Jim, from the Milwaukee Journal Sentinel, deciphering Greenspan:
A short guide to Greenspanspeak
By Avrum D. Lank
of the Journal Sentinel
Last Updated: July 25, 1999
Words are always important, but some people's words are more important than others.
Take Alan Greenspan.
When the chairman of the Federal Reserve speaks, markets move.
That is more than a tribute to Greenspan's powerful position. It is homage to his precision of thought and the way he has been able to harness the language to express those thoughts.
Over the years, Greenspan watchers have learned to pay attention to how the chairman uses several words and phrases.
This tendency was on particular display last Thursday, when Greenspan gave the first part of his semi-annual report to Congress. It will come into play again Wednesday, when he delivers the second part.
As a service to readers trying to cut through the verbal thicket the chairman can erect, here is a "Condensed Dictionary of Greenspanese," with examples taken entirely from his testimony last week:
Bubble
An unjustified increase in asset prices, in particular stock prices. When Greenspan uses this word, markets are reminded that he has thought since December 1996 that stock prices are too high. That is when he first coined the phrase "irrational exuberance."
Cyclical retrenchment
A downturn in the business cycle.
Disruptions
A bad thing. When there are disruptions in a market, events are moving too fast or too slow for orderly change. The Fed acted to lower interest rates last year when Russia's default caused disruptions in the bond market.
Easing
Lowering interest rates. To get lower rates, the Fed puts more money into circulation, thus easing its hold on dollars.
Euphoric
A red-flag word when Greenspan uses it as he did last week. "The danger is that in these circumstances, an unwarranted, perhaps euphoric, extension of recent developments can drive equity prices to levels that are unsupportable," he said. (See "bubble.")
Imbalance
Another bad thing. When forces are imbalanced, they could push the economy off course unless the Fed takes action. Thus the markets paid particular attention when Greenspan told Congress "the Federal Reserve will have to act promptly and forcefully so as to preclude imbalances."
Inevitable adjustments
What happens when imbalances get out of hand. (See, for example, "cyclical retrenchment.")
Growing faster than potential
, as in "real GDP is growing faster than potential": In the Fed's world, the economy can only grow so fast without triggering imbalances, usually a loss of "price stability" (see below). When something is growing faster than potential, inevitable adjustments are ahead.
Maximum sustainable economic growth
The economy's potential. While economists have long argued over how much this is, the Fed in the past has believed it to be from 2.5% to 3.5% annually. In recent years, the economy has been able to grow faster, causing the Fed to re-examine its assumptions.
Not necessarily unsustainable
A classic Greenspan conditional double negative. It means something may happen, but he has extreme doubts about it. Greenspan's world in composed of constantly opposing forces looking for balance. Conditional double negatives are a good way for him to communicate the shades of gray that world view produces.
Overheat
, as in "the economy could overheat": Another red-flag word. It means things are growing too quickly for Greenspan's taste and could lead to a loss of "price stability." (See below).
Policy action
A change in interest rates.
Policy stance
The Fed's decision on interest rates.
Price stability
No inflation, the Fed's goal.
Pre-empt
Take action before it becomes necessary. Greenspan has become a great fan of pre-emptive action. A giant cottage industry of Fed watchers has developed looking for the obscure signs Greenspan sees that require pre-emptive action.
Tightening
Raising interest rates. (See "easing.")
Unsustainable
, as in "demand in the United States was growing at an unsustainable pace": Another red-flag word. When things are unsustainable, they might overheat.
Wealth effect
The sense of well-being created when people have unrealized capital gains in the stock market. The wealth effect causes people to spend more and save less. That can lead to unsustainable growth in demand.
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