AS if it didn’t have enough to worry about, Wall Street tomorrow will have to deal with the latest consumer inflation report. And it might not be pretty.
Back in May, I had an exclusive interview with Pat Jackman, the senior government economist who puts together the consumer price index.
Jackman warned that the CPI during this past spring had been understating energy inflation because of statistical anomalies caused by seasonal adjustments.
And he warned that these statistical quirks would be reversed – starting in June. That’s the figure that will be announced on Wednesday.
“We are going to show huge increases,” Jackman told me.
Wall Street is expecting the CPI to show a monthly gain of 0.7 percent, compared with the 0.6 percent increase in the May numbers that were announced last month.
If the unwinding of that spring seasonal adjustment makes consumer inflation look a lot worse than investors expect, the already shaky stock and bond markets could be in for a rough ride.
In an Aug. 30, 2001 column, I warned about the looming crisis in the government-backed mortgage business,
“You gotta hate Fannie Mae in this sort of economy.
Stock of the packager of mortgages is still near its high even though the high-risk borrowers to whom this quasi-government organization caters are having increasing trouble paying their bills.
This stock should not be as high as it is, even if the company keeps assuring Wall Street that its earnings will remain good.”
Seven years is a long time. But back then, the issue of whether the so-called government-sponsored enterprises, and especially Fannie Mae, were getting themselves in over their – and the country’s – heads was basically ignored by the bubble-blowers.
Now, the risks seem quite obvious. Too obvious to have been missed.
Fannie Mae’s stock, along with that of Freddie Mac, tanked last week thanks to concerns that these mortgage packagers will soon need a federal bailout. Over the weekend, Washington offered some guarantees.
Here’s the problem that a bailout causes: If Washington has to assume trillions in debt now being carried by Fannie and Freddie, it will start paying more to borrow money.
And if money becomes more expensive, people will have a harder time paying off their credit cards (See related Crudele column on page 8). Worse, they will have a harder time purchasing a home and the housing crisis will deepen.
You’ve heard about how ridiculous airfares have gotten.
I agree – especially when Spirit Air offers flights for $9. That’s just one direction, the roundtrip fare is – you guessed it – $18.
So I booked myself onto a flight to Fort Myers, Fla., in August, even though I don’t know anyone down there and never intended to fly south this hurricane season.
If I make it back alive I will fill you in on the amenities of a $9 flight.
Barack Obama is wrong and so is John McCain.
McCain, the all-but-certain Republican candidate for president, wants to cut taxes to boost the economy. One of his economic advisers recently said the recession was all in people’s minds.
Obama, his likely Democratic rival, thinks a second stimulus package to taxpayers will do the trick.
Here’s the problem.
Both of these ideas will increase the federal budget deficit that is already strangling this coun try.
And if that happens, the dollar could re sume its plunge, for eign investors could say bye-bye to en trusting us with their money and interest rates will climb.
The US economy, under that scenario, will have even more trouble.
Because of circumstances too complex to discuss here (but mentioned numerous times before in this column), none of these ordinary policies will work. It’s called the We Are Screwed dilemma.
So what’s the answer?
Do everything possible to reduce energy prices. First, regulators have to stop the speculation that is now driving commodity prices higher.
That can be done through concerted effort to find more domestic oil, build new refineries, develop alternate energy sources with government help and come up with a plan to compel automakers – also with Washington’s assistance – to make 75 percent of their models available with hybrid gas and electric engines.
When gas prices come down that’ll feel like a tax cut to the average American. And it won’t cost Washington anything.
The other answer?
Forget about giving taxpayers another puny rebate hoping it’ll be used to stimulate the economy.
At the very least, allow people who have money in retirement accounts to withdraw a percentage of those funds without a tax penalty.
This’ll stimulate the economy. And the cost to Washington will only come in lost revenues at some point way in the future.
Also, if Washington wants to stimulate housing, allow people to invest the retirement money they withdraw in depressed real estate.
Want to give Detroit a boost? Allow the withdrawn funds to go toward a car.
Even a small portion of the many trillions stashed in retirement accounts would be a huge boost to the economy.