U.S. Economy

Washington Post business columnist Steven Pearlstein was online to discuss the latest Fed decision on interest rates. In a column today , he writes that in the scheme of things, it won't matter much.

A transcript follows.

About Pearlstein : Steven Pearlstein writes about business and the economy for The Washington Post. His journalism career includes editing roles at The Post and Inc. magazine. He was founding publisher and editor of The Boston Observer, a monthly journal of liberal opinion. He got his start in journalism reporting for two New Hampshire newspapers -- the Concord Monitor and the Foster's Daily Democrat. Pearlstein has also worked as a television news reporter and a congressional staffer.

His column archive is online here .

____________________

Austin TX: Regular reader on vacation; not James Galbraith

The question that has to come to anyone who's at least my age is "are we repeating the 70's"? That decade had also experienced a stock market bubble pop, increased military spending, and high oil prices.

Another factor that doesn't get enough mention is the entry of the baby boomers into the work force, which pushed up the price of homes and other necessities of household formation while simultaneously pushing up unemployment despite good job growth.

Currently, the oldest boomers are still only 60 (i.e. mostly working) while their echo generation (born starting 1982) are entering the workforce en masse. If your scenario plays out as you expect, should we expect to see lots of forced/encouraged retirements and unemployable 20-somethings for a few years?

Steven Pearlstein: I think the 70s analogy is very apt. I hadn't thought of the demographic factors, although I should have, since I had a difficult time getting a job when I got out of college in 1973 ($89 a week at Foster's Daily Democrat in Dover New Hampshire). I think you're on to something

_______________________

Dunn Loring, Va.: Your colleague, Jonathan Weisman, wrote in a chat on July 28th that he had covered finance and business for five years prior to politics and thus was able to say that both a recession and inflation resulting in stagflation was nearly impossible. Based on average job growth during the last three months (113,000), rising inflation and your column today it appears he may be dead wrong. Or are you wrong and he's right? Maybe a debate can be scheduled.

washingtonpost.com: The July 28 discussion transcript is online here .

Chantilly, Va.: "Ain't gonna happen?" Judging from this morning's economic figures, a recession/stagflation era could well be in the offing by late October. That, I would argue, would be the perfect scenario for a blowout.

Jonathan Weisman: Sorry, but before I went over to the political staff, I spent five years covering the economy. I've heard those stagflation predictions so many times they make my head spin. I also heard $60 a barrel oil was a sure recession, than $70, now $80. I guess after so many false alarms, I'll believe it when I see it.

Steven Pearlstein: I love Jonathan and think he's the best when it comes to covering political issues having to do with the economy. On this one, however, he's way too comfortable with the conventional wisdom. Stagflation is how this game plays out-- it is how the system naturally corrects itself after years of global macroimbalances, of which the key symptoms are the huge U.S. current account deficit and the big trade deficit with China and other Asian nations that manipulate their currency. Until 2004, by the way, that included Japan.

_______________________

Haymarket, VA: Does the pause in interest rate increases cause a problem for the Treasury to entice foreign dollars to finance the out of control Federal budget deficit? Or will the Treasury have to pay whatever it takes versus the rest of the world to entice these investors?

Steven Pearlstein: Yesterday afternoon, when I last checked, the 10 year T bond effective yield was 4.9 percent, 350 basis points below the federal funds rate. That could mean one of two things. It could mean investors actually see the economy slowing so much that inflation will disappear as a problem and the economy will be so stagnant that there won't be much demand for credit. Or it could mean that there is simply so much money sloshing around the globe, or looking for safety, that it has the effect of pushing down interest rates. I tend to see the latter as the main factor, not some market consensus about inflation and the economy. And, as I wrote today, it is in part the result of China's currency policy. By keeping our interest rates low, they stimulate our economy to keep buying their stuff, which keeps their trade surplus high, which forces them to buy more Treasury bills, and the self-reinforcing circle begins all over again.

The federal budget deficit contributes to the overall current account deficit -- not one for one, but substantially. As to what the Fed pause does regarding financing the government deficit, I'm not sure it matters at this point.

_______________________

Silver Spring, MD: Alright Steve... I am completely eliminating my usual sarcasm from this question, if you could do the same and refrain from johnny-one-note comments this week, I'd appreciate it. In all seriousness, I TOTALLY agree with your column this week. You point out MANY of the very bad effects on our economy that unrestrained free trade agreements have caused - i.e. - Chinese currency manipulation, encouraged by way of unenforced WTO provisions, is causing slow growth and inflation here. It all makes PERFECT sense to me. PLEASE, please, help me to understand how in the world this column is not directly contradictory to your previous commentaries about free global trade being a good thing for us Americans?? I am honestly just baffled right now.

washingtonpost.com: Today's Column: The Fed Pause That Refreshes? Hardly.

Steven Pearlstein: The problem isn't free trade -- its free trade within the context of a manipulated currency system, i.e. China's peg to the dollar. THAT is a big part of the problem

_______________________

Mary Esther, FL: Would you elaborate on the future of the US dollar? Seems it is going downhill and nothing is in process now to stop the decline. Would this favor our trade and economy? Thanks and be well.

Steven Pearlstein: Why the dollar has remained as high as it has, in the face of such massive trade deficits, is something of a mystery. The answer apparently is that so many foreigners want to invest their money in dollar denominated assets that it is overriding what would be the natural decline of the dollar. Investment flows, in other words, have become more powerful than trade flows, which is a new phenomenon. Most people think it only a matter of time before the dollar declines against the currencies it can decline against. The only other alternative is for the U.S. economy to essentially sell itself so that it is largely owned by foreigners.

_______________________

Rockville, MD: Interesting column, I've always wondered if these currency "interventions" actually had a negative effect on the US economy.

I mean, simplistically, a trade imbalance should naturally correct itself because those dollars being sent out should eventually return because foreign companies need to spend those dollars somehow. The easiest way to spend dollars is to buy American goods, causing inflation, the dollar falls in value and then Americans buy less foreign goods. The economy recovers and the cycle starts over.

But when national banks buy up dollars to prop up currency levels, this cycle never has a chance to get started. Thus you end up needing a "crash" to jump-start the cycle.

Steven Pearlstein: Precicsely.

_______________________

Here's a question fer ya: I've got about 25% of unsold current stock options vested, for this year. I could have (should have) sold them all 2 months ago when they were peaked. my company is very strong but the economy is going south...

Should I just sell them during the next window (4 weeks away) at a less-than-peak price (but still not bad) or should I just forget I have them with an eye to selling them either next year or when I'm old and grey. (Next year is more likely than old and grey.) In other words - is it going to get much worse in the short term than better...

I won't tell you the stocks, I'm looking more generically.

Steven Pearlstein: I can't imagine the next year is going to be a good one for the stock market generally.

_______________________

Shawnee, Kansas: Is the over indulgence in the consumption patter of American consumers a cause for the growing trade deficit?

Steven Pearlstein: There is a judgmentalism imbedded in your question that I'd be careful about. Let's assume, for the sake of argument, that the original sin here is the unusually low interest rates, which cause households to refinance, take out equity, and spend the equity to enjoy a higher standard of living, day to day -- taking vacations, buying stuff, paying private school tuitions, whatever. In an economic sense, having too many Americans do that results in current account deficit because we are living beyond our means, using cheap credit. But to the households involved, it doesn't seem like overindulgence. It seems like they have a windfall in their rising house price and why not enjoy some of it? What they don't realize is that the house price rise is something of a mirage, the result of low interest rates and excess liquidity and investment capital in the world, which is caused in part by unsustainable monetary and currency policies. Andd when those policies adjust, the price of the house will decline, and only then will their "overindulgence" become apparent to them in financial terms. At that point, they will have to pull in their belt and lower their day to day living style to comport with their normal flow of income, rather than augmenting that standard with money borrowed from their equity in their house.

_______________________

Washington, DC: When you say "higher inflation", how much higher?

Steven Pearlstein: Ah, you think I'm gonna take that bait? No way. Let's just say more than 3 percent.

_______________________

Arlington, VA: Mr. Pearlstein,

I had though inflation occurred when the fed printed more paper money than could be backed by real assets, although I happily admit that I am no economist. I thought your recent article made a lot of sense in its predictions, although I would like your comment regarding on what basis you judge commodity prices to be at "ridiculous" levels. Is it just based on "historical" levels ?

Also, maybe its just me, but the reported rate of inflation just doesn't seem to jive with what I am seeing with my regular expenses. Obviously energy costs have multiplied, but at the grocery store I also experience prices going up and up. Are these things considered when the reported rates are calculated ?

BTW, what do you think of I-Bonds as a savings instrument ?

Steven Pearlstein: There is actually a roaring debate going on about which inflation measure to use. It gets pretty technical, having to do with the way cost of housing is calculated. But I think it is fair to say that the rising price/value of homes hasn't been fully reflected in the standard cost of living measures, and so inflation that many Americcans experience has been under-reported.

_______________________

Arlington, VA: Steven Pearlstein: "Why the dollar has remained as high as it has, in the face of such massive trade deficits, is something of a mystery"

Does the fact that oil is globally traded in dollars have any impact on this? Iraq and more recently Iran have announced intent to create a bourse in Euros and I think i read that Russia may trade oil in Rubles. Would any of that have any effect on the dollar ?

Steven Pearlstein: Yes, and I'm so glad you pointed this out. Recycling of petrodollars back into dollar-denominated assets is yet another reason the dollar has remained as strong as it has.

_______________________

Washington, D.C.: Dear Mr. Pearlstein,

A most insightful and decidedly sobering column as always!! A natural inclination of debtors is to embrace inflation, which cheapens the cost of repaying the debt. We as a country owe a ton of debt to foreigners. So when stagflation hits, wouldn't our political leaders want to allow the dollar to slide (current strong dollar rhetoric notwithstanding)? This would cause interest rates to rise and hurt future borrowers but it would also ease the burden on existing debtors and stablize a new price standard around the inflated asset prices we have. Rather than our homes dropping value from their inflated valuations, everything else would simply inflate. $5 a gal for gas; $7 a gal for milk etc. We know that we will have to consume less and work a lot more in future years to balance things out. But my concern is that our economy has been so distorted by our consumption-happy production-poor ways that we wouldn't be able to produce the kinds of goods and services that foreigners want. A few Boeing aircraft and GE turbines aside, it seems most of our economy these days is devoted to providing consumption pleasure for ourselves. Everything else we import. What would we offer to the rest of the world? Natural resource assets? Intellectual capital?

Steven Pearlstein: You got the first part right, certainly. Those foreigners who have been so anxious to lend us money may begin to think twice when they start getting repaid in devalued dollars. And that's why this thing can turn disorderly rather quickly. To counteract that kind of rush to the exits, the Federal Reserve will have to raise interest rates to make sure the dollar doesn't fall too far too fast. But doing so will only decelerate economic growth even more. More stag, in other words. Meanwhile,the falling dollar will accelerate inflation because so much of what we consume is imported. More flation.

_______________________

Washington, DC: re: the trade deficit.

Don't GDP figures take the trade deficit into account?

If so, do we pay too much attention to the trade deficit (which is not to say it is good)?

Is an economy with a 1% growth rate but a trade surplus preferable to an economy with a 3% growth rate but a trade deficit?

Steven Pearlstein: A good question. You have to think both in terms of current income and wealth, and which you value more. If you are runnning a 3 percent GDP growth economy, but having to borrow the equivalent of 2 percent of GDP in order to artifically stimulate demand to run the system at that level, you are boosting current inccome at the expense of your longterm wealth. Long run, probably not a good idea.

_______________________

Arlington, VA: Rockville says: "the dollar falls in value and then Americans buy less foreign goods"

Uh, what alternative is there to foreign goods ? I mean, many staples of daily life (like shoes, clothes etc) are not produced domestically.

Steven Pearlstein: That's true. Which is why getting the currency values right won't totally solve the trade deficit problem. But over longer periods of time, I think the adjustment will take place, either because we will generate domestic supplies for some of the things we now import, or because we will be able to export more of other goods and services than we do now.

_______________________

Washington, DC: Comment and question: The nub of the international side of your argument was spelled out close to fifty years ago by Fritz Machlup in his paper "The Real Transfer Process." (See the Princeton International Finance Series.) There's nothing new about the United States' having to pay the piper.

For decades the world have benefited, on balance, from the United States' penchant for consumption, but I think any reasonable mind would agree that our nation's economic conduct has lately deteriorated into the world's greatest Ponzi scheme. What event or series of events will force the United States to abandon the Ponzi scheme -- to pay the piper -- when, paradoxically, its in the interest of much of the rest to the world to keep the Ponzi scheme in play?

Steven Pearlstein: The rest of the world has the same short run-long run tradeoffs. Consider China. But keeping its currency undervalued, it is making it possible to generate more employment and more GDP growth, but only at the expense of short-changing companies and workers in China who could, and should, be getting more value for what they are producing. I suppose it is a form of income sharing, imposed sub rosa by the government. At some point, however, I would imagine the current producers will be unwilling to continue that arrangement, and start to invest elsewhere where they can enjoy the full value of what they produce.

Additionally, we are reaching that point with China where it holds so many dollar denominated assets, (Treasury bonds), that it has another strong reason for not seeing the value of the dollar drop against the yuan, since that will mean the value of its dollar assets also falls.But failing to let the yuan appreciate only means they have to build up more and more dollar assets. At some point, they will realize its better for them over the long run to bite the bullet. But that process often takes much longer than you'd think.

_______________________

Great Falls, VA: To what extent would the trade deficit, especially with China, be corrected if we could enforce intellectual property laws on a global scale? I suspect this wouldn't fully counter the imbalance, but would it make dent?

Steven Pearlstein: Not much. If they had to pay for that stuff, they wouldn't consume nearly as much.

_______________________

DC: Where do you see mortgage loan rates going from here? I've actually been hearing that the uncertainty that remains about inflation will drive them up. Is this true?

Steven Pearlstein: Its hard to imagine rates will be going down much farther from this point. But then again, I never would have predicted they'd be as low as they are right now.

_______________________

DC: Do you think GM and Ford are going to make it through the next slow down? It seems like they've backed themselves into the corner, and I'm not sure they'll be able to emerge unscathed this time. In the nineties, they were saved by the SUV - a car that didn't require substantial investment in new technology but met the needs of American families. Households now appear to be demanding more energy efficient cars - though I'm not sure this is entirely due to rising gas prices (its probably more of a combination of rising prices in many sectors - health care, housing, etc - that are causing Americans to be more economical). GM and Ford appear woefully unprepared to compete in the emerging market for hybrid cars. Companies like Toyota have spent decades investing in the new technologies driving these cars. Will they be able to catch up in time to save themselves?

Steven Pearlstein: Hard to say. But I would suspect they survive. Only question is whether they may have to go through some sort of financial reorganization in which employees, pensioners,lenders and shareholders take a haircut of some sort.

_______________________

Fredericksburg, Va.: It seems energy inflation is quickly moving into the territory of causing irreversible economic harm on vulnerable families. I am lucky since I'm retired and don't have to spend money on commuting. However, I stopped at a local convenience store to fill-up the other day and could not help but notice the agitation of people. I don't know how to put it into economic terms, but it feels like something major is about to happen. When I look at the growth of bankruptcies and foreclosures over the past five years, I can't believe the numbers. Comments made by a couple of investment managers suggest that the dollar may be valueless before Christmas in the international market. Do you feel that we could see a replay of the 1930's?

Steven Pearlstein: No, I don't see a 1930s scenario. I don't even see, necessarily, a big crash or prolonged recession. I see a period of sub-par growth and bothersome inflation. Sort of like a low-grade infection that won't go away.

_______________________

Steven Pearlstein: That's it for today folks. See you next week.

_______________________

Editor's Note: washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions. washingtonpost.com is not responsible for any content posted by third parties.