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In Greenspan We Trust
by Sartre
5 May 2003

Greenspan, or any Fed head, contrary to popular perception, is no more an architect of prosperity than a president. But the oracle of the central bank can engender conditions that can severely inhibit the normal course of wealth creation.

The Thinker


Coming as a mild surprise was the premature announcement by President George W. Bush of another term for Alan Greenspan at the Federal Reserve helm, ending speculation about the White House plans after a rift over the need for new tax cuts.

Ari Fleischer commented, "The president thinks he has done a very able job as a steward of the economy, making certain that we had the proper monetary policies in place."  Never mind that the Fed chief questioned the need for Bush's $726 billion tax-cut plan, and back in February told Congress the U.S. economy needed no new economic stimulus and warned of the dangers of rising budget deficits. Ever since Bush’s decision for another four years, the dominator man banker continues to warn that further proposed tax cuts need to be offset by either spending cuts or tax increases elsewhere.

The slicing and dicing in the congressional conference process has the final amount of tax-cut in question. But is there any doubt that the U.S. economy is in dire need of economic stimulus? Only those who are living in a cave or on the Riviera aren’t effected by a sluggish economy. Most people still need to earn a living. That means a living wage job. So why are all the ‘so called’ capitalists eager to keep the strong man for doing the heavy lifting?

Many of the answers lie in a desire for another round of irrational hopes for exuberance!Alan Greenspan, The Maestro

When Greenspan first expressed his concern about irrational exuberance, on 5 December 1996, the Dow Jones index closed at 6,437. It was long after that warning, on 14 January 2000, that the Dow hit the giddy height of 11,723, before the US celebrated the new millennium with the bursting of the dotcom bubble.

Greenspan ignored the advice of a long-serving predecessor, William McChesney Martin, which was to remove the punch bowl before the party got going. When accepting his last offer of reappointment he also missed the chance to get out while the going was good, so that some of the lustre has been rubbed off his previously saintly image. McChesney Martin was chairman for almost 19 years and left in January 1970, just in time to avoid the currency and oil crises of the 1970s.

Greenspan, or any Fed head, contrary to popular perception, is no more an architect of prosperity than a president. But the oracle of the central bank can engender conditions that can severely inhibit the normal course of wealth creation. While juggling interest rates effect markets and redirects business decisions, their setting are not instantly transformed into profit. Confidence is the name of the game. A reasonable expectation that financial conditions will generate ongoing and profitable commerce is the desired objective.

However, when the confidence becomes the game itself, the side show barker relies on a craftiness to dupe the public. The bust in the dotcom bubble didn’t bring reality back to earth or at home. The housing market, because of the unprecedented low mortgage rate, has forestalled a consumer capitulation. But the tricks of the trade are running out of gimmicks. The Federal Reserve has no room to lower rates further. And even if they went to near zero, the experience of Japan indicates that prosperity is built on more than just virtual free capital.

Now that the Iraqi War is over, look to the foreign exchange markets for a valid indicator of the actual condition of the U.S. economy.

“The euro rose to a new four-year high against the US dollar, trading above US$1.11 for the first time since February 1999 as it continued a rally that was interrupted by the war in Iraq . . . The dollar rebounded briefly during the war in Iraq, sending the euro down to around US$1.05 in early March as financial markets anticipated a quick US victory that would end the uncertainty surrounding the war and even trigger a postwar dollar rally.”

Since government deficits are no longer able to be concealed or hidden, as during the Clinton years, and spending has become the only growth industry, the motive to devalue the dollar dominates the open market committee.

So this assessment from the previously quoted Guardian Column: “One of the ways in which US policy makers are trying to get out of trouble is via benign neglect of the dollar. During the boom years the dollar was overvalued for a long period. It has been declining for some time now. As John Flemming, Warden of Wadham College, Oxford, notes in Economic Comments (Leopold Joseph) , ' A downward adjustment in the exchange value of the US dollar has long been seen as being appropriate to switch US domestic demand from imported goods to goods and services made at home.' "

“The problem about relying on dollar devaluation, as Flemming says, is that 'Japan and Germany are suffering from sluggish domestic demand and apparently over-, rather than under-valued currencies'. When so many key economies seem to need a devaluation there is a deficiency of demand in the system as a whole. But Flemming sees little scope for a co-ordinated monetary expansion, given that US and Japanese interest rates are already so low.”

The Federal Reserve is standing inside a house of cards, and all they can do is to print more jokers. Alan is no Atlas and the weight of the world is far too heavy to hold, let alone lift back up. As the ‘Greenspan Greenback’ becomes the currency of use in more foreign countries, colonies like Iraq will transact their business in federal reserve notes. That translates into more debt created currency, higher concealed inflation, more deficits and additional pressure to raise interest rates. So why would the central Fed want to preside over this exercise in dumbbell lifting?

Maybe huge changes are just on the horizon! A new Bretton Wood Agreement ready for implementation? It wouldn’t be surprising to have The International Monetary Fund take on an even more dominate function. How will the EURO correspond with the U.S. Dollar and will the Federal Reserve expand their influence and monopoly over the rest of the world? Only time will tell, but no matter what transitions occur, the American taxpayer will pay even more. You can bank on that!

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