Weird Science

JACKSON HOLE, Wyo. -- He is certainly not targeting growth.

He all but

says he is; he all but says he wants

gross domestic product

growth to

slow to 3% from 4%.

Overall economic growth during the past three years has averaged 4% annually, of which roughly 2 percentage points reflected increased productivity and about 1 point the growth in our working-age population. The remainder was drawn from the ever-decreasing pool of available job seekers without work. That last development represents an unsustainable trend that has been produced by an inclination of households and firms to increase their spending on goods and services beyond the gains in their income from production. That propensity to spend, in turn, has been spurred by the rise in equity and home prices, which our analysis suggests can account for at least 1 percentage point of GDP growth over the past three years. Even if this period of rapid expansion of capital gains comes to an end shortly, there remains a substantial amount in the pipeline to support outsized increases in consumption for many months into the future.

Yet a chairman who sincerely and seriously wants economic growth to slow by a full percentage point -- and especially one who knows that growth has actually accelerated in the face of a truly dastardly set of headwinds -- knows full well that a negligible (quarter-point) hike in the

federal funds rate

and a

move to a neutral directive will do nothing to produce that result.

He is also certainly not placing full faith in the



He all but

says he is; he all but

says he subscribes to the New-Era notion that "the economy has become less inflation-prone than in the past, so that the chances of an inflationary breakout arguably are, at least for now, less than they would have been under similar conditions in earlier cycles."

Labor and capital productivity has risen significantly during the past five years. It seems likely that the synergies of advances in laser, fiber optic, satellite and computer technologies with older technologies have enlarged the pool of opportunities to achieve a rate of return above the cost of capital. Moreover, the newer technologies have facilitated a dramatic foreshortening of the lead times on the delivery of capital equipment over the past decade, presumably allowing businesses to react more expeditiously to an actual or expected rise in nominal compensation costs than, say, they could have in the 1980s. In addition, the surge in investment not only has restrained costs, it has also increased industrial capacity faster than factory output has risen. The resulting slack in product markets has put greater competitive pressure on businesses to hold down prices, despite taut labor markets.

Yet it is unclear why a chairman who sincerely and seriously buys into the New Era argument -- and especially one who believes fully in

published productivity increases as big as 4.3% -- is raising the funds rate at all.

Why on earth would he need to?

Why in the world would that be necessary?

We're All Fed Governors Now

So forget the growth numbers.

And forget the productivity numbers.

Just sit back and wait for something "bad" to happen on the price front.


Because that way you'll have reduced yourself to the role of Ham Sandwich.

An observer.

A reactionary.

You'll be just like a





has clearly given up on looking a year or two out; it has stated clearly that it cannot accurately forecast growth, productivity or consumer prices. It admits being entirely surprised about the economy past; it admits that it cannot quite figure out the economy present; it admits that it has no special read on the economy future.

And so every single one of us -- save perhaps the people who write me to claim that both Larry Kudlow and Ed Hyman have been nothing but Right! about the economy and bonds, because they clearly haven't even take the time to look up the very Wrong! forecasts those guys have been spitting out -- is perfectly qualified to do precisely what the Fed's doing right now.

We are all perfectly qualified to sit around and wait for something bad to happen on the price front.

We are all perfectly qualified to watch the

unemployment rate

poke new lows and to watch the


ratio probe new highs.

We are all perfectly qualified to watch the money

measures grow and grow and grow.

We are all perfectly qualified to watch the

NAPM prices-paid index

and the

producer price indices


up and

up and up.

We are all perfectly qualified to watch the




indices leave their bottoms further behind.

We are all perfectly qualified to watch the


index go from falling at a 4.4% annual rate in January 1998 to rising at a 6.8% annual rate now.

Indeed. We are all perfectly qualified to watch almost every leading price indicator you can cite grow less and less kind.

What precisely is it that will finally trip the alarm?

What precisely will it take to produce the thinking that Yes, yes, yes, the risk that our good fortune will end abruptly is greater than the risk that it will continue indefinitely?

We have no idea.

We cannot know if they do not know.

And the Ham Sandwiches ain't talking.

Side Dish

Waaaa. Waaaa. It sure is hot.

What a bunch of East Coast sissies.

And hey. Many thanks to the most excellent fellow who sent the merchandise from the



Best mystical-numbers biblical book?




Kings (either one).

God!! Why do you mock me?! Mmmm. Sacrelicious.