RATES ARE TOO HIGH, NOT TOO LOW:

Bubble Bubble, Is There Trouble? (Arnold Kling, 6/29/04, Tech Central Station)

Many economists are skeptical that real interest rates will remain low. It appears to us that investors are ignoring the potential for large increases in borrowing by the U.S. government as deficits accumulate. For example, Rudolph Penner describes some alarming scenarios, including one in which our debt-to-GDP ratio reaches 100 percent in twenty years and keeps climbing thereafter.

Nonsense--Japan's ratio is 140% and its interest rates are lower. That's what happens in a deflationary cycle like the one we're in.

IT'S THE 1870,s, NOT THE 1970's:
Playing it cool: Is Alan Greenspan fretting enough about inflation? (The Economist, 6/24/04)

Inflation-worriers, including The Economist, have pointed out that the economy is growing apace, inflation is rising and yet short-term interest rates, even after June 30th, will be negative in real terms. In the year to March output grew at its fastest pace for 20 years. Consumer prices rose by 3.1% in the year to May, up from 2.1% a year ago. Admittedly, much of that rise is due to higher oil prices, but even core consumer prices—which exclude the volatile categories of food and fuel—are edging up, from 1.1% in the year to January to 1.7% in the year to May. And people think inflation is on the rise. According to a survey by the University of Michigan, Americans' expectation of inflation over the coming year is now 3.3%, up from 2% last May.

More optimistic analysts note that inflation is still extremely low by historical standards. They point out that much of the recent acceleration may be due to temporary factors; and argue that price pressure is unlikely to damage an economy which still has a lot of excess capacity and where productivity is growing strongly.

According to conventional benchmarks, America's economy still has plenty of slack. The jobless rate at 5.6% is well above levels consistent with stable inflation and traditional measures of industrial capacity use are below historical averages. There are also signs that the jump in inflation at the beginning of the year is already abating: May's monthly core consumer prices rose by 0.2%, compared with 0.4% in March and 0.3% in April.

Indeed, given the rapidly dropping fuel prices mightn't the price index be negative for June?

Posted by Orrin Judd at June 30, 2004 9:36 AM