To all, trick or treat? perhaps some tough love! : great article gold-eagle.com Herein lies the crux. The cost suppressant effects of the
Internet have been a sideshow. What has happened, in
archetypal fashion, is that the market rate of interest (set by
the whole credit pyramid of central banks, financial
institutions and hedge funds) has clearly deviated from the
natural rate of interest. The cost of carry on all these
investments may be positive at the moment, but they will
prove loss-making at worst, sub-optimal at best, when the
credit expansion runs its course, as inevitably it must.
Greenspan himself fails to see that what he calls the capital
investment 'boom' ('there is no better word') sits ill with
consumer demand which he admits has accelerated so
much that it is above even his 'productivity-enhanced growth
of potential'. Without the rapid expansion of money which the
Fed has entrained, increased consumption would be
squeezing out investment, not fostering it. Only foregoing
consumption of present goods in favour of future ones can
provide a solid foundation for lasting capital and wealth
creation. But then, Greenspan does not seem to realize this,
subject as he is to the old Keynesian shibboleth that savings
are distasteful, or so we must infer if we are to make any
sense out his proposition that 'unless the propensity to
spend out of real incomes falls, consumption and investment
growth will rise'
Of course, the Chairman is confident he will have to avoid
doing the difficult thing to arrest any of his famous
'imbalances'. The market is, allegedly, already
short-circuiting itself as real long-term rates rise. This
benign, automatic stabilizer is coming into effect as the result
of an 'increasing demand for financing capital goods relative
to domestic savings'. Naturally, no-one is borrowing for
anything less worthy are they? Like the $305 billion of debt
substitution for corporate equity to massage returns in the
last four quarters, or the issuance of 24% more auto-loan
backed bonds in H1 1999 over the year earlier period, or the
10% more credit card receivables floated, or the 30% more
MBS and 23.4% more long-term Agencies served up to fuel
the real estate land grab?
Greenspan continually emphasis the role of the new
technologies in improving information gathering and
forecasting, promoting efficiencies and hence the potential
for the economy to grow sustainably faster. What goes
unsaid is that the greatest information void, the most
portentous distortion of the all-important price mechanism,
the most damaging obfuscation of market-given consumer
preferences all still persist as they did seventy years ago ?
that is to say that the Fed is debasing the currency,
artificially depressing interest rates and pumping air into the
credit balloon and so is presiding over an unprecedented
raft of malinvestments. This cannot end well, as even
Cleveland Fed President Jerry Jordan admitted in a recent
speech in which he reflected on the failed experiment of fiat
currencies.
Let's see what Lou Gerstner has to say when his
re-engineered, more leveraged, corporate Titanic threads its
way through the icy seas of monetary disruption sometime in
the near future.
Sean Corrigan
2 November 1999 |
