My assesment of the economy

With an update below.

I note that oil imports are approaching their 2001 import levels, by volume, when oil supplies first became constrained. Oil prices are now at $75/barrel, a 10% annual inflation from the $30/barrel of 2001. Hence, we now have some wiggle room between nominal and real oil prices, oil supplies are much less tight. Retail inflation (core) is about 0%, so we have an equilibrium. The economy has lost output capability, about $150 billion a year due to excessive oil prices we will have to endure until efficiency or time erase the consequence. At 3.5% a year, over ten years, we are potentially as risk for about $3.0 trillion total over the next ten years.

If the Fed normalizes the yield curve in mid 2010, then, with its constant six month delay, we should see real rates form a normalized yield curve about now. Hence the fed is in unavoidable bubble mode, unless it can pull an unexpected rate hike. Theory says it cannot pull the unexpected, so here is a test of theory.

For an update, I am going to link to Gail the Actuary who laid out the calculationist argument using the oil constraint and oil volatility in a post at Oil Drum.