| |||||
OPEC CHRISTMAS
|
2014 is ending strongly. The next two years look stronger yet with U.S. Government forecast of for 4.1%(2015) and 4.4%(2016) versus 2014’s 2.6% estimate). U.S. budget deficits also declined. Give most of the credit for this heady growth to OPEC and their willingness to let gas prices decline. The effect is much like tax cuts which has put an extra $80 Billion in consumers pockets, fueling growth. It is a shame the Obama administration let political goals have priority over prosperity. After all the U.S. would of exited the great recession quickly if income taxes had been reduced. With the poorest and retired the most important beneficiaries of increasing GDP why is that not a goal?
Globally India and China (with combined population exceeding 2.6 billion) are expected to be the major long term drivers of global growth. 7% growth numbers look good compared to poorly managed, no growth Latin America and Europe.
Strong U.S. growth pressures the Federal Reserve Board to begin raising interest rates. But the Fed is loathe to make that move given anemic global growth and deflation, not inflation, being a considerable threat. If I were an interest rate decision maker I would ask for data on several points: 1. Are there enough bodies to meet demand? The answer today would be yes. Unemployment is down, but many workers seeking full time employment have taken lower paying and temp jobs to make ends meet. Bottom line no wage inflation. 2. Can we produce the goods needed with the factories that exist? In November we used 80.1 of maximum output. It is a great problem meaning things are going great, but means less every year as many goods can be made in other countries and imported. No concern. 3. Is there a need to manage our currency via aggressive interest rate policy (like Russia is doing today)? No there is not. 4. Biggest question is how bond yields are changing given recent data releases. After all, the Fed makes moves in response to the bond market. I would be vocally preparing the financial world higher interest rates may be coming but do nothing.
Of course there is a preferable alternative to raising interest rates. The U.S. has big budget deficits. Suppose the rate of increase in government spending was cut. Think about it. Economic growth would slow, interest rate pressure would decline and budget deficits would shrink. With the Republicans controlling both the Senate and House it may be possible. And rhetoric aside, cutting spending would hurt the poor and people on fixed incomes less than increasing interest rates. Eventually there will be another recession. When that happens we should do the reverse and dramatically increase government spending, and deficits, to spur demand.
Last Thoughts: OPEC is saving the world by permitting oil prices to decline. But commodities, including oil, usually increase in price as inflation accelerates. So if you want keep your gas prices permanently low buy the oil stocks as a hedge.
I hope you and your families all have a wonderful holiday season.
Roger O. Groh
12/28/14
roger@mpam888.com
1001 Bridgeway #418, Sausalito, California 94965
