Fellow Shortrunners,

      Greenspan gave a speech on Friday suggesting that the economy was indeed recovering but that he would cut interest rates further if necessary.  At the same time, depressed petroleum prices are helping to keep overall inflationary pressure low and firms are doing a good job eliminating excess inventory, two key components of a recovery.  His speech remained cautious however, and there are definitely many worries in the economy at present, including falling corporate profits, joblessness and weakening demand.

      However, the real news this week however is international.  Argentina, which has been ripping through presidents and pesos, decided to float its currency.  This means that it is allowing the peso to be traded on the open market, an abandonment of its one-to-one currency peg.  Officials originally placed the currency at a rate of 1.4 pesos to the dollar, but immediately upon open trading it fell to 1.65.  A weaker peso is both good and bad for struggling Argentina.  On the bad side, it erodes savings, confuses consumers, and provokes inflation.  At this moment Argentines aren't even allowed full access to their bank deposits, so they do have plenty to worry about economically.  There aren't even enough pesos in print to meet demand if the banks wanted to meet withdrawal requests.  On the good side though, a weaker peso will be key in allowing Argentina to increase in exports and service debt, something that it has been having major trouble doing with an inflated currency exchange rate such as it experienced with the dollar.

     On another front, the US stands to hear the verdict of a WTO case later in the week, brought on by logistical issues present in the expansive US tax code.  Competing international firms (and consequently their nations) have charged the US and many of its multinational firms with the use of a tax break as a form of an illegal subsidy, which would break existing trade agreements.  The WTO decides many cases so what's significant about this one?  The size for one thing.  The case, which many experts predict will go against the US, is looking to a settlement in the billions of dollars.  This money which would likely come from US firms certainly won't have a positive impact on their bottom line and measured economic performance in the US.

Economic Releases

The data section provides charts and data for the most important economic indicators.

Consumer Credit: $19.8 Billion

• Growing consumer indebtedness continued during the 4th quarter of 2001.  Annualized rates of nearly 15% such as this have not been that uncommon for the US over the past few years, but the new trend that is developing has been a rise in the amount of non-revolving debt has been rising faster than revolving debt.  Non-revolving debt includes longer term debt such as home mortgages and as such we would expect it to increase in a period of lower interest rates. 

Jobless Claims: 395,000

• Jobless claims fell sharply last week to 395,000; a little bit of good news for the rather volatile labor market.  Even better, some would argue, was a fall in continuing claims, which may be a better indicator of business activity beginning to pick back up. 

Import and Export Prices: -0.9%

• US terms of trade rose slightly in December as the price of import goods fell more rapidly than that of exports.  Improved terms of trade are not likely to help Americans sell more abroad, especially as foreign economies continue to weaken.  Falling oil prices have been the major factor in reducing import prices over the past few months, and cheaper oil prices should play a major role in helping the economy recover.

• Wholesale trade remained unchanged during November, which was a good sign for the economy, as increased demand helped to drag down inflated inventory figures, which have been a concern of economists over the past few months.

• The Producer Price Index fell 0.7% during December.  The fall was largely the result of declining petroleum prices, and indeed the contraction in the core CPI was much smaller at 0.1%.  A weak labor market combined with lower interest rates are helping to cut production costs and so far threats of inflation have yet to appear.

• Bouncing back from last weeks collapse, the ECRI WLI rose to 120.7 last week.  The increase was likely affected by the heavy improvements in jobless claims and the move appears less significant because last weeks figure has been revised upwards.

Classroom

    Check out the new classroom section and watch for it to grow and change in the coming weeks as we implement drastic reconstruction to the section.  Comment and suggestions as to the best method for this kind of a section would be extremely helpful.    

Articles / Book Reviews

   Newest Articles:

Recipe for Disaster: The Rise and Fall of Currency Boards in Argentina
- Richard Carew

Balance East and West
- Contributed by Kautilya AKD

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