Thursday, August 10, 2006

9/11 changed everything, what's changed now

Sometime, maybe in a day or two, I have to write about the Mayor and machinations.

So, the unimpeachable British have stopped a terrorist plot. Did the market drop because it just got a lot harder to know what Congress will look like next January? My personal guess was that the Bush administration was going to pull Osama out of hiding, but maybe they are saving that for ’08. As an aside, which would you rather have, evil Machiavellian geniuses running the country, or clueless incompetents ruining it? Of course, the utterly ruthless Soviets could not stop the Afghan resistance, so maybe it is as hard as conservatives say to fight in the mountains.

But anyway, now should we react to the news from British Air (so to speak)? The administration now can say “we told you so”. How to handle it if you are, say, Rick Santorum? I dunno, since I dunno what Casey thinks of Iraq?

OK, I just looked (at Casey’s website) and it is a wishy-washy “we need an exit strategy” statement. In general, though, the republicans are going to position themselves as the national security party, and the Democrats will thrash in response. Actually, Ned Lamont’s victory suddenly gives the democrats a problem. Iraq, of course, should have (almost) nothing to do with terrorism. But that is the sort of complication anxious people want to avoid. Much easier to listen to the person who talks about handling it all, about fighting people who must be terrorists in Iraq, so they don’t get on airplanes in America with bottles of explosive shampoo.

A different aside, anyone who has ever seen a James Bond movie immediately accepts the premise of explosive shampoo.

So the republicans just got a security issue. Someone clever might ask why the NSA, tracking international phone calls, money transfers and purchases of English shampoo, decided to let the English take the credit? Since it is unthinkable that they might not know (see above: genius versus incompetent). Then the question is whether the Fed stopped raising interest rates soon enough to take the economy out of the mid-term equation.

It surely is no accident that Milton Friedman talks about expectations, since he is a monetarist. Fiscal policy generally has an immediate or at least defined effect. Sure, sometimes we are surprised by increased tax revenue after tax cuts, but mostly if you raise taxes people are grumpy and if you spend money on bridges or schools construction workers or teachers are happy and spend. By comparison, monetary policy is pretty murky. I mean, it starts simple, reduce interest rates and companies borrow more because the money is cheaper. The borrowed money is spent and the economy gets a lift. But if the economy gets a lift, does that mean the value of stocks goes up? Does the price? How does that relate to the rate of return for stocks, ie, their effect interest rate? If the Fed reduces interest rates for borrowing from the Fed, is that increasing the money supply? How does that effect the value of money? If the economy is “heating up”, does that mean the increased spending is causing inflation, or is it the value of money thing, or does it have to do with the value/rate of return of stocks (which is also increases the money supply if the price of stocks goes up, because now stockholders have more money?). I think I understand that if the Fed raises rates, the amount of money available for borrowing goes down, and businesses refrain from starting as many new projects, affecting consumer spending and slowing economic growth (for at least a couple of reasons).

And then you have to ask how much of this is predicted by markets and businesses, and how much do they react to when it happens? And how long that reaction takes? And whether businesses react only to increases or decreases in the fed interest rate, or whether they react to a stop in a pattern of increases or decreases, or to a “pause”.

I feel better about sounding stupid above because I know a lot of smart people study the Fed and only manage to ask my questions in a smarter fashion. As I said, I know expectations play a role, and we don’t know when or even whether the economy will react to the Fed’s pause. Is it “factored in”? It seems unlikely the economy is going to come roaring back in November, but if it can avoid tanking…

Well, I want to say something about Israel and Hezbollah, but I will pause here …

No comments: