The Blog

Good News and Bad News

A mixed bag as all eyes turn to the Fed.

11:00 PM, Dec 10, 2007 • By IRWIN M. STELZER
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FOR SOME REASON, people, and not only in America, think that their fate--the prices of their homes, what they will have to pay when using their credit cards, the growth rate of the economy--is determined by the central bankers whose periodic decisions are awaited with baited breath by the 24-hour business channels. It isn't, at least not entirely. While all eyes today are focused on Ben Bernanke and his colleagues on the Federal Reserve Board's monetary policy committee as they weigh the need to lower rates to lubricate credit markets against the dangers of triggering inflation, the fate of the world's economies is being determined in the wealth-producing part of America, which surely excludes Washington; Abu Dhabi; and Beijing. Any quarter-point cut in interest rates that the Fed initiates might ease credit markets, but America's workers and entrepreneurs, a bunch of cartelists, and Chinese currency manipulators in the end have as much or more to say about the welfare of the average American as any interest-rate setter.


In America's real economy the news is a lot better than you are hearing from the whining investment bankers who fear that their billions in bonuses might drop off a few percentage points. The jobs market surprised analysts with its strength, creating lots of new jobs despite lay-offs in the construction and financial services sectors. Factory orders rose a bit last month. Rapidly rising labor productivity seems to be keeping labor costs down, offsetting some of the inflationary effect of the falling dollar and high oil and food prices. That gives the Fed's monetary policy committee room to cut interest rates later today--unless it is made skittish by the inflationary threat of the rising prices of food and energy.


The news from Abu Dhabi, where OPEC held its latest meeting, was not quite as encouraging as that coming from the American economy. The cartel of oil producing countries, which controls about 40 percent of world output, decided not to increase production from its current level of 27 million barrels per day, despite pleas from President Bush and leaders of consuming countries. Instead, the cartelists will sit on their spare capacity, which has risen from about one millions barrels per day to about four million barrels. OPEC is concerned that a slow-down in the United States will so reduce demand for oil that the recent modest price drop will accelerate if its members increase world supply, and that the dollars they are getting for their crude oil just aren't going as far as they once did in the world's fleshpots and arms bazaars, or in the pay packets of the foreign workers that do the work in the economies of most OPEC members. It seems that these workers are hearing grumbling from the wives and relatives to whom they send most of their pay, which is in dollars: the dollars don't buy as much of the local currencies of the home countries as they once did. That could lead to strikes and the sort of unrest that Arab governments always fear could spin out of control.


The good news coming out of the Abu Dhabi meeting was that the oil producers decided not to stop pegging their currencies to the dollar--only Kuwait, which owes its very existence to the United States, has taken that step. Had the other petrocountries done so, their demand for dollars would have declined, putting more downward pressure on the American currency. That would have has three consequences.


First, U.S. exporters would cheer, as the weaker dollar expands their overseas markets by making their goods cheaper in foreign countries. Indeed, exports are already growing at an annual rate of about 15 percent as foreigners troop to America to denude our shelves of jeans, iPods, and computers, and foreign buyers substitute Boeing's new models for the Airbus.


Second, if the dollar falls faster the Fed will get nervous, and more reluctant to continue cutting interest rates. Imported goods might become more expensive--although that has not happened to any significant extent yet--allowing American manufacturers to raise prices, pushing up inflation.