3/21/2005

Inflation

In the article Ongoing inflation fears weigh on stocks they talk about how the price of crude oil is at $57 a barrel, interest rates are rising, and how the stock market is falling. Many large companies are making major cut backs. Could this be the beginning of a recession? I think that is what is happening in our economy right now. Our unemployment rate is up and we are having major cut backs. I think that it is time to watch for the recession's effects to start happening.

6 comments:

Marie said...
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Marie said...

Wow, I really think that states what is happening to our economy in a nut shell. I remember at the beginning of this class Dr. Tufte stated that the economy is doing better, but the population has fears that were persisting from the last recession, keeping everyone from recognizing the progress. The variables mentioned surely can't help the weak recovery that we had

Drake said...

Inflation is not the problem. Our food supply is the safest and cheapest in the world, consumer electronics have never been more affordable, clothing is more affordable now than it ever has been, and housing costs have just barely started to rise because of interest rates. The problem is oil barons. There are a select few in the world that control the world's oil supply and those select few are damn greedy and they have us by the throat. Inflation is not out of control the price of oil is out of control.

rico said...

I disagree. I believe economic growth is slowing down, but we aren't heading for a recession. The increase in interest rates is to slow growth. This is what the Fed is trying to do! It isn't just the economy pointing at a recession. According to supply and demand, as price of oil goes up, we should see a decrease in demand. That is not the case. Businesses are paying the higher prices in freight and production because the consumer is paying a higher price in the end. If consumers are still using more fuel than ever, we are far from a recession.

Tom said...

I would tend to agree with Rico. The economy is not heading for a recession. Because interest rates are on the rise money mangers are turning to bonds instead of stocks. Small percentage moves means millions of dollars for these guys and that is what is making the market slip, at least which is what Professor Bowman believes. With the rise of the interest rate, maybe there could have been a little bit of overconfidence. I don't know I'm still trying to figure this dismal science (economics) out for myself.

Dr. Tufte said...

No offense Nick, but here is something that everyone should carry away from an undergraduate education - if you think you can sense the start of a recession you are fooling yourself. They are not at all predictable, and very subtle when they start. Most professional macroeconomists miss them when they start.

There is also a factual mistake here - the unemployment rate is neither high nor rising. Unemployment rates rise quickly after peaks and fall slowly after trought. The 2001 recession was weak, so the unemployment rate never went very high, while the drop in the unemployment rate has been smaller than usual, it is there, and it is substantial.

As to oil prices and interest rates, reading too much into the behavior of prices is a common mistake - economists do this too. Rising oil prices are bad for buyers, but they are good for seller - so they tend to be a wash for the economy as a whole. The same can be said for interest rates - when they rise lenders are helped but borrowers are hurt.

I think Marie has recalled something important - but I'm not sure she believes it herself. People tend to think the economy is doing worse than it is, and both Nick and Marie seem to be falling on the too-worried side. (Which is OK - this isn't hard science, and everyone is entitled to an opinion).

One fact this is worth stating is that 2004 was a very good year for the U.S. economy, and the best year for the global economy since the early 1970s.

Drake's comment is more or less correct, but I don't think we need fear "oil barons". If there is a lot of money being made in oil right now, then oil companies would be a good investment, and so would companies and governments of oil rich countries. That isn't the case. Worldwide demand for oil is high right now because the world economy is doing so well - that pushes oil producers up both the marginal cost curve and the average total cost curve. It isn't clear that this means that oil companies are making a lot more profit per barrel.

With respect to Tom's comment, I think Bowman is right - people are moving out of stocks a little bit. I'm not sure though if rising interest rates are sympton or cause of that.