New Domain

Move the site to its own domain today, www.creativedestructionblog.com. On the off-chance that anybody actually has the site bookmarked, please update your bookmarks. ;)

Middle Eastern Economic Developments

The Middle East Media Research Institute (MEMRI) argues that there is a severe lack of understanding by western countries and economists of economic developments in the Middle East, and I think they're right. A number of economic occurences that have come to pass recently give me greater hope for peace in the Middle East than any political or military actions ever have.

In one development, Saudi Ayla Development Company, a subsidiary of the Astra Group, signed a deal with the Aqaba Special Economic Zone Authority (ASEZA) in Jordan to construct tourism projects in southern Joran worth $1.79 billion. A second development similarly involves construction of a real estate project in the West Bank near Ramallah by Saudi Land Holding Company (LHC) and the Palestinian Authority's Palestinian Investment Fund, valued at $200 million.

In separate news, Syria and Iraq been negotiating to revive agreements related to ground, air, rail and sea transportation, reactivating the joint companies for ground transportation and establishing a joint company for rail transportation.

Why do I see these as positive signs? Because economic entanglement is a disinsentive to conflict. Any upheaval in the West Bank or Jordan, for instance, could jeopardize the value of the holdings of the Saudi companies investing in those areas. Thus, it is in the best interest of the investors in those companies to avoid violence and conflict that can lead to upheaval and decrease the value of their investments. After all, Israeli tanks and helicopters knocking down your buildings tends to be bad for the value of your investment. Since the Israelis generally only take such actions in response to attacks by terrorist groups, it will then be in the best interest of the investors in Saudi Arabia and Indonesia to prevent attacks against Israel.

The same holds true for the negotiations between Syria and Iraq. Syrian elements have been major contributors to conflict in Iraq through support of the insurgent groups that are trying to destabilize the country (commonly through attacks on economic infrastructure). If Syria benefits from the economic infrastructure of Iraq, the country's leaders will be inclined to prevent attacks on that infrastructure and will take steps to stop whoever is supporting the insurgents.

This, of course, assumes rational behavior, but that's the nature of economics. On the other hand, I tend to think that rational people avoid violence as a general rule, so maybe none of this applies to the people causing the violence and conflict.

Fed Cuts Rate

So they went and did exactly what everyone expected. I'm neither surprised nor dismayed by this move. A quarter point cut shouldn't throw off too much inflationary pressure, and could help reduce (but won't eliminate) economic slowdown due to the mortgage "crisis."

The next couple of months will be interesting, though. The Fed will have to watch both inflation and economic growth very closely after this move to determine their next move. Anything is possible over the next couple of months. If the economy starts to look like it's going into recession, the Fed will want to cut rates (possibly to Gross' three percent target) to stem the tide. But if prices start to climb, they're going to be under a lot of pressure to raise the rates in order to help cut inflation.

If both of those things happen, there's going to be some interesting debate on what's the best move for the national economic picture... are we more afraid of a recession or inflation? Under Greenspan, the answer was inflation, but I'm not sure what path Bernanke will take.

Federal Funds Rate Below 3 Possible?

Bill Gross of PIMCO thinks that the Federal Funds rate could go to three percent in 2008 as we near or reach recession levels. Today, however, he thinks the Fed will only cut rates by a quarter point because of the "hawks" (as he calls them) who are worried about inflation.

I guess if I were on the Fed, he'd consider me a "hawk," then.

Shortages Lead to Increasing Beer Prices

The growing energy crisis is starting to hit home in still more ways, this time where it really hurts. That's right... beer prices could double.

CNN reports that the price of beer is going up due to a shortage of commodities (such as barley) that go into the production of beer. What does this have to do with energy, you ask?

Farmers in Germany are growing less barley because they've converted their fields to growing crops that are used for biofuels. The same is happening all over the world as farmers shift production to more lucrative crops. In the U.S. many farmers have shifted their fields to corn, a dietary staple to be sure, but much of that corn is now going to produce corn-based ethanol for vehicle fuels, causing increased demand for corn. As students of economics, we know that when demand increases faster than supply, prices go up, and that is happening for consumers of corn and any product that uses corn (or corn-based products such as high fructose corn syrup).

Another CNN report further illustrates this problem for pasta makers in Italy, who are suffering from rising prices of wheat and other ingredients.

Fed Meeting Next Week

The Federal Reserve meeting is next week, and the majority opinion is that they will cut the Federal Funds rate by a quarter point. Some think it could be as much as a half point, but I'd rather see them leave it alone.

Today's economic news shows that factory orders are up and productivity is growing faster than wage growth. Our economy is in pretty good shape, other than the financial services companies that made stupid decisions by lending money to people who couldn't afford to pay it back.

Lowering interest rates at this stage will keep the economy booming along, but perhaps bring more aggressive growth than we can afford, risking increasing inflation. Mostly a rate cut at this point will help mitigate some of the damage to banks and financial institutions, almost like rewarding them for their stupidity.

In short, I'd rather the Fed leave interest rates alone until we see actual signs of an impending (or active) recession.