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To: Jim McMannis who wrote (26032)	3/20/2005 4:07:01 PM
From: Elroy Jetson	Respond to of 116555

Good question. It could be personalities and culture, or perhaps Australia can afford to "get it" while America can't. This is what happened from my perspective. The Asia Crisis hit in 1996 sending Asia into a depression. In classic Monetarist response Greenspan hit the gas gunning our economy up to double-speed to pull Asia out of trouble. This actually works in the short-run. Once you lessen the impact of the shock, you need to take your foot off the accelerator and take your recession, which allows for necessary liquidations and adjustment. Inexplicably Greenspan did not take his foot off the gas. Instead he increased credit creation sending the stock market into a bubble and beginning the real estate bubble. At this point Greenspan lost the support of many economists and even some Fed governors, in particular Larry Lindsey. You can read the minutes of the Fed meetings during this period pointing out the obvious bubbles yet Greenspan didn't indicate what he was really thinking except to say the Fed could once again hit the gas if they were bubbles and collapsed. It's understandable why Australia has turned away from this course. But what is Greenspan thinking? Is he afraid of deflation if he takes his foot off the gas? Did he think that a longer course of asset inflation was needed to provide the spending power for American consumers to further stabilize Asia? If anything like this is the case, I believe Greenspan is only creating a worse problem. Monetarist games, although useful short-term, always fail in the long-run. I repeat again two pieces of wisdom from the 1930s which say in effect, if you don't want the economic depression - don't create the bubble in the first place. "Policy does not allow a choice between depression and no depression, but between depression now and a worse depression later". "Inflation pushed far enough would undoubtedly turn depression into the sham prosperity so familiar from European postwar (WW-I) experience, and would, in the end, lead to a collapse worse than the one it was called in to remedy." For "recovery is sound only if it does come of itself. For any revival which is merely due to artificial stimulus leaves part of the work of depressions undone and adds, to an undigested remnant of maladjustment, new maladjustment of its own which has to be liquidated in turn, thus threatening business with another [worse] crisis ahead" Joseph Schumpeter A policy aimed at monetary stability will secure a relative stability of prices, but the economic history of the 1920's teaches us that a policy whose goal is stabilization of prices may result in inflation of money and credit, and very unsound speculation. Charles Rist

To: Jim McMannis who wrote (26032)	3/20/2005 4:28:18 PM
From: Elroy Jetson	Read Replies (3) \| Respond to of 116555

In my prior post, I said there was a possibility Australia "get's it" because they can afford to. What does this mean? Income and wealth distribution is far more equal in Australia than in America, in large part because Australia has maintained a progressive tax structure while Reagan replaced income tax cuts with a larger Monetarist tax - punishing savers through excess debt creation. It should come as no surprise that the savings in America completely vanished in response. Because Australia did not follow this course, Australia has not experienced the dramatic home equity extraction and liquidation we have seen in America. Australians also have savings in the form of a fully funded Social Security and retirement funds. All of these factors combine to create a broader and more stable aggregate demand in Australia which can weather a serious downturn far better than America, which is living on the knife edge of credit and marginal demand. Additionally, in Monetarist terms, Australia has a full armory with an economy whose recent modest weakness, in the face of a 5.75% short-term rate and rising, is still stronger than the US economy. Form a cultural perspective, Australia does not have the mind-set of empire. The Australian Reserve Bank would never gin up their economy with massive new debt creation just to bail the Asian economies out of trouble. Australians are not the sort to buy dinner and a round of drinks for everyone in the restaurant. • • • If there is really a risk of a world-wide depression, Australia is well prepared to weather it better than most. As a consequence the Australian Reserve Bank is prepared to follow normal economic policies and risk the consequences. I think Greenspan's policies are fear based, yet in the end will create the very conditions he is fearful of. .