All Recessions are Not Created Equal

In an announcement that was of little surprise to most of us, the National Bureau of Economic Research (NBER) finally declared that the United States has been in a recession since December 2007. What may not be quite as well known is that not every state is necessarily undergoing an economic recession at any given time. I thought it might be interesting to see which states are doing well despite the recession and which states are suffering the most.

To do my analysis, I downloaded the historical data spreadsheet (Excel file) of the State Coincident Indexes, which is published by the Federal Reserve Bank of Philadelphia. This is a long-running series of indexes that has been published since 1979. What the coincident indexes do is:

...combine four state-level indicators to summarize current economic conditions in a single statistic. The four state-level variables in each coincident index are nonfarm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average).

Based on this index number, individual state economies can be compared against each other and the nation as a whole to see how well the state is doing. The Philadelphia Fed also create month-by-month color-coded maps so that one can see at a glance each state's performance. Below is the most recent map available, from October 2008. (You can find all of the previously published maps since January 2005 here.)


Looking at the data since December 2007, when the recession officially started, what we find is that fourteen states have actually had economic growth as a percentage change over the past eleven months. Thirty-five states have had a contracting economy while one state (Kansas) has had neither a recession nor growth (a 0.0% "change"). (There is no data for the District of Columbia.) The fourteen states, in order of decreasing economic performance, are: Wyoming, Texas, South Dakota, New Hampshire, North Dakota, Virginia, New York, West Virginia, Colorado, Oklahoma, Louisiana, Nebraska, Massachusetts, and California. What's surprising to me is that California is in this list as they currently have the third highest unemployment rate in the country.

On the other side, the bottom ten states since last December are Delaware (41st), Arizona, South Carolina, Pennsylvania, Rhode Island, Michigan, Idaho, Nevada, Washington, and Oregon (50th). All of these states have had their index drop by at least 2.2% since December and, in the cases of the latter four, by over 4.0%. (Oregon's index has dropped by a whopping 6.1%.)

Of course these index numbers can change significantly from month to month. Both Oregon and Nevada have seen their index numbers drop by double digits within the eleven-month span (and not for the better). However, while things may look gloomy for some individual states, the economy may become better for them within a short period of time while the rest of the country labors under the current recession.

U.S. Unemployment Rates: Where Do We Stand?

The October US unemployment figures were recently released and, with very few exceptions, the numbers are rather dismal. (Highlights can be found here.) The numbers that were released, however, are only the "official" statistics. Meaning, the official unemployment rate that the U.S. Bureau of Labor Statistics gives out in its monthly press release is only one of six unemployment rates that it actually calculates. The "official" unemployment rate is the not-so-imaginatively named "U-3." There are two smaller unemployment rates (U-1 and U-2), and three larger (U-4 through U-6). What I'm concerned about is U-6.

The official definition of U-6 is:

Total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers.

...where...

Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not currently looking for a job. Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule.

Yada yada yada.

In essence, U-6 covers everyone who's either unemployed, whether they receive unemployment benefits or not, or might be working a part-time job but who really want to be working full-time (i.e., they're underemployed).


On to the statistics then. In October, the "official," U-3 unemployment rate was 6.5%. This is the highest unemployment rate we've seen since March 1994. However, the U-6 unemployment rate in October was 11.8%. This is the fourth month in a row that U-6 has been over 10%, with the lowest rate this year having been in February, at 8.9%. The last time U-6 was this high was in January 1994, when it was 11.8%. (Ironically, this is also the very first month U-6 was published.)


As most economists are presuming today, the country is almost certainly in a recession at this time (even though it hasn't been officially announced yet). How do these unemployment rates, then, compare against the last three recessions? U-6, being a rather limited series of data, only covers one time period when unemployment was almost as bad as it is today. In June 2003, U-3 peaked at 6.3%, while U-6 peaked in September, at 10.4%; the largest spread between the two unemployment rates that year was 4.3%.

The next earliest spike in unemployment rates happened in June 1992, when U-3 reached 7.8%. However, there wasn't any U-6 rate at that time, so we can only guess what it might have been. Doing a little spreadsheet analysis, my own guess is that the spread between U-3 and U-6 at the time was about 5.3%; add that to the 7.8% and the hypothetical U-6 unemployment rate may have been about 13.1%. The worst of the three recessions, though, was that of the early 80s. U-3 peaked in November and December 1982 at 10.8%; this is the only time U-3 has ever peaked above 10% since 1948, when the current series of unemployment rate data starts. Assuming that the spread between U-3 and the hypothetical U-6 was still around 5% at that time (and I think it may have actually been larger), total unemployment and underemployment probably would have been around 16% in late 1982.

So. Unemployment is bad now. It's slightly worse than it was six years ago, but it's also not as bad as it was back in the early 90s or the early 80s, which was much, much worse. Consider that your positive thought for the day. ;)

US Unemployment Figures - October 2008

The October US unemployment figures were released on Friday. Unsurprisingly, the numbers were not good, although there were a few positive surprises. Here are some of the highlights:

• Overall, the national unemployment rate increased by 0.4%, from 6.1% to 6.5%, over September's number. For the past twelve months, the national rate has increased 1.7%.
  
• In terms of monthly change, the state with the largest increase is Oregon, with a 0.9% increase; Alaska and South Carolina have the next two largest increases, at 0.7% each.
  
• On an annual basis, the state with the largest increase is Rhode Island, which has nearly doubled in the past twelve months, from 5.1% to 9.3%, an increase of 4.2%. Florida had the second largest increase, at 2.7%, followed closely by the states of Idaho (2.6%), California, Georgia and Nevada (all at 2.5%).
  
• The state with the highest unemployment rate are the states of Rhode Island and Michigan, both of which are at 9.3%. California is in third with a rate of 8.2%, followed by South Carolina with a rate of 8.0%.
  
• States with the lowest unemployment rates are primarily located in the west and upper mid-west: Wyoming and South Dakota (3.3%), North Dakota (3.4%), and Utah (3.5%).
  
• In terms of non-farm payroll employment (i.e., number of jobs), states with the biggest decreases since September were Washington (-29,300), Florida (-27,300), Michigan (-19,600), and Arizona (-17,700).
  
• For annual changes in non-farm payroll employment, states with the biggest decreases are Florida (-156,200), California (-101,300), Michigan (-71,200), and Arizona (-70,400). However, two states had statistically significant increases over the past year: Texas (230,400) and Wyoming (9,500).

The PDF version of the Bureau of Labor Statistics press release can be found here.

Want a Strong Economy? Vote for a Democrat!

Yesterday, I highlighted a post over at Angry Bear that showed that every Democratic president since World War II has left office with a lower unemployment rate than the one he inherited from his predecessor, whereas only one Republican president, Ronald Reagan, could make the same claim. The moral of that story: if you want a job, you should vote for a Democrat.

Today, the folks at Angry Bear have ranked the last fourteen presidents (since Herbert Hoover) as to how the American economy did in real terms (i.e., adjusted for inflation) during each administration. Interestingly enough, five of the top seven presidents were Democrats, and only one Democratic president (Truman) was in the bottom seven. Below is the listing of presidents and the last two paragraphs of the essay; you can read the entire post here.

1. FDR
2. LBJ
3. JFK
4. Clinton
5. Reagan
6. Carter
7. Nixon
8. Ike
10. GW (that's 10 so far – don't be surprised if he sinks further into the mire)
11. Ford
12. Bush Sr.
13. Truman
14. Hoover

What the list shows us, is that, the top half of the spots are dominated by Democrats. Two Republicans, Reagan and Nixon, make it in (5th and 7th, respectively). It also shows us that the bottom half of the list is populated almost exclusively with Republicans. The one Democrat in the bottom half of the list, not incidentally, is the Democrat most beloved of Republicans today: Harry Truman. George Bush has compared himself to Truman, and a few weeks, Sarah Palin told us how she too was comparable to Truman. What are the odds that prominent Republicans would compare themselves with FDR or LBJ? (Snarky answer – probably about the same as the odds a Republican administration would produce a growth rate comparable to FDR or LBJ.)

Now, after 70 years of data, after observing what we've observed over all sorts of conditions, it is hard to conclude anything but this: one party advocates policies that produce rapid economic growth, and one part dismisses those policies with epithets like "socialism" and advocates instead policies that produce dismal economic growth. And dismal economic growth has consequences. Poor economic growth makes people worse off, and hits them in their pocketbook. And when people are hurting financially, their health suffers, the rate of divorce goes up, suicides increase, and the abortion rate increases. So those who advocate the policies that bring us lower incomes, poorer health, break up families, increase suicides, and increase the rate of abortions are doing us all a lot of harm. More, in fact, than Osama or Saddam could possibly have done. And yet, the folks who advocates those policies question the patriotism of the rest of us. It's very, very strange.

The Economic Version of "Final Destination 3"

There is someone, walking behind you
Turn around, look at me
There is someone, watching your footsteps
Turn around, look at me
One more post on economics (for now), this time an unusual look at housing prices. The New York Times produced a graph of Robert Shiller's American housing price index, which shows what prices have been like from 1890 through 2006. For example, if a standard house cost $100,000 in 1890 (in 2006 dollars), a similar home would have sold for $199,000 in 2006. What's interesting, though, is that someone has taken Shiller's data and transformed it into a roller-coaster ride using Atari's RollerCoaster Tycoon (R)3 software. (Be sure to look at the bottom right corner to view the year.)



The problem with this video, though, is that it stops short of what's happened in the past two years. Back in late May, The Economist, which I do read (apparently this is a political joke now), produced a graph that shows this past year's plunge. To give an idea of what the end of the roller-coaster ride should look like, one wit at Angry Bear suggested the following video:



HT: Angry Bear

State Coincident Indices Through August 2008

The State Coincident Indices, published by the Federal Reserve Bank of Philadelphia, have been released through the month of August. The top graph is from the month of May, which I've republished to provide some continuity from the previous set of graphs; the latter three graphs are for June, July and August.

As you can see, there has been some strengthening in the Gulf states of Texas and Louisiana (one wonders how the graphs will look after taking into account Hurricanes Gustav and Ike), the western half of the upper Midwest, and West Virginia, which went from deep red to dark blue in a matter of two months. Trouble spots include the Pacific Southwest and the Midwest, although the latter region may be improving; we'll have to wait and see.

From the August 2008 press release [pdf]:

The Federal Reserve Bank of Philadelphia has released the coincident indexes for all 50 states for August 2008. The indexes increased in 12 states for the month, decreased in 31, and were unchanged in the remaining seven (a one-month diffusion index of -38). For the past three months, the indexes have increased in 12 states, decreased in 35, and were unchanged in the other three (a three-month diffusion index of -46). For comparison purposes, the Philadelphia Fed developed a similar coincident index for the entire United States. The Philadelphia Fed’s U.S. index was flat in August and has remained unchanged over the past three months.

State Coincident Indexes

Every month, the Federal Reserve Bank of Philadelphia produces a "State Coincident Index" that allows economists to see how well each of the individual states are doing economically:

The coincident indexes combine four state-level indicators to summarize current economic conditions in a single statistic. The four state-level variables in each coincident index are nonfarm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average). The trend for each state’s index is set to the trend of its gross domestic product (GDP), so long-term growth in the state’s index matches long-term growth in its GDP.

What the graphs below show is a state-by-state analysis of the economy. The first three maps show the month of January for 2005, 2006 and 2007, respectively. (Note that in these maps, a five-point scale is used with dark blue being the best and dark red being the worst.) The last six maps are for the last six months available, December 2007 through May 2008. While the scale has been increased from five points to seven points, the same basic color scheme is still used; i.e., dark blue is the best, dark red is the worst.

As you can see, the American economy has gotten quite bad over the past six months, especially in the Northwest and, to a slightly lesser degree, in the Midwest and South. Some of the states in the Mountain West and Northeast are doing well, with the best state currently being Texas. (I'd be tempted to say that Texas is doing well because of the multiplier effects from higher oil prices, but if that's the case, then why isn't Alaska doing well too?)










HT: Economist's View

Robert Reich: ""No" to Further Offshore Drilling

The other day, in my update about how much oil the U.S. imports, I wrote:

...[S]hame on you ... if you believe either McCain or Cheney that drilling for oil offshore or up in Alaska will make a significant difference. Two reasons: "drop in the bucket" and "long-term projects," neither of which will lower your gas prices.

On the same day that I wrote the above, Robert Reich, former Secretary of Labor during the Clinton administration and currently a professor at the University of California (and a blogger), had a similar post on why the U.S. should not do further offshore drilling for oil. His first and second reasons are identical to what I wrote above, just further developed:

First, the crude oil market is global. Oil companies sell all over the world. The price of crude is established by global supply and demand. So even if 3 million additional barrels a day could be extruded from lands and seabeds of the United States (that sum is the most optimistic figure, after all exploration is done), that sum is tiny compared to 86 million barrels now produced around the world. In other words, even under the best circumstances, the price to American consumers would hardly budge.

Second, whatever impact such drilling might have would occur far in the future anyway. Oil isn't just waiting there to be pumped out of the earth. Exploration takes time. Erecting drilling equipment takes time. Getting the oil out takes time. Turning crude into various oil products takes time. According the the federal energy agency, if we opening drilling where drilling is now banned, there'd be no significant impact on domestic crude and natural gas production until 2030.

Third, oil companies already hold a significant number of leases on federal lands and offshore seabeds where they are now allowed to drill, and which they have not yet fully explored. Why then would they seek more drilling rights? Because they want more leases now, when the Bushies are still in office. Ownership of these parcels would serve to to pump up their balance sheets even if no oil is pumped.

Last but by no means least, environmental risks are still significant.

HT: Economist's View

Why Beef Prices are Heading Higher

Bonddad recently wrote about a Bloomberg article on rising beef prices. My quibble isn't with his technical analysis, but with one of his comments. He thought that demand was increasing for beef because...

...as the world's standard of loving [sic] increases (think India and China making more and more money) people will want better things like steak.

Now, generally speaking, what he said is true; as people's incomes rise, we do want goods that are better than what we had before. In economics, we call these "normal goods." A normal good is any good for which demand increases when income increases. A car is an example of a normal good. All things being equal, what would you rather do if your income increases, continue taking the bus or train to work or buy a new car? Of course, you'd buy the new car. (Conversely, an "inferior good" is a good that decreases in demand as income rises; an example for the US being ramen noodles.) Anyhoo, Bonddad is suggesting that because incomes are rising in countries like India and China, they want to eat better foods such as American steak. However, the truth is that beef exports to other countries isn't the reason.

In 2006, the US exported a total of 1.145 billion pounds of beef out of a total supply of 29.912 billion pounds, which comes to 3.83%. So a little under 4% of all US beef available in the country was exported. In 2007, the percentage was 4.74%, in 2008 total beef exports is projected to be 5.44%, and for 2009, 6.21%. [All of these numbers and the following data come from the US Department of Agriculture's monthly report, World Agricultural Supply and Demand Estimates, for April and May 2008.] So, beef exports are increasing, but very slowly. Rising beef exports out of the total available for sale in the US will cause domestic beef prices to rise, but not by that much. Let's look at the more likely culprit.

American cattle are normally either grass-fed or corn-fed. Per Wikipedia, "In the United States, cattle in concentrated animal feeding operations (CAFOs) are typically fed corn, soy and other types of feed that can include "by-product feedstuff." As a high-starch, high-energy food, corn decreases the time to fatten cattle and increases yield from dairy cattle." Per a 2003 Colorado State University study, "80% of consumers in the Denver-Colorado area preferred the taste of United States corn-fed beef to Australian grass-fed beef." And so a very significant portion of America's annual corn crop goes to feed cattle, and the price of corn has been rising dramatically, like other agricultural products, such as rice. Just how much corn is being used to feed cattle?

In 2005/6, the US had a total supply of 13.237 billion bushels of corn. Of that amount 6.155 billion bushels (46.50%) were used as "feed and residual," 2.981 billion bushels (22.52%) were used as "food, seed and industrial," and 2.134 billion bushels (16.12%) were exported. The remainder (1.967 billion bushels, 14.86%) was "closing stock" and used in the following year, 2006/7. Now, looking at these individual categories, we see that "feed and residual" was 44.73% in 2006/7 and is estimated to be 42.73% in 2007/8 and 39.19% in 2008/9. Clearly, "feed and residual" isn't a problem. Likewise, exports aren't a significant cause of corn inflation either: 16.98% of all US corn was exported in 2006/7, and 17.37% and 15.53% is expected to be exported in 2007/8 and 2008/9, respectively. Which leads to "food, seed and industrial."

The first two of these should be self-explanatory. It's the industrial that we're concerned with. The industrial use of corn comes primarily in the form of ethanol. You know, the alcohol addititive to your gasoline so that you wouldn't pay as much money (you hoped) to run your car? Turns out that ethanol is bringing up the price of corn. The USDA breaks out the amount of corn that's used in the production of ethanol, which is very helpful for our analysis. In 2005/6, corn used for ethanol made up 1.603 billion bushels out of the 2.981 billion bushels mentioned above (the remainder was presumably used for food and seed). Which means that that 1.603 billion bushels made up 12.11% of the total American corn supply. In 2006/7, that percentage increased to 16.92%, and is expected to increase to 20.84% and 29.58% in 2007/8 and 2008/9, respectively. That's where the corn's going! So, let's connect the dots.

Because Americans prefer corn-fed cattle over grass-fed, cattle producers feed them lots of corn and other grains that, in turn, help them to fatten up quicker before they're slaughtered. Still, it takes feedlot cattle 14-18 months before they are killed, which means they eat a lot of corn. (I don't know exactly how much an average cow eats in its lifetime. No doubt the farmers do.) Because the price of corn has been going up ($2.00 per bushel in 2005/6 to $3.04 per bushel in 2006/7), it costs the cattle producer that much more to feed a cow until it gets to its terminal weight. Which means that cattle producers are actually losing money now for every cow they sell. According to the Bloomberg article, the feedlots were losing $139.56 a head in April, up from a record loss of $169.80 a head in March, and down from a profit of $46.79 a head in April 2007. No doubt there are some other factors that probably have affected the price increases for corn (oil and fertilizers come to mind), but the primary cause of the price increases in beef appears to be due to the increases in the price of corn. Which, no doubt, must be a relief to the Indians and Chinese, who don't tend to eat beef anyway; the former tend to eat mutton and chicken, the latter pork.

Kevin Phillips: Numbers Racket: Why the Economy is Worse Than We Know

Kevin Phillips, author of American Theocracy (a book I endorse), has an article in Harper's Magazine about the fudging of economic data by the American government. The problem, according to Phillips, apparently began with the Kennedy administration and has continued on an erratic basis through to the present day, with the guilt being shared by both Democratic and Republican administrations. The first third of the article documents how the Consumer Price Index (CPI), unemployment statistics, and the gross domestic product (GDP) numbers have all been manipulated over the decades, not necessarily out of some grand conspiratorial plot, but out of "accumulating opportunisms."


Sources: John Williams, ShadowStats.com, U.S. Bureau of Labor

The second third of the article looks a little more deeply at the opacity that has developed over the three economic statistics mentioned above:

Of the "big three" statistics, let us start with unemployment. Most of the people tired of looking for work, as mentioned above, are no longer counted in the workforce, though they do still show up in one of the auxiliary unemployment numbers. The BLS has six different regular jobless measurements—U-1, U-2, U-3 (the one routinely cited), U-4, U-5, and U-6. In January 2008, the U-4 to U-6 series produced unemployment numbers ranging from 5.2 percent to 9.0 percent, all above the "official" number. The series nearest to real-world conditions is, not surprisingly, the highest: U-6, which includes part-timers looking for full-time employment as well as other members of the "marginally attached," a new catchall meaning those not looking for a job but who say they want one. Yet this does not even include the Americans who (as Austan Goolsbee puts it) have been "bought off the unemployment rolls" by government programs such as Social Security disability, whose recipients are classified as outside the labor force.

Second is the Gross Domestic Product, which in itself represents something of a fudge: federal economists used the Gross National Product until 1991, when rising U.S. international debt costs made the narrower GDP assessment more palatable. The GDP has been subject to many further fiddles, the most manipulatable of which are the adjustments made for the presumed starting up and ending of businesses (the "birth/death of businesses" equation) and the amounts that the Bureau of Economic Analysis "imputes" to nationwide personal income data (known as phantom income boosters, or imputations; for example, the imputed income from living in one's own home, or the benefit one receives from a free checking account, or the value of employer-paid health-and-life-insurance premiums). During 2007, believe it or not, imputed income accounted for some 15 percent of GDP. John Williams, the economic statistician, is briskly contemptuous of GDP numbers over the past quarter century. "Upward growth biases built into GDP modeling since the early 1980s have rendered this important series nearly worthless," he wrote in 2004. "[T]he recessions of 1990/1991 and 2001 were much longer and deeper than currently reported [and] lesser downturns in 1986 and 1995 were missed completely."

Nothing, however, can match the tortured evolution of the third key number, the somewhat misnamed Consumer Price Index. Government economists themselves admit that the revisions during the Clinton years worked to reduce the current inflation figures by more than a percentage point, but the overall distortion has been considerably more severe. Just the 1983 manipulation, which substituted "owner equivalent rent" for home-ownership costs, served to understate or reduce inflation during the recent housing boom by 3 to 4 percentage points. Moreover, since the 1990s, the CPI has been subjected to three other adjustments, all downward and all dubious: product substitution (if flank steak gets too expensive, people are assumed to shift to hamburger, but nobody is assumed to move up to filet mignon), geometric weighting (goods and services in which costs are rising most rapidly get a lower weighting for a presumed reduction in consumption), and, most bizarrely, hedonic adjustment, an unusual computation by which additional quality is attributed to a product or service.

...

"All in all," Williams points out, "if you were to peel back changes that were made in the CPI going back to the Carter years, you'd see that the CPI would now be 3.5 percent to 4 percent higher"—meaning that, because of lost CPI increases, Social Security checks would be 70 percent greater than they currently are.

Furthermore, when discussing price pressure, government officials invariably bring up "core" inflation, which excludes precisely the two categories—food and energy—now verging on another 1970s-style price surge. This year we have already seen major U.S. food and grocery companies, among them Kellogg and Kraft, report sharp declines in earnings caused by rising grain and dairy prices. Central banks from Europe to Japan worry that the biggest inflation jumps in ten to fifteen years could get in the way of reducing interest rates to cope with weakening economies. Even the U.S. Labor Department acknowledged that in January, the price of imported goods had increased 13.7 percent compared with a year earlier, the biggest surge since record-keeping began in 1982. From Maine to Australia, from Alaska to the Middle East, a hydra-headed inflation is on the loose, unleashed by the many years of rapid growth in the supply of money from the world's central banks (not least the U.S. Federal Reserve), as well as by massive public and private debt creation.

U.S. Unemployment Rates:
Red - Including workers who are part-time for "economic reasons"
Yellow - Including other "marginally attached" workers
Blue - Including "discouraged" workers
Black - The official "unemployment rate"

Source: US Bureau of Labor Statistics

The last third of the article sums up the numerous economic problems the U.S. is currently facing:

The real numbers, to most economically minded Americans, would be a face full of cold water. Based on the criteria in place a quarter century ago, today's U.S. unemployment rate is somewhere between 9 percent and 12 percent; the inflation rate is as high as 7 or even 10 percent; economic growth since the recession of 2001 has been mediocre, despite a huge surge in the wealth and incomes of the superrich, and we are falling back into recession. If what we have been sold in recent years has been delusional "Pollyanna Creep," what we really need today is a picture of our economy ex-distortion. For what it would reveal is a nation in deep difficulty not just domestically but globally.

Undermeasurement of inflation, in particular, hangs over our heads like a guillotine. To acknowledge it would send interest rates climbing, and thereby would endanger the viability of the massive buildup of public and private debt (from less than $11 trillion in 1987 to $49 trillion last year) that props up the American economy. Moreover, the rising cost of pensions, benefits, borrowing, and interest payments—all indexed or related to inflation—could join with the cost of financial bailouts to overwhelm the federal budget. As inflation and interest rates have been kept artificially suppressed, the United States has been indentured to its volatile financial sector, with its predilection for leverage and risky buccaneering.

Arguably, the unraveling has already begun. As Robert Hardaway, a professor at the University of Denver, pointed out last September, the subprime lending crisis "can be directly traced back to the [1983] BLS decision to exclude the price of housing from the CPI. . .With the illusion of low inflation inducing lenders to offer 6 percent loans, not only has speculation run rampant on the expectations of ever-rising home prices, but home buyers by the millions have been tricked into buying homes even though they only qualified for the teaser rates." Were mainstream interest rates to jump into the 7 to 9 percent range—which could happen if inflation were to spur new concern—both Washington and Wall Street would be walking in quicksand. The make-believe economy of the past two decades, with its asset bubbles, massive borrowing, and rampant data distortion, would be in serious jeopardy. The U.S. dollar, off more than 40 percent against the euro since 2002, could slip down an even rockier slope.

The credit markets are fearful, and the financial markets are nervous. If gloom continues, our humbugged nation may truly regret losing sight of history, risk, and common sense.

HT: Economist's View