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Greenspan unscrambled: worse to come
Larry Elliott can reveal just what the economic future holds, according to the boss of the US Federal Reserve.
For years, codebreakers have been struggling to unravel the secret language of Alan Greenspan. The best brains from the world's elite universities have tried to crack the code. But to no avail. Greenspan scrambles his thoughts in his personal Enigma machine, from which they emerge as gobbledegook when he surfaces from the depths of the US Federal Reserve.
Until now. For we can reveal that the years of toil have paid off and it is possible to decipher what Greenspan really thinks. Here in its unexpurgated form is what the Fed chairman was going to say on Capitol Hill before the encoders got to work.
"First things first. The terrorist attacks on New York and Washington last month were terrible events, and we must not shrink from our duty of bringing the guilty men to book. But when the politicians say we are winning the war against Osama bin Laden they are wrong. I've no real idea whether carpet bombing Afghanistan means we are achieving our military objectives, but I know one thing: the economic war has already been lost. All that remains now is damage limitation.
"The economic consequences of the war have yet to make it to the front pages of the papers or into the top slots on the TV bulletins. But they are profound, and it would be wise to wake up to the possibility that the global economy is now faced with a downturn that will be the worst since the early 1980s.
"We were already on course for a recession in the second half of this year, and that recession will now be longer and deeper. The initial shock to the American psyche from the attacks was profound, and has since been amplified by the anthrax scare. From a personal point of view, however, being able to blame the terrorists for higher unemployment, the bankrupt businesses and the cuts in investment makes it easier to escape my culpability for America's boom-bust cycle.
"At this stage, I really can't tell you how bad things are going to get. But I would certainly beware of those who are predicting only a short, sharp recession followed by a rapid recovery early next year. Last week the Organisation for Economic Co-operation and Development predicted that growth in our 30-nation rich man's club will be just 1.2 per cent next year, compared with the 2.6 per cent it was predicting only four months ago.
"Lawrence Lindsay, economic adviser to the White House, now admits the US will be in recession by the end of this year and will experience only sluggish recovery next year. The European Commission says it cannot rule out a 'temporary contraction' in the EU economies, where unemployment is expected to rise from already high levels.
"Why then, you might ask, have share prices been rising? Isn't it a bit strange that for the first time since the high-tech bubble burst 18 months ago, there has been a return of speculative buying? That's a very good question, and one that has led me to question my long-held belief in the efficiency of markets.
"Wall Street is expecting earnings to grow by 17 per cent in the US corporate sector next year, which was always going to be a struggle but now looks utterly unrealistic. You do not need to be Sigmund Freud to work out that consumers, who have seen the value of their investments halve, are in danger of losing their jobs, are still in a state of shock post-September 11 and fear the Great Plague is coming are not going to be in a mood to flash the plastic.
"We at the Fed are doing what we can. Interest rates are being cut, but as the Japanese have found, the impact can be negligible if people prefer to save rather than spend. If our consumers save just one cent out of every dollar they were previously spending, that will cut demand by about $US70 billion [$137 billion], the equivalent of the President's fiscal package.
"To the extent that we have a solution for the savage downturn now under way, it is to reinforce the weaknesses that were already glaringly evident before September 11 - an excess of debt, an excess of speculation and an excess of spending. To the extent that my entire policy has relied on underpinning overvalued financial assets, the buck stops with me.
"The fact is, however, that the alternative to what I am doing is a full-scale credit crunch. Irving Fisher said that a combination of excessive debt and deflation was the cause of the Great Depression, and that is what I am trying to avoid. But it won't be easy. We are the world's biggest economy, but we are awash with spare capacity bought on the never-never during the wild excesses of the late 1990s. There was little appetite for fresh investment among entrepreneurs anyway, but we are relearning that Keynes was right when he said that the future is too fraught with risk and uncertainty to believe in the infallibility of financial markets.
"What does all this mean? It means the global economy could be in for a very rough ride. It means we could be at one of those points - as in 1929 and 1973 - when the prevailing economic orthodoxy is challenged. It means politicians are going to be a lot more wary about handing over power to market forces (and central banks, for that matter). And it means my reputation is firmly on the line.
"Now turn that machine back on and make sure this is turned into the usual nonsense."
The Guardian
Greenspan unscrambled: worse to come
Larry Elliott can reveal just what the economic future holds, according to the boss of the US Federal Reserve.
For years, codebreakers have been struggling to unravel the secret language of Alan Greenspan. The best brains from the world's elite universities have tried to crack the code. But to no avail. Greenspan scrambles his thoughts in his personal Enigma machine, from which they emerge as gobbledegook when he surfaces from the depths of the US Federal Reserve.
Until now. For we can reveal that the years of toil have paid off and it is possible to decipher what Greenspan really thinks. Here in its unexpurgated form is what the Fed chairman was going to say on Capitol Hill before the encoders got to work.
"First things first. The terrorist attacks on New York and Washington last month were terrible events, and we must not shrink from our duty of bringing the guilty men to book. But when the politicians say we are winning the war against Osama bin Laden they are wrong. I've no real idea whether carpet bombing Afghanistan means we are achieving our military objectives, but I know one thing: the economic war has already been lost. All that remains now is damage limitation.
"The economic consequences of the war have yet to make it to the front pages of the papers or into the top slots on the TV bulletins. But they are profound, and it would be wise to wake up to the possibility that the global economy is now faced with a downturn that will be the worst since the early 1980s.
"We were already on course for a recession in the second half of this year, and that recession will now be longer and deeper. The initial shock to the American psyche from the attacks was profound, and has since been amplified by the anthrax scare. From a personal point of view, however, being able to blame the terrorists for higher unemployment, the bankrupt businesses and the cuts in investment makes it easier to escape my culpability for America's boom-bust cycle.
"At this stage, I really can't tell you how bad things are going to get. But I would certainly beware of those who are predicting only a short, sharp recession followed by a rapid recovery early next year. Last week the Organisation for Economic Co-operation and Development predicted that growth in our 30-nation rich man's club will be just 1.2 per cent next year, compared with the 2.6 per cent it was predicting only four months ago.
"Lawrence Lindsay, economic adviser to the White House, now admits the US will be in recession by the end of this year and will experience only sluggish recovery next year. The European Commission says it cannot rule out a 'temporary contraction' in the EU economies, where unemployment is expected to rise from already high levels.
"Why then, you might ask, have share prices been rising? Isn't it a bit strange that for the first time since the high-tech bubble burst 18 months ago, there has been a return of speculative buying? That's a very good question, and one that has led me to question my long-held belief in the efficiency of markets.
"Wall Street is expecting earnings to grow by 17 per cent in the US corporate sector next year, which was always going to be a struggle but now looks utterly unrealistic. You do not need to be Sigmund Freud to work out that consumers, who have seen the value of their investments halve, are in danger of losing their jobs, are still in a state of shock post-September 11 and fear the Great Plague is coming are not going to be in a mood to flash the plastic.
"We at the Fed are doing what we can. Interest rates are being cut, but as the Japanese have found, the impact can be negligible if people prefer to save rather than spend. If our consumers save just one cent out of every dollar they were previously spending, that will cut demand by about $US70 billion [$137 billion], the equivalent of the President's fiscal package.
"To the extent that we have a solution for the savage downturn now under way, it is to reinforce the weaknesses that were already glaringly evident before September 11 - an excess of debt, an excess of speculation and an excess of spending. To the extent that my entire policy has relied on underpinning overvalued financial assets, the buck stops with me.
"The fact is, however, that the alternative to what I am doing is a full-scale credit crunch. Irving Fisher said that a combination of excessive debt and deflation was the cause of the Great Depression, and that is what I am trying to avoid. But it won't be easy. We are the world's biggest economy, but we are awash with spare capacity bought on the never-never during the wild excesses of the late 1990s. There was little appetite for fresh investment among entrepreneurs anyway, but we are relearning that Keynes was right when he said that the future is too fraught with risk and uncertainty to believe in the infallibility of financial markets.
"What does all this mean? It means the global economy could be in for a very rough ride. It means we could be at one of those points - as in 1929 and 1973 - when the prevailing economic orthodoxy is challenged. It means politicians are going to be a lot more wary about handing over power to market forces (and central banks, for that matter). And it means my reputation is firmly on the line.
"Now turn that machine back on and make sure this is turned into the usual nonsense."
The Guardian
