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To: Richnorth who wrote (57409)	8/18/2000 11:56:33 AM
From: Alex	Respond to of 116777

Greenback is America's strength ... and weakness Asia Pacific, By Peter Hartcher Most people are under the misapprehension that the US Secret Service exists to protect the personal security of the President. Not so. It exists to protect something even more important to the country's well-being - its currency. That's why the service is based in the Treasury Department. For every one Clint Eastwood jogging next to the presidential limousine poised to yell "gun", there are nine Secret Service operatives tracking greenbacks and poised to yell "counterfeit". Why does the US dollar matter so much? The dollar is to today's world what gold was to yesterday's - the preferred store of value worldwide and the anchor of the global monetary system. And the strength of the dollar in the past decade turns out to be crucial to the long, uninterrupted episode of American prosperity we now witness. A new research paper by the Federal Reserve Bank of New York finds that the diamond-hard greenback has been the greatest single reason that American inflation has been so quiescent for so long. This has explosive implications. The chairman of the board of the Federal Reserve and hero of the world economy, Alan Greenspan, has championed the view that the New Economy has held inflation in check. He has argued that the spread of new computer technology has created such tremendous new efficiencies that companies have been able to hold their costs and prices down. And that means low inflation. And with low inflation, there is no need to jam on the economic brakes. The happy era of endless prosperity can continue indefinitely. Only the lightest occasional tap on the brake pedal is required to fine-tune things. But the new paper from the economists at the New York Fed directly debunks the boss in Washington DC. They are not indelicate enough to name him. But Ronald Rich and Donald Rissmiller are quite clear in their conclusion: "Many analysts," including Greenspan, "have attributed the low inflation rates of the 1990s to a fundamental change in the relationship between inflation and economic growth. By contrast, we find that conventional economic forces ... can account for the restraint." Nothing has changed permanently. There is no New Economy. These conventional forces, they write, "can be reversed at any time". And key among these conventional forces that account for low US inflation, they find, is the low price of imports. There are a few ways of sending this into reverse, abruptly sabotaging the era of prosperity, but the quickest and surest would be a big fall in the value of the US dollar. If the dollar weakens, it takes more greenbacks to pay for the same level of imports. That means rising prices. Hey presto! Inflation. So if the Fed's New York office is right, the great era of continuous American growth and riches is not only temporary, it is also quite fragile. Not even a whole battalion of squinting, teeth-gritting Clint Eastwoods can fight off the world's foreign exchange markets if they are determined that the dollar must fall. But then again the dollar does have another great defender. And that is Alan Greenspan. Unlike the Clint Eastwood types, who only carry pistols and testosterone, the Fed chairman is armed with control of US interest rates and testosterone. He, too, is probably more important to his country's well-being than the President. The American people certainly think so. Polls show the public gives more credit for America's economic prosperity to the 74-year-old central banker than to Bill Clinton. That's why it is so reassuring for the US and the world economy that Clinton has reappointed Greenspan for yet another four-year term - his fourth. So while the political system may twist madly in the winds of this year's election campaign, the dollar and the economy can continue in serene good health. Right? Not so fast. The global economist at the Zurich Group, David Hale, this week warned that the presidential campaign poses three big dangers for the dollar, and that there is not much Greenspan can do about it. Hale's three dollar dangers? One is that an incoming presidential administration will be full of novices who will blunder around in their early days in office and could easily panic the market. He reminds us that when Clinton first moved into the White House his new Treasury Secretary, Lloyd Bentsen, inadvertently set off a 10 per cent devaluation through sheer inexperience. Another danger is that while Greenspan may still be chairman of the Fed's governors, there could be five vacant governorships opening up in the next 12 months. That would be more than in any single year since the Fed was founded in 1914. As the new president fills them, he could make the Fed "more vulnerable to political intimidation than at any other time in American history", says Hale. The third danger is that a new president and Congress will be irresistibly tempted to spend more of the looming US Government Budget surpluses. This could overheat the economy, perhaps obliging the Fed to damp it down with a big increase in interest rates, crippling the economy. In sum, the US economy and its "new era" of apparently endless growth is vulnerable to abrupt reversal. The very symbol of its strength - the greenback - is its greatest point of vulnerability. And the political cycle poses the greatest danger, Alan Greenspan and the Secret Service notwithstanding. afr.com.au