International Perspective, by Marshall Auerback
Greenspan Gives Himself An Unjustified Pat On The Back
January 13, 2004
“There is currently a $3 trillion dollar bubble in the housing market, which when it breaks could have an effect similar to the bursting of the stock market bubble. Mr. Greenspan has encouraged the growth of this bubble by publicly denying its existence.
But this unprecedented run-up in home prices -- more than 40 percentage points above the overall rate of inflation over the last 8 and a half years -- has no plausible explanation other than being the result of a speculative bubble. Mr. Greenspan should tell the truth about this bubble -- this time before, rather than after, it has done its damage.”
-Mark Weisbrot is Co-Director of the Center for Economic and Policy Research (www.cepr.net), in Washington, D.C.
-----------------------------------------------------------------------------------------------------
“Owing to advancing information capabilities and the resulting emergence of more accurate price signals and less costly price discovery, many market participants are better able to detect and to respond to finely calibrated nuances in customer demand. Value added, accordingly, is enhanced per work hour.
· · · ·
One result of the more-rapid pace of innovation has been an evident acceleration of the process of “creative destruction”, which has been reflected in the shifting of capital from failing technologies into those technologies at the cutting edge. The process of capital reallocation across the economy has been assisted by a significant unbundling of risks in capital markets made possible by the development of innovative financial products.
· · · ·
Yet the veritable explosion of equipment and software spending that has raised the growth of the capital stock dramatically over the past five years could hardly have occurred without a large increase in the pool of profitable projects becoming available to business planners. Had high prospective returns on these projects not materialized, the current capital equipment investment boom—there is no better word—would have petered out long ago.
· · · ·
Gross product per work hour measured for the non-farm business sector, employing the newly revised data made available this morning, rose an average 1-1/4 percent per year over the past five years, and nearly 2-3/4 percent over the past two, after averaging 1-3/4 percent over the previous two decades.
· · · ·
But other data are more compelling. Growth in gross domestic income has outstripped the growth of the conceptually equivalent gross domestic product in recent years, producing a dramatic widening of the statistical discrepancy. Productivity growth in the non-farm business sector, estimated as real gross income per hour rather than real gross product per hour, over the past two years is, thus, a more noticeable 3-3/4 percent at an annual rate, 1 percentage point faster than measured from the product side.
· · · ·
But how long can we expect this remarkable period of innovation to continue? Many, if not most, of you will argue it is still in its early stages. Lou Gerstner (IBM) testified before Congress a few months ago that we are only five years into a thirty-year cycle of technological change. I have no reason to dispute that, although forecasting the evolution of technology is a particularly precarious activity. It nonetheless seems likely that we will continue to experience vast advances in the application of the newer technologies and their associated increases in output per work hour.”
Excerpts from Fed Chairman Alan Greenspan’s speech on technology and productivity at the peak of the high tech boom, Oct. 28, 1999, Boca Raton, Florida.
Before Alan Greenspan breaks his arm giving himself too many congratulatory pats on the back, he ought to consider the foregoing quotes, especially his own. The Fed Chairman has certainly been in a festive frame of mind as we have come into 2004. In a speech made on January 3rd, Greenspan confidently asserted that there was at least tentative evidence to suggest that “our strategy of addressing the bubble’s consequences rather than the bubble itself” had been successful. More extraordinarily, he asserted that it would be “a stretch” to ascribe lingering imbalances in the economy, such as “large residues of household and external debt” to the cause of the next recession, implicitly anticipating the rebuttal that the function of the bear market should be to reverse the forces that became excessive in the preceding bull market (which, if nothing else, requires that the overvaluation of shares, the paring of debt and concomitant balance sheet repair, at least show a modicum of improvement).
There are signs that the rest of the world is unprepared to join in the ovation which Greenspan clearly thinks is justified under the current circumstances. In spite of the best efforts of Asia’s central bankers, it is highly telling that the dollar has continued to sell off and gold continues to rise. More significantly, is that such dollar depreciation, although accompanied by some hand-wringing amongst French and German industrialists (who perceive their export markets under collective threat as a consequence of the euro’s record-breaking strength against the greenback), is not engendering any significant reaction from Euroland’s monetary authorities. They appeared prepare to let the dollar’s freefall continue indefinitely. If anything, recent comments by European Central Bank President Jean-Claude Trichet, who said the euro’s 22 per cent gain in the past year would not prevent the region’s exports from increasing, appear a rebuttal to Mr Greenspan, especially as such remarks came on the heels of the Greenspan and Bernanke speeches. In effect, Trichet appears to be telling American policy makers, “You’re on your own.”
It is worth remembering that the new ECB President is the same man who was synonymous with the Banque de France’s “franc fort” policy throughout the 1980s and 1990s – in spite of persistent devaluation pressures which arose at that time – in order to force structural economic reforms on the French economy. Although expressing some concern at the pace of the rise, rather than the absolute level of the euro per se, it does not appear just yet that the ECB is prepared to play the game of competitive currency devaluations, although that may come later. However, what does ring clear in remarks by former ECB President Wim Duisenberg, chief economist Otmar Issing, and now Trichet, is that ECB authorities continue to exhibit concerns about the stability of the global financial system in a manner somewhat at variance with Mr Greenspan’s own optimistic assessment.
This is not the first time that we appear to have an outbreak of civil war between the ECB and the Fed. Concerns about a US stock market and credit bubble have been sounded repeatedly from the highest offices abroad for years. The relative insouciance with which the Fed has greeted each successive crisis, in marked contrast to foreign observers of the American scene, has become a hallmark of the Greenspan legacy. Former German head of State Helmut Schmidt, former Bundesbank Council Chairman Hans Tietmeyer, and current Bundesbank head Ernst Welteke, former head President of the ECB, Wim Duisenberg, former Japanese senior finance official Eisuke Sakakibara, have all expressed reservations about a US bubble and its potential to take the global economy down with it. Similar concerns have been voiced more recently by official international organizations like the IMF, which argued in a report published last week that with its rising budget deficit and ballooning trade imbalance, the United States was running up a foreign debt of such record-breaking proportions that it threatened the financial stability of the global economy.
Greenspan himself appears oblivious to these concerns. The man appears determined never to learn from history, even his own.
The current Fed chairman’s behaviour is so much at variance with his historic predecessors: In 1928 the Federal Reserve under the influence of New York Fed Governor Benjamin Strong worried about the ever-increasing speculation in the US stock market. In 1989 the Bank of Japan fretted long and hard before Governor Mieno burst the bubble in 1990. Yet today, US Fed Chairman Alan Greenspan persists in remaining become one of the current US economy’s staunchest defenders, exhibiting a persistent tendency to “hear no evil, see no evil, speak no evil” of anything that has occurred under his own watch.
It is indeed ironic listening to this same Fed chairman now congratulating himself on containing the adverse consequences of a bubble whose existence he continued to deny as late as 2000. At that time, he legitimised the new era conviction used to justify unprecedented US high tech stock valuations, which largely rested squarely on bogus claims of a high technology induced productivity revolution. Rapid advances in information technologies were said to have streamlined production and distribution in the overall economy. Mr Greenspan argued they made our financial markets more informed, more discriminating, more demanding and therefore more efficient in the allocation of resources. In a way that has little parallel among major modern central bankers, both in the U.S. and abroad, Mr. Greenspan repeatedly used public opportunities time and again to bolster conviction in the new era high tech productivity miracle of our times. This is worth remembering in the context of this year’s January 3rd speech.
It is somewhat curious and a bit shocking that a central bank chairman would seek out so many opportunities to encourage euphoric expectations in a market that so many of his foreign counterparts openly regarded (and still view) as a potentially dangerous bubble. We tend to share the concerns expressed by the few remaining policy makers who act like real central bankers. After last year’s spectacular rebound, the US market is 50 per cent to 100 per cent more overvalued than it was at its prior all time valuation peaks, excluding the March 2000 period. And, as Mark Weisbrot illustrated at the top of this page, the housing bubble has persisted unabated, even throughout the time that the high tech mania abated.
Today, recovering stock prices and persistently rising real estate values continue to encourage a large proportion of households to spend beyond the limits of their incomes. One would have would have expected that the move toward massive fiscal deficit by the Bush administration would have arrested private debt growth and stabilized an unstable economy. But, in fact, what has happened is that a Fed and administration, hell bent on preventing a full unwinding of the 1990’s Bubble and its consequences, fostered expansion in a credit/debt bubble to keep the economy and markets aloft. A retrenching corporate sector was not willing to participate, so the role of credit/debt and demand growth had to fall on the household sector.
Years of such external borrowing have made the United States the world’s largest debtor nation. Its net external liabilities are now approaching 25 per cent of GDP---an alarmingly high level for a mature industrialised economy. This furious rate of external debt issue has now placed the US economy on an explosive debt path that could easily take it to LDC junk bond status in only a few years. The recent hellish collaboration between profligate U.S. consumers, US Ponzi finance institutions, the GSE ‘s and the Fed have brought about two years of a weak recovery in the economy and stock market, but this has occurred only through massive injections of debt. Now, after such sustained substance abuse, the economy bears the legacy of a now debilitating debt condition, which Mr Greenspan appears determined to ignore.
We have commented on the perverse symbiotic relationship now developing between Asia, notably China, and the US. The Asians continue to extend indefinitely and on relatively lax terms the credit with which American households continue to over-consume, which in turn enables emerging Asia to continue to over-produce goods that exert a deflationary undertow on the global economy. For all of the talk about the Fed’s great “stewardship” of the American economy, over the past five months, just 278,000 jobs have been generated in the US – a number that is typically achieved in a single month during a typical economic upswing. Last Friday’s release of the latest employment statistics should further give pause to the Fed chairman.
If there is any “credit” (literally) to be doled out for this unhealthy state of affairs, it is to the Far East that Mr Greenspan ought to turn his gaze: The real “saviours” of the American economy, reside not in Washington, but in Beijing, Tokyo, Bangkok, Hong Kong, Singapore and Taipei. But for the continued buying of Asian central banks, which remain true to their mercantilist instincts, the dollar would already be in free fall. As Christopher Wood of CLSA has remarked, Asian central banks have accounted for 58 per cent of US Treasury bond and government agency bond buying by foreigners over the past 12 months, of which 33 per cent came from Japan. This factor alone has enabled long term US rates to remain low, keep the American consumer financed, and in effect enable Mr Greenspan to perpetuate his fantasy of Federal Reserve success. But, as Wood notes, at some point the pervasive Asian central banks’ purchases of dollars to hold down their local currencies will have the mechanistic effect of boosting domestic money supplies: “True Asian central banks try to sterilise this domestic money-supply expansion with varying degrees of zeal. But this process becomes both more difficult and more costly the bigger the dollar purchases gets. And they are becoming bigger all the time, with Asian central banks’ foreign reserves now totalling US$1.8tr.”
In contrast to Mr Greenspan’s musings, a more accurate characterisation of current reality is that an unsustainable boom in consumer spending fuelled by credit has simply replaced the unsustainable bubble in corporate expenditure of the late 1990s that was driven by corporate debt. In view of these continued imbalances, we view the bear market as merely interrupted, rather than eradicated; at some point in the near future it will return. But when this latest bubble pops appears to us to be very much a case of Asian central bank discretion, rather than “brilliantly conducted” Fed policy. As Wood suggests, the options of emerging Asian monetary and financial officials are becoming more circumscribed by the day, as the dollar fall accelerates. When they decide that the game is up, then the Fed chairman’s latest set of self-congratulatory predictions will prove to have been as ephemeral as the current US economic “recovery”.
|
