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Good News: Bush
moves to stop his own hemorrhaging, FEMA’s Brown removed from “role in Katrina
efforts”, a half-firing and half-admittance of wrong appointments. Alarm growing on
storm’s cost for agriculture: fall harvest concerns http://www.nytimes.com/2005/09/08/business/08farm.html? Pt of New Orleans
set to reopen Friday http://www.alertnet.org/thenews/newsdesk/N07166197.htm Bush suspends Bacon-Davis Act: federal
contract wages for Katrina reconstruction http://www.washingtonpost.com/wp-dyn/content/article/2005/09/08/AR2005090802037.html Willing workers but with the wrong job skills http://www.nytimes.com/2005/09/09/business/09jobs.html Cancellations, refunds and closures: businesses implement new disaster policies http://www.latimes.com/travel/la-tr-log11sep11,0,1057514.story?coll=la-home-travel Fannie, Freddie give breaks on payments http://www.washingtonpost.com/wp-dyn/content/article/2005/09/08/AR2005090802016.html Gas inventories at a five-year low http://www.nytimes.com/2005/09/09/business/09oil.html Louisiana, Mississippi state debt under review http://www.msnbc.msn.com/id/9267273/ Tourist industry losing $50 Million/Day http://www.msnbc.msn.com/id/9268660/ Katrina, an Economic Tipping Point By Steven Pearlstein, Business
Columnist, Washington Post, Friday, September 9, 2005; D01 Allow me to dissent
from the sanguine view of the economic impact of Hurricane Katrina embraced by
the Wall Street herd, policymakers and most forecasters. By any measure, Katrina is a shock to
an economic ecosystem already seriously out of balance. It has reduced national
wealth by several hundred billion dollars, displaced hundreds of thousands of
citizens, aggravated bloated budget and trade deficits and reduced the political
odds for permanent tax cuts on capital. And with so much still unknown, the
risks, as they say at the Fed, are on the downside. As always happens with
disasters and financial crises, the early forecasts are based on tweaks to the
standard forecasting models. These macro-analyses are invariably arithmetic and
linear in nature (as in "a $100 billion loss is the equivalent of only a
0.6 percent drop in the S&P 500"). They assume rational behavior by
consumers, investors and executives, and timely and effective intervention by
the Fed. But economic crises
are by nature unpredictable. They are about the interplay of micro-events that have macroeconomic
consequences.
They involve irrational, herdlike behavior and tipping points in which the
effects are nonlinear and geometric. And the Fed can rarely prevent them. Pre-Katrina, the
unpleasant scenarios all ended in the same place: stagflation, that '70s-era
combo of inflation and stagnant economic growth, two conditions that were not
supposed to coexist. Post-Katrina, the stagflation odds have greatly increased. First, consider energy
prices, which were up sharply before the hurricane and are likely to settle
even higher because of storm-related damage. Today's crisis is gasoline; next
week it could be jet fuel; and you can be fairly sure that a heating oil and
natural gas spike will follow in the winter. Higher fuel prices
have begun to show up in taxicab surcharges, freight rates and airline tickets.
Now that pricing power has been restored in much of the economy, prices across
a range of manufactured goods are likely to jump, as well. And with barge
traffic backed up, the extra cost of getting this fall's harvest to market
translates into higher food costs. Sharp price increases
are also likely in the cost of construction materials and workers as the
massive rebuilding begins on the Gulf Coast. If you thought it difficult or expensive to get a roofing
contractor or mason last month, you ain't seen nothing yet. All of these increases
might be relatively benign as long as they don't result in higher wages. But
with labor markets tightening, productivity slowing and health benefit costs
rising at double-digit rates, inflationary wage and benefits increases are a
real possibility for the first time in years. That's the
"flation" part. Now let's consider the "stag." Start with the lost output from an
estimated 400,000 workers whose jobs or companies no longer exist. Add the drag
on other consumption as households and firms pay higher prices for energy,
transport, food and construction. The auto industry,
already on fumes, now warns of further troubles as higher gas prices drive down
sales of gas guzzlers. Insurers can only guess the magnitude of the hit they
will take. Airlines will take it on the chin once again. And farm income is
almost sure to decline. Some of that, of
course, will be offset by federal spending for relief and reconstruction. But
the fiscal stimulus could prove insufficient if many consumers respond to
higher prices and pictures of destruction by saving more and consuming less. Even before Katrina,
U.S. economic growth was overly dependent on debt-driven consumption and the
housing bubble that was so much a part of it. Now the hurricane could prove to
be the long-expected shock that finally forces the economy onto a slower but
more sustainable path. The transition would be a rocky one for households and
businesses, but rockier still for financial and real estate markets that have
overpriced assets and underpriced risk. And that is where the greatest danger
lies. The financial
system is often described as the "lifeblood" of the economy, and once
infected, it creates a self-reinforcing dynamic in which caution begets
caution, weakness begets weakness and selling begets selling. So far, markets of all sorts have blithely
shrugged off Katrina. Given the magnitude of what has happened, and the
uncertainty still ahead, that may be the most worrisome sign of all. http://www.washingtonpost.com/wp-dyn/content/article/2005/09/08/AR2005090802077.html |
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