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Subject:  Re: Deflation? Date:  11/29/1999  4:21 PM
Author:  JimLuckett Number:  1590 of 86414

Gary Schilling has done some good work in housing economics, but I think his leap into macro forecasting and futurist pronouncements is unfortunate.

Let me refute his points in order:

1) Productivity enhancements and other positive supply factors result in deflation only if the Fed fails to increase aggregate demand sufficiently to take full advantage of them. The Fed leadership has stated that price stability is its goal, not deflation, while its actions have shown it willing to err slightly on the side of inflation. The Fed responds to politicians. Politicians, and the public, like growth and low interest rates. Therefore, I think the Fed will supply enough stimulus to take full advantage of whatever acceleration in productivity growth and other positive supply shocks come our way.

2) Most people don't want to work at home. Some do, and some will be forced to, I suppose, but if you believe the premise of galloping productivity growth and a benign inflation environment, then you have to also expect a very good economy, which has to be good for office and hotel demand.

3) "Consumers will ease off their borrowing-and-spending binge" -- no evidence of this starting to happen and no evidence is offered by Schilling in this column as to why we should expect this. If it were to happen, I would expect the Fed to offset it with less monetary restraint. This would lower interest rates which would lower the international exchange value of the dollar, stimulating net exports. Lower interest rates would also stimulate investment spending.

4) Building costs will fall? I don't see it. The construction industry will not benefit much from the internet. Trees don't grow in cyberspace. From where I sit, in Boston, construction costs have burst through $100 psf for housing and show no signs of abating. Factory built housing is NOT half as expensive for a comparable finished product. Having built my own house with factory-built modules, and having cost out various developments both ways (factory vs stick) its a marginal difference.

5) Baby-boomers have their houses so housing demand will fall. -- If that's true, why is housing demand rising???????? As he says, the boomers have their houses. But housing demand is still rising!

Bottom-line: Dr. Schilling forgets that the Fed plays last in the game of macroeconomics. Throw in all the price depressing, demand depressing factors you like, the Fed has the power to offset them all, as long as it is not worried about INFLATION.

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