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To: PaulM who wrote (37859)	7/27/1999 9:05:00 AM
From: Rarebird	Respond to of 116957

Storm Clouds On America's Economic Horizon: The New Australian Storm clouds on America's economic horizon By Gerard Jackson No. 127, 26 July - 1 Aug. 1999 Even before Greenspan raised rates I stated that it is "patently obvious" that "future rate rises are a distinct possibility". It did not require a spark of genius to see why. Greenspan well knows, as do most economic commentators, that consumer spending is driving the boom and not investment. Unfortunately this does not worry most commentators, steeped as they are in Keynesianism, even though Greenspan clearly sees the dangers but not the economic horizon. Interestingly enough Bankers Trust said: "Such a strong, broad based rise in personal spending so late in a business cycle is the hallmark of a boom mentality." Not quite. It is the symptom of a boom that has reached the final stage. At this point it becomes a question of whether the boom will be allowed to burn itself out or whether the Fed will take the initiative and apply the monetary brakes. I think Greenspan has already signalled the Fed's intentions. It is abundantly clear that Greenspan's timid 0.25 per cent rate rise was grossly inadequate. Nevertheless the belief that more rates rises are on the way is keeping the market on tenterhooks. Once again it is a question of how many rises will there be? The answer, as always, is as many as it takes to do the job. This brings us back to Greenspan's "imbalances". Despite evidence to the contrary commentators are still arguing that there is little or no inflationary presence. This is a ridiculous view given the Fed's loose monetary policy which in turn fuelled America's consumer boom. So-called consumer demand has not only misdirected domestic production it has also misdirected foreign production. By starting and prolonging the consumer boom the Fed caused the trade deficit to explode sending imports to a record high. This is why David Jones, an economist with Aubrey G. Lanston & Co., could say that: ". . . strong demand in our economy is spilling over into higher imports.'' Consumer spending has been so strong it has driven the trade deficit even higher, raising it by more than 33 per cent above last year's record high. Rather than being a sign of a strong economy this import penetration is a symptom of a weak monetary policy. Greenspan is enough of a monetarist to recognise this fact. What is rarely recognised, however, is that the Fed's monetary expansion has also caused foreign producers to redirect production to meet US consumer demand. When this demand is eventually curtailed these foreign producers will find they have been deceived into making malinvestments. Therefore the longer the Fed persists in funding America's consumer splurge the more foreign malinvestments will be created. In other words, the Fed's monetary policy has been distorting the pattern of world trade, creating more of Greenspan's "imbalances". As expected, the flow of imports has largely consisted of consumer goods and related products, e.g., cars and car parts. This has naturally led many to complain that imports are responsible for the loss of 500,000 manufacturing jobs in the last year. A plausible but fallacious argument. It should be clear that any jobs that were lost because of the inflation-created trade deficit should be laid at the doors of the Fed and not foreign exporters. More importantly, if the deficit argument on manufacturing jobs is correct then the majority of these job losses should have occurred in those stages of production closest to the consumer. But most of these job losses occurred in the higher stages of production, those furthest from the point of consumption. This is precisely what we should expect at the final stage of a boom, the stage that Bankers Trust referred to. The markets have every reason to be nervous. It seems that Greenspan is finally moving to bring the boom to an end. newaus.com.au