Greenspan: he's armed and dangerous
Jun 27
Peter Hartcher
At first glance, it's hard to see why Alan Greenspan is so panicked about America's economic recovery. He's got interest rates so slender they look like a thermometer on a diet. Actually, they're not even that big.
The 1 per cent official rate he announced yesterday is actually negative once you adjust for inflation of 2.1 per cent.
It's so slender it's not even there. If you take money from the Fed at that rate, it's cheaper than if it were interest free. It's actually subsidising the loan.
And Greenspan's off fretting about deflation again.
Not many economists in the US believe that it's a real danger. With their record, though, that alone may be reason enough to go with Greenspan.
I mean, these are the people who went for years underestimating the boom in the 1990s, completely missed the bust of 2000, and now have been telling us the economy will bounce back in the second half of the year - every year for three years now.
But a lot of people pretend to go along with Greenspan's fear of deflation anyway. Why?
"It's like the guy who gets into the elevator with a gun," explains Paul Kasriel of the Northern Trust Co.
"He might be crazy, but he's got a gun, and you've got to respect that. So you go along for the ride.
" He's powerful, so you go along for the ride."
But look around. The stockmarket's up by 20 per cent in the past three months. That's called a bull market. Interest rates are incredibly low - you can get a home loan at 3.8 per cent.
The economy was growing at about 2 per cent the last time the government made a guess. That's not gangbusting, but it's racy compared to the other major economies.
Unemployment is at 6.1 per cent. Call that a recession? In Western Europe, where the average is 50 per cent higher, that would be a godsend.
In the last American recession joblessness hit 7.5 per cent and in the one before that it got to 10 per cent.
And there's so much stimulus already in the American system. The federal budget went from a projected surplus of $US200 billion ($300 billion) to a forecast deficit of $US300billion in less than two years - that's a swing equal to 5 per cent of gross domestic product.
That's a vast support to growth.
Of course, there's a downside too. As Herbert Hoover put it: "Blessed are the young, for they shall inherit the national debt."
And then there's Greenspan's dozen earlier frenetic slashes into official interest rates. They've got the money supply growing at 16 per cent in the past two months.
When all this stimulus finally hits, you'd have to expect the US economy to look like the Energiser bunny on speed.
As for deflation, where is it? Consumer prices were up 2.1 per cent in May. Inflationary expectations are rock solid; they haven't budged in years.
So why is the old man so worried? Is he finally losing his faculties? A columnist in theChicago Tribune, Steve Chapman, pondered recently that even if Greenspan did lose his faculties, how would we know? No one understands a thing he says, even when he's got all his marbles.
He likes it that way. "I know you believe you understand what you think I said," he once chided a congressman, "but I am not sure you realise that what you heard is not what I meant."
But when you look more closely, you see maybe there is a reason to wonder about America's economic future.
Look at economic growth. When business investment collapsed with the end of the Great American Bubble, the Fed stepped in and cut rates.
The idea is that extra cheap money will keep consumers spending until corporate America gets out of its funk and comes back, ready to invest.
So monetary policy is a way of temporising, keeping consumers treading water in an ocean of liquidity until they feel the solid ground of corporate investment under foot.
Initially, the monetary mojo jolted two key parts of the US economy like a shot of electricity to the heart.
The big car companies offered to finance consumers' new car purchases at zero per cent interest for five years. General Motors alone estimated that this added half a million sales to its figures last year.
But the demand started to taper off, so the car companies offered cash rebates as well. Now the average new car comes with $US3000 of rebates plus free finance.
General Motors, which used to make $US1200 profit on every sale four years ago, now makes just $300 on each car it runs out of its showrooms.
And still car sales are sagging. Because eventually even Americans have enough three-tonne SUVs. So the auto industry channel for monetary policy is no longer supporting growth.
Greenspan's monetary magic is now reduced to working through a single channel - housing.
And it's working frenetically. New figures yesterday showed the increase in the value of new American mortgages over the past three years is nothing less than 2800 per cent.
Yesterday's cut in interest rates, and the Fed talk to keep interest rates down, was chiefly aimed at the mortgage market.
The Fed is desperate to keep home buying and home refinancing running hot. Because it's about all Greenspan's got.
And while America is waiting for Godot, where is that recovery in corporate spending? Nowhere in sight.
What about the unemployment rate - what's so terrible about 6.1 per cent? There are two reasons that Greenspan and George Bush are sweating on unemployment.
One is that, if joblessness keeps rising, the newly out-of-work will start missing repayments on those mortgages, and stop fuelling the consumer spending that is the only thing standing between growth and stagnation.
The other is that the Bush administration, like one of those old Soviet-style planned economies, has a very specific economic growth target.
Thanks to Bush's former chief economic adviser, Larry Lindsey, we know the arithmetic. The aim is to get economic growth at 3.5 per cent or higher for a full 12 months before the date of the presidential election, which is due in November next year. The point, of course, is to get Bush re-elected. They're a long way from this growth target.
OK, but what about the bulls roaming the stockmarket? Markets always get it right as a leading indicator, right?
Americans developed the gambler's curse during the great bull market of 1987-2000. Each time stock prices fell, they bought more in anticipation that the dip would be followed by another big rise.
They were conditioned. Their retraining started in March 2000, and the average American investor has now lost every dollar that he made in the bubble years, but his painful therapy continues.
This Wall Street rally is no better at foretelling the coming recovery than the last two were.
What about deflation? Let's just note that nobody foresaw Japan's long and slow descent into deflation, and there is no magical amulet that will automatically protect America either.
Besides, the old guy who just got in next to me has a gun and a dangerous glint in his eye.
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