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Leadership Institute for Directors Farm Credit “ An Economy Full of Conundrums ” November 13, 2005 Hyatt Regency Savannah, Georgia Gerald J. Swanson, Ph.D. Professor of Economics Thomas R. Brown Chair in Economics Education Eller College of Management University of Arizona
November 13, 2005
Gerald J. Swanson, Ph.D.
Professor of Economics
Thomas R. Brown Chair in Economics Education
Eller College of Management
University of Arizona
All Economic News is Bad”
There are Signs that Growth is Slowing!
1st Quarter 3.8%
2nd Quarter 3.3%
3rd Quarter 3.0%
First half 2005 Productivity Gains 1.8%
2003 – 2004 Productivity Average 5%
TRADE DEFICIT – Continues to set RECORDS
First Three Months 2005 Record $174 billon deficit
February Record deficit for one month -$61 billion
First half 2005 - $346billion
2005 Estimate over-$700 billion deficit – A Record!
This is a Major Imbalance –
It is Not Sustainable!
Who Should We Blame?
Oil Prices Up 106% from December 2003
December- 2003 Oil $31 per barrel
Oil Prices Up 255% from November 2001
November 2001 OIL $18/barrel
Why hadn’t oil derailed the economy prior to the hurricanes?
Oil Has Been the Key Trigger for Every Serious Bout of Inflation Since WW II
This is Not Just an Oil-Shock
Price is Being Driven by Demand
At 9% Growth China Doubles Its Use of Resources Every 8 Years – Including Oil
China is Currently the Second Largest Consumer of Oil in the World!
The Main Variable
Worried, But They Still Keep Shopping
Spending Home Equity
Record Consumer Debt Levels
Consumer Confidence is Down
Real Wages Declining
Higher Gasoline and Heating Oil Prices Cutting into Budgets
Business Spending Showing Signs of Life
Inventories are Starting to Increase
Business Confidence is Weakening
Tax Revenues are Up 14% over last year
Pre Katrina and Rita Spending
Guns and Butter Squeeze Yet to Come!
Projected Deficit for 2005 Now Below 2004
Deficit Projection $333billion Fiscal 2005
Record Deficit 2004 - $413 billion
Projection - Fiscal 2006 – A Record Deficit
Why haven’t large government deficits pushed up interest rates?
How Much of Today’s Federal Government Budget
is Really Discretionary?
Interest on the Debt?
Percent of Budget = 82%
Virtually Running All Other Functions of Our Federal Government on Borrowed Money!
First Year Outgo Exceeds Income for:
Social Security - 2017
Disability Insurance - 2008
MEDICARE – it Happened in the Summer of 2004
UNFUNDED LIABILITIES YET TO BE ADDRESSED
This is the Big Topic of the Day
Dollar has Gained Some Strength
Weaker Dollar has Helped Exports
Weaker Dollar Increases Costs of Imports
Increases Risk of Inflation
Flooding World with Dollars
Accepting Our IOU’s to Buy Their Goods
1982 – +12%
1990 – +7.4%
1. Interest Rate Differentials Among
2. Widening Trade Deficit
3. Foreign Central Banks Diversifying
Foreign Currency Reserves
5. Asia’s Desire to Keep Exporting
6. Stability of European Union
By Far Larger Than Any Other Financial Market
Current Federal Funds Rate Target – 3.75%
Up 275% form June 2003
Alan Wants to Make Rates Neutral
4% to 4.5%
Prior to June 2003 We Went Four Years Without an Interest Rate Increase
Alan Greenspan Re Stock Market Bubble
Alan’s Recent comments:
“Housing Market is a Little Too Exuberant for Its Own Good.”
“ There are Lots of Local bubbles”
Low interest rates lead to upward adjustments in asset prices--housing
What is Fueling the Bubble?
Low Interest Rates
Low by Historical Standards
What Do All These Exotic Loans Have in Common?
They Allow Homeowners to Buy a More Expensive Home Than They Could Have Qualified for With a Traditional Loan
Housing Prices Fall
Borrowers With Interest Only Loans
Could End Up Owing More Than the Value of
Questions of the Day
Is Monetary Policy Too Tight?
Short Term Interest Rates Up
Is Monetary Policy Too Loose?
Long Term Interest Rates Remain Low
Higher Oil Prices Pose a Quandary for the Federal Reserve
Higher Oil Prices Act as a Tax on Consumer Spending – Slows the Economy
Higher Oil Prices Boost Other Prices –
Which Should Alan Fight?
Higher Interest Rates
Could Hurt Home Sales
Could Hurt Car sales
Could Hurt Retail Sales
Could Really Hurt Federal Budget
Could Hurt Bond Market
Could Hurt Financial Institutions
Who Will Replace Alan Greenspan?
One of the Most Important Appointments of Bush’s Presidency
Beware of the Sleeping Dragon!
Think China When You Think About Our Country’s Future
China and India are the Future of the Global
Combined Population Over 2 Billion!
United States, as Well as Germany and Japan, Remain A Very Big Part of the Present
Hitting a Bit of a “SOFT PATCH”
Still Moving in a Positive Direction
SO FAR – We are Weathering the Storm
The Risks Out There are Real!
We are Nervous Because of the Large Amount of Uncertainty
So Many events Beyond Our Control
We Must be Proactive In Correcting Our Imbalances!
We Must Continue to Work to Regain Our Fiscal Sanity!
Good News For Now
Our Economy is Moving Forward Despite Major Natural Disasters.
What Can You do?
Just Don’t Stop Shopping!