Dr. Shaefer is right, consumers will retain their solid buying power.
However, not all economists seem happy with the news. "It looks like [Fed Chairman Ben] Bernanke is going to boost economic growth in exchange for high inflation," said Dr. Isaac Litchfield, a professor of economics at the University of California at Berkeley. "Inflation is already dangerously high, and since Bernanke is cutting interest rates to spur investment, this creates a potentially explosive combination. I would urge further deficit cuts to reduce the money supply, thus bringing the interest rate back in line with the market's excess liquidity."
Others have called for repealing the tax cuts which were put through by President George W. Bush, which would remove liquidity from the market and also make deficit reductions easier. President Rick Warder said the tax cuts are "here to stay", as shown by the recent passage of the fiscal year 2009 budget.