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Travails making US a poorer country
The US may pay a steep price to free itself of its economic and financial travails: bigger government, faster inflation and a poorer country.
- Bloomberg
- Published: 00:34 March 25, 2008
- Fed Chairman Ben Bernanke and his colleagues acknowledge that inflation expectations have risen, even as they cut the benchmark interest rate three-quarters of a percentage point and began lending directly to big Wall Street dealers.
- Lawmakers are discussing expanding the government's role in the housing market and increasing oversight of financial services.
- Some 45 per cent of consumers expect their inflation-adjusted incomes to fall in the coming year, the worst outlook since 1990.
- The depreciating dollar threatens to push up inflation by raising the cost of imports.
Washington: The US may pay a steep price to free itself of its economic and financial travails: bigger government, faster inflation and a poorer country.
That would mark a reversal from the course of much of the past two decades, when Washington has been dismantling regulations, the Federal Reserve has been largely successful in containing inflation, and many Americans have felt wealthier thanks to rising home prices and cheaper imports.
"We're going to have four to five per cent inflation," says Kenneth Rogoff, former chief economist for the International Monetary Fund who's now at Harvard University. "The dollar will continue to drop and stay down for years. And we're going to end up with more regulation."
The seeds of that outcome are already being planted. Fed Chairman Ben Bernanke acknowledged last week that inflation expectations may have risen, even as they cut the benchmark interest rate three-quarters of a percentage point and began lending directly to big Wall Street dealers.
Lawmakers are discussing expanding the government's role in the housing market and increasing oversight of financial services.
Downward turn
Americans sense that the economy is changing for the worse. Some 45 per cent of consumers expect their inflation-adjusted incomes to fall in the coming year, the worst outlook since 1990, according to a survey by University of Michigan/Reuters.
"The pessimists are beginning to outnumber the optimists," says Lynn Franco, who runs a separate monthly survey of consumers for the New York-based Conference Board. "Expectations about the future are at a 17-year low."
What's happening, econ-omists say, is the bill is coming due for Americans after years of living beyond their means. Over the last 15 years, domestic demand has grown an average 0.3 percentage point more per year than the overall economy.
"We've been spending more than the economy's been producing," former Fed Chairman Paul Volcker said March 18 on the Charlie Rose television show. "So we have been depending increasingly on foreign finance - monies coming from abroad."
Behind the borrowing binge were rising asset prices, first for stocks in the late 1990s, then for real estate. Those bubbles have now burst, with house prices in 20 metro-politan areas down a record 9.1 per cent in Dec-ember from a year earlier, according to the Case-Shiller index. "It's like a person who discovers that he's not going to inherit something that he was counting on inheriting," says Nobel laureate Edmund Phelps, an econ-omics professor at Colum-bia University.
"Suddenly he works harder, he saves more, he accepts worse terms for various things."
Edwin Truman, a former Fed official now at the Peterson Institute for International Economics in Washington, sees a return of the "malaise" of the early 1990s. That was a period when domestic demand grew more slowly than the economy, with exports making up the difference.
Declining dollar
Since the Fed started cutting interest rates in Sep-tember, the dollar has dropped 10 per cent against the euro and 15 per cent versus the yen. Allen Sinai, chief economist at Decision Economics in New York, forecasts a further fall, with the euro rising to $1.70 to $1.75 and the yen strengthening to 90 per dollar in coming months. The euro traded at $1.53 at 2:58pm yesterday in Tokyo, while the dollar was at 99.82 yen.
The depreciating dollar threatens to push up inflation by raising the cost of imports. Import prices excluding petroleum rose at a year-over-year rate of 4.5 per cent in February, the fastest rise in more than a dozen years.
"Inflationary pressures are coming at us from a lot of different directions," Rogoff says.
David Dillon, chief executive of Kroger Co., agrees. "We don't think it's abating at this point," the head of the country's biggest grocery chain said on a March 11 conference call.
Impact: Cost of inflation
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