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Strategies & Market Trends : P&S and STO Death Blow's -- Ignore unavailable to you. Want to Upgrade?

To: LTK007 who wrote (20916)	12/20/2002 6:59:45 AM
From: john722	Respond to of 30712

The Ultimate Soldier: By Rex Nutting, CBS.MarketWatch.com Last Update: 8:20 PM ET Dec. 19, 2002 NEW YORK (CBS.MW) - The U.S. economy is flexible enough to weather almost any challenge, from stock market bubbles to the threat of deflation, Alan Greenspan said Thursday. Looking ahead, Greenspan remained cautiously optimistic that the U.S. economy will resume robust growth, but he gave no timetable for the recovery. Consumer spending is likely to slow as the stimulants wear off, but businesses should be ready to step in with increased spending as soon as the threat of war subsides. In a wide-ranging address on the economy to the Economic Club of New York, the Federal Reserve chairman once again reassured markets that deflation is a remote possibility in the United States. Read the speech. "The United States is nowhere close to sliding into a pernicious deflation," he said. Even if deflation were an imminent threat, the Fed could stop it, he said. "Options for an aggressive monetary policy response are available," he said. The Fed could and would flood the economy with money even if nominal interest rates hit zero, he said. "Deflation is more of a threat to economic growth than is inflation," he said. Household and businesses would be faced with spiraling real interest rates while wages and prices received plunged. Depression could result. Greenspan's remarks on deflation echo those of his fellow Fed governor Ben Bernanke, whose speech on preventing deflation has been widely noted. The Fed's first strategy in avoiding the evils of deflation clearly is to talk it down. The Fed's most recent rate cut on Nov. 6 can also be seen as a warning shot that any whiff of deflation will be dealt with quickly and severely. Greenspan called the cut "some insurance against the possibility that the weakening would gain some footing." Many see the seeds of deflation in the sudden collapse of asset prices that have been pushed too high. Greenspan again defended the Fed's monetary policy in the late 1990s when the U.S. stock market headed for the moon. Greenspan's inaction has been widely criticized, particularly since he seemed to warn investors about the dangers in his famous irrational exuberance speech in late 1996, well before the most excessive excesses. There's little that can be done to prevent bubbles or to gently prick them when they develop, Greenspan said, reprising much of his Jackson Hole speech on the topic. He said it was "ironic" that the same policies that lead to a stable economy are also the ones that tend to fuel bubbles. "After five or six years of uninterrupted expansion, is it irrational or even unreasonable to assume that expansion would continue to the subsequent six months?" he asked. He noted that in the midst of a bubble, rate hikes often end up pushing stock prices higher. In 1999 and 2000, the Nasdaq gained more than 40 percent even as the Fed ratcheted rates higher. A dose of inflation might prevent bubbles from forming, but it would also inhibit growth. It's better to clean up after the bubble than to foster chronic high inflation, he said. Looking ahead, Greenspan sees low interest rates and high productivity benefiting both consumers and businesses. He dismissed notions that U.S. consumers are heavily burdened with debt. But he acknowledged that spending must slow eventually as the cash from mortgage refinancing slows to a drip. As for businesses, "it is simply too early to tell" if capital spending has bounced back, he said. Spending on equipment and software has stabilized and turned up in some cases, "an improvement to be sure, but not necessarily the beginnings of a vigorous recovery." "In the end, capital investment will be most dependent on the outlook for profits and the resolution of the uncertainties surrounding the business outlook and the geopolitical situation," he said. The nation's top central banker maintains a deep faith in the U.S. economy, especially in its ability to adapt quickly to new technologies and opportunities. "As we focus on the dangers of bubbles, deflation and excess capacity, the marked improvement in the degree of flexibility and resilience exhibited by our economy in recent years should afford us considerable comfort for now," he concluded. Rex Nutting is Washington bureau chief of CBS.MarketWatch