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Strategies & Market Trends : ahhaha's ahs -- Ignore unavailable to you. Want to Upgrade?

To: ahhaha who wrote (2146)	5/2/2001 6:40:51 AM
From: Micawber	Read Replies (1) \| Respond to of 24758

Milton Friedman: Greenspan 'overdoing it' WASHINGTON, May 01, 2001 (United Press International via COMTEX) -- In an interview with United Press International's Economics correspondent, Ian Campbell, on April 30, Milton Friedman, the Nobel-winning economist, said that Fed Chairman Alan Greenspan may be overdoing interest rate cuts, that inflation was sure to rise if monetary policy is not tightened and that it may be impossible for the U.S. economy to avoid recession. Friedman said Greenspan was erring on the side of a too-loose monetary policy in order to avoid a repeat of the Depression of the 1930s or the slump in the Japanese economy in the 1980s. "Monetary policy has shifted too much toward easing," Friedman said. "With the rates of monetary growth occurring now there's a very serious danger of higher inflation." Asked why Greenspan was not concerned about the rapid growth in the money supply, Friedman said he was sure Greenspan was concerned. Friedman's belief was that "in the background of Alan's mind is that you have had three periods of rapid economic expansion in which new technology has been an important factor and production has been rising at more than 4 percent per year. The first is the United States in the 1920s; the second is Japan in the 1980s; and the third is the United States in the 1990s ... The first two ended in disaster. Alan wants to make sure that the third one doesn't end the same way." Friedman called Greenspan the best Fed Chairman since 1913 but said it was "very hard to account for ... the extraordinary confidence in Alan Greenspan. U.S. Treasuries reflect inflationary expectations of only 2-3 percent over 10 years or so." Friedman also warned that the dollar was overvalued and the euro undervalued. "They will come together," he said. Having grown for almost a decade the U.S. economy slowed abruptly in the fourth quarter of last year. Fed Chairman Alan Greenspan has responded by cutting the Fed Funds rate by 2 percentage points in the first four months of this year. Is he right to be cutting interest rates so rapidly? Does the marked pick-up in monetary growth not pose some inflationary risk? We asked the Nobel Prize economist Milton Friedman, for his views. Campbell: Alan Greenspan appears to be cutting rates at present as though he is not concerned about the pace of money supply growth. Friedman: I'm sure it does concern him. But monetary policy has shifted too much toward easing. You need a psychoanalyst here as much as an economist, but I think in the background of Alan's mind is that you have had three periods of rapid economic expansion in which new technology has been an important factor and production has been rising at more than 4 percent per year. The first is the United States in the 1920s; the second is Japan in the 1980s; and the third is the United States in the 1990s. In all three cases there was a raging bull (stock) market, they went on for the same length of time and were of a similar size. The first two ended in disaster. Alan wants to make sure that the third one doesn't end the same way. Campbell: In the previous cases was monetary policy wrong before the bubble burst or after it? Friedman: Afterward. In the case of the 1920s one feature that was different from today was that there was a sharp decline in the money supply, of about a third, from 1929-33. It started in a mild way at the end of 1929 and then worsened with successive bank failures and became very serious in 1931. In the Japanese case monetary growth has been too low since the bursting of the bubble. You had negative monetary growth after 1989 for a quarter or two and in the 1990s very low monetary growth. You have had much too low monetary growth in Japan in the 1990s and it is still too low. I suspect that Alan is very concerned not to suffer the same fate and would rather err on the side of a too loose monetary policy than a too tight one. Campbell: The United States has had a period in the 1990s where it appeared to abolish the business cycle. But in the record current account deficit and very low savings rate you have signs of excess. Wouldn't it be better to accept the need for a slowdown? Isn't it reckless to encourage consumers and companies to borrow more at a time when the economy needs to slow down to reduce some of its excesses? Friedman: You have to remember that the function of the (interest rate) cuts is to increase the quantity of money in the small market for federal funds. Long-term rates are more important for the economy. Campbell: Yes; and often they will go up if inflationary expectations rise. Friedman: Yes. But at present they are not doing so. What it's very hard to account for is the extraordinary confidence in Alan Greenspan. U.S. Treasuries reflect inflationary expectations of only 2-3 percent over 10 years or so. That is a very optimistic prediction. Campbell: You would say that inflation must rise? Friedman: If recent double digit rates of money growth continue for long, higher inflation is almost sure to follow. Campbell: Do you not feel that after the boom in asset prices and growth in the second half of the 1990s that the United States must enter a recession now and that it's a mistake to try too hard to avert it through monetary policy? That doing so risks adding inflation to the slowdown? Friedman: Its true that you may not be able to avoid recession now. But it was excessively tight monetary policy that produced the 1930s and the 1990s in Japan. What you're arguing, with some justice, is that there's a risk of creating a repeat of the stagflation of the 1970s. Campbell: Should the Fed not have done more to check the stock market boom of the second half of the 1990s? Friedman: No. The Fed should be concerned only with the prices of final goods. In 1995-98 the economy behaved very well. There was a real bubble in the new economy stocks but no more than a strong bull market in the old economy ones. Campbell: So what is your assessment of Alan Greenspan's record as Fed chairman? Friedman: To judge by results, he's done a splendid job. I am a great admirer of Alan Greenspan. He's been the best Fed chairman since 1913. But I think Alan may be overdoing it now. With the rates of monetary growth occurring now there's a very serious danger of higher inflation. Campbell: What do you think would be a suitable growth rate for M2? Friedman: Around 5 percent. Campbell: More or less the same rate as targeted by the much-criticized European Central Bank? Friedman: Yes. Campbell: And how about the dollar? Friedman: It's overvalued. The euro is undervalued. They'll come together. By IAN CAMPBELL, UPI Economics Correspondent Copyright 2001 by United Press International.