Fed Pianalto Takes The Bridge From Conundrum To "Creative Destruction"

Wednesday, October 05, 2005


Fed Cleveland president Sandra Pianalto had the honour to tell the auditorium of "Greater Mahoning Valley Growth Awards, Youngstown/Warren Regional Chamber Youngstown, Ohio" about the future course of the economy. It seems "creative destruction" will climb the charts of Fedspeak, surpassing "conundrum" if the trend continues. From her speech:
"Deep currents of change have swept over our industrial landscape. Economists call this process "creative destruction." It is a natural, and indeed a necessary, part of our economic development, as the familiar industries of the past are replaced by the innovative technologies that will shape our future.
As relentless as the ebb and flow of tides, economic change will direct resources to wherever they are most productive. Capital and creative energy - and eventually jobs - will flow toward the new goods, services, and processes that will deliver greater value than the old ones.
Of course, creative destruction can be an uncomfortable process. But it is the absence of this healthy ebb and flow that should concern us. The common perception is that Ohio has had a higher-than-normal share of plant closings. In fact, Ohio's rate of plant closings has been about 25 percent less than the nation's. Unfortunately, Ohio's rate of plant openings is also 20 percent less than the nation's. The net result is that our state's economy is less dynamic than it should be to sustain healthy growth."

Not that anybody can say Fed members did not warn often enough of what is about to come. Inflation is rearing its head and it won't go away as energy prices will stay high. Is your tank for the cold season topped up yet?
The Fed has now made it clear in an increasing frequency that problems lie ahead. What will hit first? Unemployment or one of the three major deficits appear to be the next market-shaking issues.
At this point I want to remind readers that Joseph Schumpeter, who created the Fed's new chart topping term of "creative destruction" first introduced Austria to triple-digit inflation during his short reign as Austrian finance minister and then went bankrupt with his own private bank in the feverish bull market of the 1920's. By 1930 he had sworn off complete liberalism and even promoted protectionist measures.
The Dow has broken downside my forecasted short term trading range of 10,350/600 inside my primary trend expectation that says lower equity prices for the rest of the year. Interest rates will begin to eat into the flexible debt segment of consumers and house buyers, all signs of slower consumption. Whatever debt one has, better to think about a swap into a fixed rate loan/mortgage. It ain't coming any cheaper soon.
In the bond market yesterday's minimal inversion from 2 to 3 years maturity was corrected with all bonds longer than 2 years posting small gains.

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