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Strategies & Market Trends : Currencies and the Global Capital Markets
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To: SofaSpud who wrote (3515)2/4/2003 1:08:14 PM
From: jameswallen  Read Replies (1) of 3536
 
"That could be interpreted as fairly deft handling of the monetary levers..."

Whenever people make arguments in support of Greenspan along the line of "well, he must be doing something right considering how well the economy is doing" I remind them that in the 1973 running of the Belmont Stakes, any and every jockey in the field could have won with Secretariat. Well, the US is the Secretariat of world economies, yet Greenspan managed to loose.

The main point of the article was that while Greenspan was using gold as the monetary compass from 1987 through 1996, the economy continued to perform and expand as it did in the 1980s under Reagan/Volker. But once Greenspan got it into his feeble mind that stock prices were too high and that the highest priority was to bring down stock prices, the stage was set for deflation and the problems which ensued.

..., relative to some of Greenspan's predecessors."

Many, if not the majority of central bankers have been incompetent with respect to managing the money supply. That is why inflation (mostly, but also deflation) have been persistent problems for economies which have paper (fiat) money. This is really sad, because managing the money supply does not require "deft handling of monetary levers." In fact "deft handling" causes more problems than it solves and exacerbates the business cycle.

Milton Friedman several years ago put together a neat graph showing the relationship between economic volatility monetary volatility. For each year from 1869-1981, he plotted the moving standard deviation of the annual rates of change of the money supply and the net national product. The correlation between the two series is .776. This means that erratic changes in the money supply translate into erratic behavior in the economy. Also, steady increases in the money supply lead to steady expansion of the economy

A central bankers' ability to "fine tune" the economy is overrated. In fact, I would say that it is a myth. The most important contribution a central banker can make is to grow the money supply at a constant rate consistent with the long-term ability of the economy to expand. This provides price stability and a consistent expansion of the economy.

Greenspan didn't do this. He decided to worry about a problem that didn't exist ("excessive exuberance in the stock market.") The result was an incompetent monetary policy and the deflation and recession which followed. Greenspan has proven again that an "activist" central banker is dangerous.
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