Defining Deflation: Debunking the Greenspan Myth, Part 2
By Don Luskin
Special to TheStreet.com
Originally posted at 8:49 AM ET 3/13/01 on RealMoney.com
This is Part 2 of Don Luskin's commentary on deflation and the Greenspan myth. Be sure to read Part 1.
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Aiming at a Different Target
Do you see the subtle but profoundly subversive suggestion here? It is that the Fed should give up targeting interest rates. It shouldn't target the money supply as pre-Greenspan regimes did, either. Instead, the Fed should target commodity prices. Interest rates and the money supply are nothing but instruments to be used as needed to hit the target. They are not themselves the target.
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Angell has now brought to wide public consciousness arguments that have been made for several years now by supply-siders Jude Wanniski of Polyconomics and David Gitlitz of DG Capital Advisers (an occasional contributor to TheStreet.com and MetaMarkets.com). Most economists consider these ideas as something between heresy and idiocy. But, thank goodness, the market is smarter than most economists -- and it is clearly taking these ideas very seriously.
The market is especially ready to absorb these ideas now because of the news background. Yesterday, the Japanese stock market broke a 16-year low, and its central bankers and finance ministers publicly declared the Japanese economy to be a disaster area. And the reason? You guessed it: deflation.
An article that ran on the front page of The New York Times Monday -- the same day as Angell's op-ed piece -- put the concept of deflation into the major-media headlines for the first time: "Japan Is Shackled by Deflation, Blocking Its Hope for Recovery."
Reporter Stephanie Strom got it exactly right when she described deflation as "a rare but devastating drop in the prices of goods and services that is starting to feed on itself. Deflation is chipping away at asset values, increasing credit risks, pinching wages and salaries, and preventing the economy from generating any sustained growth after a decade of stagnation."
Putting It All Together
What does this have to do with Wayne Angell, monetary policy and Monday's stock-market crash? Simple. Japan's central bank, the Bank of Japan, has tried for years to cure the deflation by targeting interest rates. They've been pretty much at zero for most of the past four years. And the situation there just gets worse and worse.
Phyllis Diller used to say, "Honey, you can twist those dials all you want and the picture ain't going to get any better." That's what Wayne Angell has learned from Japan's deflationary catastrophe and the attempt to fix it with interest-rate targets. Even zero isn't low enough.
This pretty much scotches the naive myth that somehow "Alan Greenspan will take care of it -- he always does." Everyone knows that Greenspan will lower rates by 50 basis points March 20 -- and nobody cares. The tools that Greenspan knows how to use don't work. His interest-rate-targeting mechanism will be about as effective as "Whip Deflation Now" buttons.
The Greenspan myth is one that investors aren't giving up happily. That's what Monday was all about. |
