Economic Commentary

The Plot Thickens

A massive world-wide recession leads to a world-wide banking crisis, a depressed real estate market and soaring unemployment. We have a massive off-shore oil spill that hits our economy at the worst time, adding to the pain. Political turmoil sends oil prices surging just as we are gathering steam in our recovery. Could things get any more interesting? Well, let’s add a devastating earthquake and tsunami in the world’s third largest economy, Japan. And so the plot thickens. Now let’s make it thicker. As bad as the crisis in Japan is, nothing is more ominous than the warnings of nuclear power catastrophe. Not only because of the danger to Japanese citizens, but because of the long-term implications this disaster brings to the world. Just as off-shore drilling for oil is going to be a big part of helping the world cope with growing energy demand, so is nuclear power. For some reason, we seem to have short memories with regard to previous nuclear catastrophes from Russia to the U.S. If off-shore drilling is deemed too risky and nuclear power also deemed too risky, then what happens in the long-run with regard to energy prices?

Fortunately, the markets don’t always think long-term. They are more likely to react to short-term influences. In the short-run, prices for oil and commodities dropped temporarily because of the devastation in Japan. What has happened is that the Japanese crisis succeeded in getting the Middle Eastern/African crisis off the front page the better part of a week. The markets now have had another crisis to occupy their minds and these changes in direction are a reflection of this new plot. Even rates have drifted downward as the stock market has been under pressure and has been extremely volatile. While this is good news with regard to consumer loan rates, especially those who have been waiting to purchase or refinance a home, the reason for the wildly volatile markets’ movements certainly can’t be seen as good news. In the meanwhile, the Federal Reserve Board’s meeting was relegated to the back page as the Fed Governors are on board with keeping rates low and continuing asset purchases. The Fed statement emphasized that the economy’s recovery is on firmer footing and though commodity prices have risen and spooked the markets, the fundamentals do not support surging prices. In other words, it is the good news which is being buried. Let us hope that the winds of change get behind the recovery and help it along. As we know, the plot and the winds seem to shift every week.

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