For some reason, people — and not only in America — think that their economic fate (i.e., the prices of their homes, what interest rate they will have to pay when using their credit cards, the growth rate of the economy) is determined by central bankers. It isn’t, at least not entirely.
While all eyes are focused on Ben Bernanke and his colleagues on the Federal Reserve Board’s monetary policy committee as they meet today to weigh the demand to lower interest rates to lubricate credit markets against the dangers of triggering inflation, the fates of the U.S. and world economies were 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 in the end, America’s workers and entrepreneurs, a bunch of cartelists, and Chinese currency manipulators will have as much — or more — to say about our economic well-being as the Fed.
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 job market continues to surprise analysts with its strength, and 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.
The news from Abu Dhabi, where the Organization of Petroleum Exporting Countries 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 million barrels per day to about four million barrels. OPEC is concerned that a slowdown in the United States will so reduce demand for oil that the recent modest price drop will accelerate if its members increase world supply. They’re worried that the dollars they are getting for their crude oil just won’t go as far as they once did in the world’s fleshpots and arms bazaars, and when remitted by foreign workers to their wives and relatives around the world.
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 pleased U.S. exporters, already benefiting mightily from the cheap dollar, and shopkeepers and hoteliers overrun with foreigners here on a spending spree.
But it would not have produced smiles at the Fed, since the higher prices of imported goods would liberate U.S. manufacturers from some competition and enable them to raise prices. Not good news for inflation fighters who do not want to raise interest rates just now, when the credit markets are seized up. That would resurrect the ghost of President Carter’s economic policy — stagflation. Even the Saudis, with their huge investments here, are not keen to see that happen.
Which brings us to Beijing, which has more bad news for us: China will not succumb to the entreaties of Treasury Secretary Henry Paulson or the U.S. Congress, even when joined in by French President Nikolas Sarkozy and EU trade commissioner Peter Mandelson — or anyone else, for that matter — and allow its currency to appreciate to anything like the level the market might set.
Therefore, China will in effect continue to subsidize exports, making it difficult for our manufacturers to compete. But they can at least take solace from the spurt in exports triggered by the falling dollar.
There we have it: good news from the American economy, bad news for consumers from Abu Dhabi, and bad news for Beijing’s competitors. But later today, good news for those who are pressing the Fed’s monetary policy committee to give the bankers want they want: a rate cut to help ease credit markets.
Examiner columnist Irwin Stelzer is a senior fellow and director of The Hudson’s Institute’s Center for Economic Policy
