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To: pater tenebrarum who wrote (83722)	1/19/2000 3:39:00 PM
From: clochard	Read Replies (1) \| Respond to of 86076

nationalpost.com It was a pity that Wall Street paid so little attention on Friday to U.S. Federal Reserve chairman Alan Greenspan's talk on Thursday night to the Economic Club of New York. To my mind, he fired two shots across Wall Street's speeding bow, both reflecting the dangers of our American cousins continuing to use stock-market gains to maintain spending at a pace their economy simply cannot accommodate. One is the possibility of the U.S. economy booming itself into recession. The other is that the rise in bond rates that has spooked the markets from time to time reflects the resulting rise in the cost of capital rather than the more generally attributed inflationary concerns. If that is so, and the trend continues, then that, too, might be naught for the comfort of U.S. stock prices. Mr. Greenspan's first shot across the bow was that, while increases in wages in excess of productivity growth may not be inflationary if they are offset by decreases in other costs or declining profit margins, a protracted decline in margins is also a recipe for recession. "Thus, if our objective of maximum sustainable economic growth is to be achieved, the pool of available workers cannot shrink indefinitely." Mr. Greenspan then pointedly quoted his old friend and eminent economist Herb Stein saying, if a trend cannot continue, it will stop. Sure, he began by acknowledging all the beneficial effects of technological advances that the bulls keep lauding to the skies. But then he devoted himself to the challenge of the "wealth effect." The huge rise in equity prices has, "tended to foster increases in aggregate demand beyond the increases in supply," he said. It seems there is a whole range of estimates of how much added economic growth the rise in equity prices has engendered, but they do centre around one percentage point -- or a full quarter of the four-percentage-point annual growth rate of U.S. gross domestic product since late 1996. To divert from Mr. Greenspan's theme, I find that a rather frightening proportion. Whatever the illusions to the contrary, North Americans cannot prosper by higher stock prices alone. As Mr. Greenspan concluded, the additional domestic demand generated by this wealth effect can be met only with increased imports (net of exports) or by new domestic output as a result of employing more workers.