Financial turbulance

Quite a week inn the international financial markets. And perhaps another interesting week to come.

It is quite extraordinary that the Fed pumped $62 billion into the financial system in two days: $24 billion on Thursday, and when that did not work, another $19 billion Friday morning, $16 billion a few hours later and then another $3 billion Friday afternoon. The Fed bolstered their action with words: They are ready to do what it takes to preserve the markets.

Not since the September 11 attacks on New York have we seen this kind of action. Think about the situation then, how we were feeling, and compare it to now. Do you hear strain in the voices?

Your writer is a dilettante when it comes to economics and finance. But I believe that the pros were glad this crisis came late in the week and there was weekend, a “time-out,” for everyone to to catch their breath. Now the focus is on next week, when a slew of financial data will be revealed.

My guess is that inflation numbers will come in worse than expected, though those are part of a rigged game. At some point, high oil prices have to be reflected in transportation costs. I know how much a tea pot costs at my local hardware store.

At some point, the fact that washers and dryers are made more cheaply in Korea will not be a moderator on prices here in Oregon. The loss of American jobs will not be adequate to offset higher prices, the new balance of production will be come the benchmark.

I think consumer confidence numbers will come in worse than forecast. At some point, we are going to realize that the value of our homes can go down as well as up. That the new washer and dryer is more than I can afford and I need to find a used unit. And by the way, I need to save for retirement, because social security is not secure.

The subprime situation is being given more credit than it deserves: like blaming the trigger for the noise of a gun. If, after all this liquidity has been pumped into the markets, things are still snarky, it will be the beginning of a purge. We have been living beyond our means. Time to pay the bill. At some point, retail sales should fall.

I think the Fed will be limited in what they can do, pinned between inflation (cost driven versus demand driven, therefore less amenable to easier credit, more in the control of offshore factors) and a slowdown driven by real world experience (higher prices, fewer assets, fewer jobs). Stagflation like we had in 1980.

Gonna be an interesting week.