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Strategies & Market Trends : Booms, Busts, and Recoveries -- Ignore unavailable to you. Want to Upgrade?

To: Rolla Coasta who wrote (1865)	2/7/2001 2:32:44 PM
From: tradermike_1999	Read Replies (1) \| Respond to of 74559

On Monday Robert McTeer, the President of the Dallas branch of the Federal Reserve gave a speech and said that this is a new economy. Technology has changed everything and this slowdown is not a contraction in the business cycle, but a simple inventory correction in a manufacturing sector that got so excited about the economic boom that they made to many goods. He claimed that the economy is perfectly fine, it is the stock market that needed to be propped back up. He then said to his audience "If we all join hands together and buy a new SUV, everything will be OK." He closed his speech by yelling out "Go out and buy something!". My Father was Colonel in the US Army in the 1970s and 1980s and served as an advisor on the Army Staff in the late 1980s - during Grenada, Nicaragua, and Panama. He told me that he would give briefings in which life and death decisions were made and some of the more elderly Generals would play with their pipes or sleep throughout the entire meetings. McTeer's speech put that picture back in my head. Although his comments are among the most crazy I have seen coming from a Federal Reserve official they provide an important clue to the way these guys are thinking. Some of the Fed people - and Greenspan may be in this camp - actually believe in the new economy and think that this is nothing but an "inventory correction." The only problem we have had is that the stock market fell to much. It is one thing when a George Gilder or New Economy fruit loop believes in the wizard of oz, but it is a whole different matter when Federal Reserve officials believe this nonsense. Their opinions matter. Greenspan told the Senate the other week that for now he thinks the slowdown is nothing but an inventory correction and if things don't pick up in the next few months than it is a recession. This downturn is not simply an inventory correction. Use common sense. It is the inevitable unwinding of an economy that went out of wack due to a stock market bubble in which corporations over invested and consumers and businesses took on record debt levels - levels which are simply unsustainable. The economy will CONTINUE to contract for at least the first half of the year as this albatross of debt unwinds itself. The problem is that everyone seems to think that this downturn is going to be extremely quick and that we'll be on a huge rebound towards the end of this year. But if this is more than just an inventory correction this won't happen. This is not the end of the world. A downturn now can actually help the long term prosperity of our economy by smoothing out these economic imbalances. Alan Greenspan knows about these economic imbalances and they scare him to death. He knows that if foreign investors sold the dollar it would crash and create an economic crisis because of the bloated current account deficit. But a slow downturn now can help cut this deficit back and put the US on the path to more sustainable growth. There is a danger that he is so scared that he cuts interest rates too much and makes GDP growth jump right back up without unwinding these unsustainable imbalances. Doing that means that the real hard landing in the future would make the stock market crash of 2000 and this slowdown look like a walk in the park. We can have a slight downturn now or a complete disaster later. This week the Dallas Fed President showed us that he is a complete nut. Greenspan is not a nut, but whenever he acts he always has a sense of desperation. He got desperate in 1998 when the world economy appeared to meltdown and he got desperate last month when he cuts interest rates by a 1/2 point while the Nasdaq was in total collapse. Now he is gambling that he can keep the stock market bubble going, prop economic growth back up, and ignore the wild debt problems that he created.