A Peek Into 2007

Years ago I wrote about deflation and how I felt the cheap imports consumers were bringing in from China (via stores like Wal-Mart) were actually bringing prices for goods down. It used to be that just small items such as knickknacks were made in Asia. Today, it’s everything from small items to big ticket items like appliances, electronics and automobiles.

Why I am I bringing this up again?

So many U.S. Federal Reserve board members have come out this month stating they are concerned about inflation. Frankly, I believe they are barking up the wrong tree. they should be more concerned about the deflation tree than they are about the inflation tree.

I’ve written extensively about how the housing boom in the U.S. is over and how prices are either now flat or actually starting to move lower. That’s deflationary. You’ve read my comments on the general stock market and how I believe the bear market in stocks that started in the year 2000 continues in full force today. That’s deflationary.

Please, don’t get me wrong. I’m not insinuating that inflation will grip America like it did Japan in the early 1990s and throw us into a depression. On the contrary, I’m saying the U.S. Federal Reserve board fixated with the core consumer price index (a measure that’s likely out of date with modern times) is too narrowly focused on inflation.

But I don’t sit on the Fed board, so I’m not making the decisions. The futures market now tells us that traders are sure the Fed will raise interest rates in the U.S. later this month: That will be 17 interest rate hikes in 24 months. If the Fed is worried about inflation and wants to cool the economy, 17 interest rate hikes in a row will definitely kill growth.

Remember, changes in interest rates often take six to 12 months to filter through the economy. Hence, you won’t really see the ramifications of what the Fed is accomplishing in raising interest rates so aggressively until late this year. into the spring of 2007. I have a feeling 2007 will be an ugly year for financially over- extended consumers and for the U.S. economy in general.