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Economy becoming a good news-bad news joke

By
June 19, 2009

Trying economic times have prompted many Americans to search the financial horizon for positive signs we may be pulling out of the recession. But sometimes what looks like good news can also be bad news. This week’s release of housing starts was just that, good news bearing potential hidden bad news between the lines. In May, housing starts jumped 17 percent above the year before, exceeding expectations in a housing market that seems to have bottomed out and which may soon start to produce rising home prices.

That’s the good news. The looming bad news is, if this keeps up, inflation is on the way. The two most important indicators of inflation have recently skyrocketed. We’ve all been watching in despair as oil prices climb back toward last summer’s ridiculous highs. Ballooning oil prices are the first of several factors that merit greater attention in today’s seesawing economy where deflation and inflation are oddly simultaneous worries.

Only six months ago, the price of a gallon of gasoline fell to near $1.60, according to the AAA’s Fuel Gauge Report. Just since last month, however, the AAA reported pump prices zoomed skyward for a record 49 days in a row, and regular gas is now selling for more than a dollar above the lows of late last year.

Similarly, rates on 30-year fixed mortgages have been rising. Factoring in oil and interest rate rises, it’s not hard to envision looming inflation.

If the economy heats up too quickly, price cuts for food, real estate and consumer goods that have fallen during the recession due to weak consumer demand will fizzle. Cuts in the cost of consumer goods could be replaced by soaring inflation. The Obama administration has intelligently created tax breaks to lure first time homebuyers into the housing market. But one reason new buyers are ready to jump in is low home prices. If inflation pushes up prices, those buyers will once again be priced out and the administration’s efforts will have failed.

The Federal Reserve is trying to keep down otherwise soaring interest rates by buying Treasuries and keeping the benchmark interest rate close to zero. Nonetheless fixed home mortgage rates jumped more than a point in one week last month. We are experiencing an economy with a bizarre admixture of elements that could push us over either side of the fence toward deflation or inflation. If job creation lags, we could wallow in the depths of recession for months more to come. If the economy tips toward the side of overheating, we face inflation threats.

Conservatives are right to worry that the Obama stimulus package approved by the Democratic Congress spends way too much money on pork. This will seem especially true if the economy takes off on its own, and starts creating market-based jobs.

Liberals are correct to shoot back that our current economic mess was created by the prior Republican administration. But the Bush administration’s financial failures don’t give free rein to his successor to overspend in response.

President Obama won’t do it, but he should tap the brakes on government job creation for a while, to see if the economy pulls itself out of recession. With housing starts and consumer prices starting to rise, after months (in the case of consumer prices) and years (in the case of housing starts) of going down, the economy may pick itself up, without the push of inflationary government spending.

Obama has strong public support. But that can evaporate quickly. And it will if inflation becomes the dominant feature of the U.S. economy.

(Bonnie Erbe is a TV host and columnist. E-mail bonnieerbe(at)CompuServe.com.)