Correct But a Bit Too Early Today 06/06/2008 04:54:57 pm by Dan Krohn

	Earlier today this blog suggested that caution was the word on the U.S. economy. That was before this blogger saw the close of market headlines showing oil prices back up to their all time highs and the Dow falling almost 400 points today. Apparently others have also concluded that the worst rise in unemployment statistics in 22 years combined with the other factors stated above and the weak dollar warrant pessimism. To top matters off, a high ranking Israeli official stated forthrightly that if needed to prevent Iran from having nuclear weapons, an attack on Iran would be made. Allegedly Iran has spread out its nuclear program geographically, so an effective attack would likely do serious damage to Iranian oil exports. An ongoing war with Iran would certainly have an effect on oil production. Readers might want to note that U.S. officials have been making more aggressive noises concerning Iran during the last couple weeks. Israel might not be going alone. From an economic point of view, such a war would clearly raise oil prices, and since oil prices affect almost everything else, inflation would naturally follow. Inflationary periods going back to about 1970 were generally the result of overheated economic activity with rapidly rising incomes. This kind of one commodity driven inflation is a different breed, if not a different animal (note rising unemployment does not typically accompany an overheated economy); and the usual cure of raising interest rates will not be as effective. If there were war with Iran, there would be an increase in government spending (wars always do that) and such an increase would be an additional inflationary factor. There are cynics who believe that a war with Iran will be launched in time to assist the McCain candidacy - people would vote for the war hero during wartime. But would McCain really want that? What is clearly true is that the next president of the U.S. will inherit a real economic mess and will be blamed for much of it no matter what. Such was the fate of the first President Bush. (Nothing in this entry should be read as an opinion on whether or not Iran should be attacked in some way. Given its president's clearly stated dedication to the total destruction of Israel and the recent activities of its client group Hezbollah in Lebanon, one cannot blame the Israelis for being concerned.)

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More Economic Bad News 06/06/2008 12:07:56 pm by Dan Krohn

	News on the U.S. economy continues to flow at high speed. There was a warning from FDIC that bank failures should be expected. Today we learned that unemployment rates are rising more rapidly that was expected. And surprise: unemployment data for April was revised, guess which direction. Previously this blog has warned readers to expect such revisions - standard Washington procedure to make things look better than they are. More interestingly, mortgage rates are rising quickly along with other medium to long term interest rates. Even the Fed is hinting at interest rate increases to battle inflation. To readers of this blog, this comes as no surprise. If there is an unexpected aspect, it is that the Fed's hinting at interest rate increases has come sooner than expected. Previously this blog has noted that the Fed is not so powerful as it once was due to the global nature of the economy. Interest rates in Europe are notably higher than in the U.S. and the European bankers are talking increase. Perhaps concerns about money leaving the U.S. and heading to stronger currencies and better rates abroad pushed the Fed to speak sooner than it would have liked. After all, it seems like just yesterday that rates were being lowered dramatically. Readers be warned that there will be all sorts of short term fluctuations which cannot be trusted as clues to long term direction. For example, many were gleeful to see oil prices drop about $10 per barrel - but today they are back up. Where are we going over the next year or two? This blogger believes that the real problems have not yet been addressed or fully felt. The U.S. housing market is still very sick, and rising mortgage rates only make it harder for buyers - whether they are buying from willing sellers or out of foreclosures. Most foreclosures are yet to occur as homeowners have been hanging on through payment increases due to adjustable rate mortgages, by credit card borrowing, and in spite of rising prices for other items (think gasoline and food). It takes no rocket scientist to understand that unemployment will not make things easier for homeowners. The effects of lower house prices, higher interest rates, and higher prices for most everything else have yet to work their way through the economy. There is much difficulty to come. The only bright side is that the falling dollar seems to have helped the manufacturing sector by increasing exports of "cheaper" U.S. goods. But interestingly that does not seem to have prevented layoffs in the manufacturing sector. This blogger truly hopes his pessimism as to the economy is misplaced. But nothing has yet occurred to give cause for celebration.

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