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Monday, February 06, 2006

Dallas Fed President Fisher Dons the Foam Finger: We're #1!!!

Dallas Fed president Richard Fisher speaking in London, though at the end it might be better described as lecturing, says economic conditions look strong strong in the growth rim, the megastate, and the uberstate. Although growth looks to be a bit more chilly up north, there is every reason to believe the U.S. will continue to fuel the world economy, a situation that will persist so long as foreign leaders fail to achieve open and flexible markets:

The United States: Still the Growth Engine for the World Economy?, by Richard W. Fisher, Dallas Fed President:  ...My kind hosts, who had no idea that this event would follow ... the meager growth estimate reported for last year’s fourth quarter, have asked me to address the question: Is the United States still the growth engine for the world? The answer is yes. ... The American economy has been on an upswing for more than four years. ... I would not be surprised if GDP were revised upward when we take a more definitive look at the fourth quarter. ... We have weathered hurricanes’ fury and record-high energy prices while continuing to grow and keep inflation under control. ...

This is especially true in what I call the “growth rim”—an arc of population centers with favorable demographics that begins in Virginia, runs down the southeastern seaboard through Georgia to Florida, then through the megastate of Texas and on to the uberstate of California and up to Seattle. I use “mega” and “uber” to describe the two largest states for a reason: to illustrate the depth and breadth of our economy. In dollar terms, Texas produces 20 percent more than India, and California produces roughly the same output as China. To the extent there is weakness in the U.S. economy, it is in the Northeast and North Central states.

Netting all this out, the consensus of most economic forecasters is that growth in the first quarter will rebound to a rate well above 4 percent. To understand what this kind of growth means, we need ... to “do the math.” The United States produces $12.6 trillion a year in goods and services. Be conservative ... and assume that in 2006 we grow at last year’s preliminary rate of 3.5 percent. The math tells us we would add $440 billion in incremental activity—in a single year.

That is a big number. What we add in new economic activity in a given year exceeds the entire output of all but 15 other countries. Every year, we create the economic equivalent of a Sweden—or two Irelands or three Argentinas. ... Of course, our growth is driven by consumption, a significant portion of which is fed by imports, which totaled $2 trillion last year. Again, do the math: Our annual import volume ... exceeds the GDP of all but four other countries—Japan, Germany, Britain and France.

So, yes, the United States is the growth engine for the world economy. And it is important that it remain so because no other country appears poised to pick up the torch if the U.S. economy stumbles or tires. Are there reasons to worry it might do so? In fashionable circles and at various “chat shows” like Davos, you certainly hear many.

Of immediate concern is the potential bursting of the so-called housing bubble. ... Again, it is important to do the math. Currently, 80 percent of U.S. homeowners have fixed-rate mortgages. Just one in five has a variable-rate mortgage. ... It is true that homeowners with variable-rate loans borrow larger amounts. It is also true that they have higher incomes. ...

In recent years, the analytically nettlesome Interest-Only—or IO—mortgages have become a significant percentage of housing loans in some markets. ...  Many of these mortgages, however, have long periods during which the interest rate and IO period are locked up. ... many houses will be sold or refinanced before the amortization period ever kicks in. Given this, I will let you draw your own conclusions about whether the housing market’s financial dynamics will strain the U.S. economy as interest rates rise in response to Federal Reserve tightening. ...

The other preoccupation is the U.S. current account deficit, a subject second only in popularity to the ongoing saga of Brad Pitt and Angelina Jolie. America’s large trade deficits have been discussed for so long by so many eminent analysts that I have little to add—except to remind you that it takes two to tango. Those urging the United States to rein in its spending should be equally full-throated in prodding countries with excess savings and trade surpluses to create conditions for growing their domestic demand.

If they fail to do so, and the U.S. suddenly becomes virtuous on its own, the global economy would sink into a deep funk. So if there is a ready substitute for the United States as the consumer of first and last resort for many developing economies, I would like someone to tell me which country, or group of countries, might fill the bill. ...

The key to the American economy’s success in recent years ... has been a unique combining of money and brains to enhance productivity ... New technology fed the productivity surge. The microprocessor led to a host of productivity-enhancing tools ... The Information Age technologies were available in nearly all countries, but few reaped the same productivity gains as the United States. ... The key to wringing more from the new technologies lies in the American economy’s adaptability. ... We have not saddled the private sector with regulations that interfere with hiring and firing or dictate outmoded methods of production. ...

I would like to think that America’s greatest asset is the wisdom and steady hand of its central bank. But truth be told, wise and temperate monetary policy is a necessary but insufficient condition for America’s success. Our greatest asset is our inherent flexibility ... As long as the Federal Reserve does its job of holding inflation at bay, and as long as our political leaders resist protectionism and other forms of interference..., we will remain a productive economic machine. ...

It is up to the continent’s political leaders to create conditions that liberate the private sector to reignite the combined mass of Europe’s economies as an engine of growth while the ECB ensures that business remains undistracted by inflation. Until then, the task of being the world’s economic engine falls to the United States.

    Posted by on Monday, February 6, 2006 at 05:46 PM in Economics, Fed Speeches, Monetary Policy | Permalink  TrackBack (0)  Comments (7)

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