In today's volatile and confusing stock markets everyone is searching for a guru who knows which way the market is going and when. Ask any economist and he will have an answer. Ask 2 economists and you will have 2 answers. Ask 3 economists - ad infinitum.

At the Federal Reserve Board we have Mr. Greenspan and all his economist Governors talking at each other about how to best micromanage the U. S. economy. Notice I said talking at and not talking with. Each one of them thinks he has the Holy Grail and knows exactly what to do. It has not occurred to any of them that doing nothing might be the best for everyone.

On April 27 there was an important economic statistic released. The Employment Cost Index gain was 1.4% which was more than expected by the investment community. This was considered to be negative for the stock market because the Fed is considered to be "anti-prosperity". This number shows more people are being paid more money. Mr. G. thinks this is inflationary. It is a theory he has dreamed up. Going back in history there is no actual correlation showing wage increases cause inflation. This is one of his own pet theories.

When you consider the fact that worker productivity has increased 4 times more than wages have risen it means more to the bottom line profits of corporations. The logic here is very simple. The companies are making more money even though they are paying higher wages and therefore do not have to raise prices on their merchandise. Maybe this is too simple for an economist. If I could make up a really complex formula I might be able to get his attention. Probably not.

This is just one statistic and I know Mr. G. and his money puppets look at hundreds of statistics, but please do not lay inflation on the justifiable wage increases of the workingman.

The base cause of inflation is too much money chasing too few goods. Today we have so much so much competition (goods) it is extremely difficult for almost any company to raise prices. Since profits are increasing 4 times faster than wages most companies will shave profits before they raise prices to their consumers because they do not want to lose their market share.

Large corporations usually have debt. In almost all cases this was money borrowed for plant and equipment. When interest rates rise there is nowhere to offset this cost as there is with wage productivity. This is a cost that ultimately must be passed along. As long as the company has room at the bottom line it can do so. Right now money is expensive, not tight. The Fed wants to slow the economy and it can do it this way because companies will cut back their borrowing for expansion. The economy will slow, but if they keep on doing it they stop everything and that means recession. Their thinking is backwards.

If you want advice on the stock market do not ask an economist.

Copyright 2005


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