Stagflation-Greenspan still doesn't get itgreenspun.com : LUSENET : Grassroots Information Coordination Center (GICC) : One Thread
Drop the interest rates to zero and the problem will continue. There is nothing in Greenspan's book of knowledge about this. Buttom line, markets control the economy, not the banks.
Greenspan talks about M2, consumers are talking about dollars per gallon. Get with it Allen, you missed the boat this time.
Analysis: Stagflation stalks Greenspan
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Tuesday, 8 May 2001 19:06 (ET)
Analysis: Stagflation stalks Greenspan By IAN CAMPBELL, UPI Economics correspondent
The White House said Tuesday that President George W. Bush is "very concerned" about the U.S. economy. A fall in productivity in the fourth quarter is an "additional sign of weakness." But Fed Chairman Alan Greenspan might wish he had only weakness to worry about.
The first quarter 2000 productivity report, released Tuesday by the Labor Department, confounded consensus predictions. Economists had expected productivity to rise by about 1 percent. Instead, non-farm business productivity fell at an annualized rate of 0.1 percent during the first three months of 2001. Meanwhile, unit labor costs rose at an annualized rate of 5.2 percent against consensus expectations of around 4.5 percent.
The report, therefore, showed weakness and strength. The weakness was a sudden fall in productivity. The strength was in labor compensation.
For Bush, at present, weakness offers opportunity. He can use it to press Congress to pass his tax cut. "The President believes the best way to address the weaknesses is by Congress passing the budget that he has sent up that includes a tax cut to get the economy going again," the White House said Tuesday.
Bush's policy may be astute politically. He is demanding a huge tax cut in to help avert recession. If the Congress gives him a smaller tax cut than he demands, he can blame his opponents when and if recession comes. It is unlikely that this will insulate Bush fully from the widespread discontent that recession would bring. But it is a maneuver that might help to limit the future political damage.
For Greenspan, meanwhile, signs of weakness in the economy are no longer the most alarming things. Weakness, after all, helps to justify his drastic change in monetary policy, the 2 percentage point cut he has made in the short-term Fed Funds rate so far this year. What will alarm Greenspan more is the further sign that inflation is gathering strength.
While growth and productivity is falling, wages are rising. This means that even in a weak economy, inflation could rise. The phenomenon has a name: stagflation. It means that inflation rises and prevents the central bank from cutting rates even when there is little or no economic growth. Greenspan's worst nightmare might be a 1930s style slump. His rapid rate cuts have been designed to avert that. Stagflation is his other nightmare and, it might be argued, the one his policies have courted.
The jump in labor costs now may seem surprising. After all, last week's employment report showed that lay-offs in the last four-week period were at their highest level since 1992. But even now, at 4.5 percent of the workforce, unemployment is not far above the 30-year low of 3.9 percent recorded in July last year. Greenspan has warned that the tight labor market could create inflationary pressures. Those pressures may at last be appearing, even as the economy loses pace.
In the weaker economy it might seem unlikely that rising wage costs will be passed on to consumers. Therefore, consumer price inflation might not be pushed up. But the assumption is not a safe one. Energy costs are also extremely high. Pressured by wages and energy prices, firms may be forced to increase their retail prices.
Moreover, a further inflationary threat could easily emerge. The dollar remains extraordinarily strong against the yen, euro and pound sterling, despite the enormous U.S. trade deficit, the deteriorating prospects for U.S. growth and the weak performance of the U.S. stock market in the past year, which may deter capital inflows. The dollar could easily slide. If it does, the price of many imported goods and services will rise.
Greenspan's monetary policy is also encouraging inflation to rise. In December to March broad money (M2) rose at an extraordinarily high annualized rate of 12.8 percent. Greenspan has pumped money into the economy to try to escape recession. A week ago, Milton Friedman, the Nobel Prize-winning economist, said in an interview with United Press International that if this rapid monetary growth persists, it is certain to lead to higher inflation.
Moreover the labor cost element in the productivity report is the second major data series to suggest that inflation pressures are rising. In the first-quarter GDP report the price deflator -- a measure of inflation -- jumped to an annualized increase of 3.2 percent from just 2.0 percent in the fourth quarter.
The stock market received Tuesday's report nervously. The Dow Jones Industrial Average finished down 0.47 percent at 10,883.5. The market's expectation had been that Greenspan's rate cutting would continue next week. The Federal Open Market Committee meeting May 15 had been expected to deliver another 50 basis point (half of 1 percent) interest rate cut. Tuesday's statistical release made the market a little less certain about that. Greenspan, too, may now be in a quandary.
He has focused in recent years on productivity growth, pointing to it as the reason why the U.S. economy has been able to grow above trend without inflation emerging. Having stressed the importance of productivity so much while the news was good, Greenspan seems unlikely to take the view that this dip in productivity does not matter.
He ought to take the growing inflationary risks into account next week. In our view, the pace of money growth is too high already and interest rates should not be cut at all next Tuesday. But our expectation is that there will be a cut of 25 basis points (quarter of 1 percent).
That is likely to disappoint the stock market and could provoke a quite major fall. But Wall Street's belief that "Greenspan will do all it takes" to prevent recession was naive.
The cards are dealt for the U.S. economy. After the boom of the 1990s, it faces a cyclical slowdown and probably recession. Ever cheaper money is not a panacea. And like many a quack remedy, it may have a nasty side-effect. It lingers a long time and is best avoided. The (economic) doctors call it stagflation. -- Copyright 2001 by United Press International.
-- Tom Flook (firstname.lastname@example.org), May 08, 2001
Good analysis! Right on!
-- Wayward (email@example.com), May 08, 2001.
Take productivity being down (from an astonomical high of 6.9% in the 4th quarter of 1999) to -0.1%, then add shortages from the energy crisis, stir well, and, yes, stagflation, here we come. All the interest rate cutting in the world will not help this scenario.
Now is a good time to be a treasury bond investor. For, with Greenspan so aggressively cutting rates, it's only a matter of time before Gov't bonds will follow. This will menn a big boom in the bond market.
-- JackW (firstname.lastname@example.org), May 09, 2001.
I wouldn't jump to conclusions about bonds.
Bond rates have risen as Greenspan cut. If inflation rises -- Greenspan cutting or not -- the bond market will take rates UP.
-- Jackson Brown (Jackson_Brown@deja.com), May 10, 2001.