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To: lorne who wrote (52148)	5/1/2000 8:43:00 AM
From: lorne	Respond to of 116761

Spin can't hide truth for the Fed Tuesday 25 April 2000 Andrew Smithers' weekly column After its record fall, on bad inflation news, Wall Street bounced back. The news didn't change, but it was reinterpreted. Many spinners probably believed this masterpiece of spin, which has become that branch of the art of lying which consists of fooling yourself without quite deceiving others. Wall Street is a massive bubble. The evidence is in the economy as well as the stock market. Bubbles drive down savings and drive up investment. The gap between savings and investment is inflationary. Filling the gap, by importing savings from abroad, has become more difficult as the world economy picks up. So US inflation has been picking up as the world recovers. Faced with the bad news, Wall Street's spin doctors have been rising to the challenge. After first denying that inflation was rising, they then announced that the rise was unimportant. This was done by claiming that 'core inflation' was what mattered. This excluded the costs of such apparently inessential activities as eating, transport and heating. But the latest inflation figures are bad, even at the 'core'. The market's shock was severe, but the spin doctors explained it all away. They made several points. The first was that it was foolish to worry about short-term economic data. The next set of figures could well show that things were really much better. This, of course, is true, though it is equally true that they may show things to be just as bad or even worse. The second was that the rise in core inflation was only the result of the rise in oil prices working its way through the economy. This is spin at its most remarkable. We are first told not to worry because oil prices will fall, without any knock-on effects and then not to worry about the knock-on effects. The debate depends on ignoring a basic principle of economics, which is that the cost of capital has to equal its return. Assets, in general, are not worth any more or any less if the return on them is expected to rise or fall. In a competitive economy, assets are worth what they cost to produce. Whether or not the so-called 'new economy' will allow the US to grow faster in future has nothing to do with the value of Wall Street. So long as shares remain overvalued, the economy will grow too fast and inflation will continue to pick up. To slow the economy the US Federal Reserve has to get the stock market down. The only way it can do that is by raising interest rates. There has been lots of comment about the Fed raising rates, but the spin merchants ignore the point that inflation has been rising even faster. Over the past year real short-term interest rates have fallen. It seems unlikely that the Fed can continue to ignore the fact that inflation has risen, even in an election year. smithers.co.uk