Re: [A-List] Greenscam, Fedgov's favorite central planner

["Anne Williamson" <annewilliamson@xxxxxxx>]

GREENSPAN'S MORTAL SIN
> by Dan Denning
>
>
> Nobody expected a discussion on the morality of lower
> interest rates...in Las Vegas. But these are strange
> times for investors. And you never know when you're
> going to hear the advice that could save your portfolio.
>
> At the Foundation for Economic Education conference in
> Las Vegas, Dr. Roger Garrison, an economist of the
> Austrian persuasion, who plies his trade at Auburn
> University, addressed the long-term consequences of
> artificially low interest rates. His discussion
> highlighted a key economic - and I would add moral -
> element to interest rate discussions.
>
> From an economic perspective, it amounts to a basic
> conceptual error by Alan Greenspan. Yes, productivity
> did improve in the first quarter by 8.6% - the strongest
> growth since Ollie North was ducking cameras and
> microphones in Senate hearings on the Iran-Contra
> affair.
>
> But the real engine behind greater productivity growth,
> says Dr. Garrison, was layoffs. Unit labor costs fell
> 5.4% in the first quarter. Compensation costs actually
> rose 2.7%. In short, when you get fewer people to
> produce as much as a pre-layoff workforce did, you
> become more "productive". In the real world, however,
> employees don't actually produce 8.6% more goods and
> services than they did the quarter before.
>
> Following this trend, "productivity" can spurt higher
> for a short while, just like it's possible to saw a log
> quickly for a couple of minutes. But long-term
> productivity growth is unlikely.
>
> In short, the first quarter number looks like a fluke.
>
> This formula is not at all mysterious. Still, it's
> precisely the reason Greenspan gave for lowering
> interest rates without causing inflation. Greenspan
> seems to believe an increase in productivity means you
> could increase the money supply indefinitely without
> increasing prices.
>
> Could it have escaped Greenspan's attention that the
> increase in productivity was largely a result of: a)
> lower capital costs because of the Fed's own interest
> rate policy and b) falling unit labor costs as a result
> of higher unemployment?
>
> This single "mistake" has been largely responsible for
> trillions of dollars in stock market losses, and
> billions of dollars of capital "consumed." If, in fact,
> it's an oversight, Greenspan's miscalculation is quite
> possibly the single largest error any central banker has
> ever made. And its consequences will weigh on the stock
> market for years to come.
>
> I know what you're thinking: how can a Randian central
> banker fail so miserably at simple Aristotelian logic?
> I was wondering the exact same thing.
>
> Say's Law tells us that new wealth is created from the
> application of technology and ideas to create new goods
> and services. Production, and not consumption, is the
> key to new wealth. And new production comes from
> investment. Yet the Fed continues to do what it does
> best - encourage consumption by making the currency
> increasingly worthless.
>
> The great Austrian economist Carl Menger pointed out
> that ascendant economies are always forward looking,
> planning for the future, storing up savings to invest
> later in new wealth creation. Only declining economies
> consume at the expense of future generations. Delaying
> consumption, I would argue, is the moral thing to do. If
> you're willing to have a little less now, you can invest
> in productive enterprise and have a little more later.
>
> By removing market forces from the determination of
> short-term interest rates, the Fed artificially cheapens
> the cost of capital and encourages uneconomic
> investment. There are a lot of consequences to tinkering
> with the market mechanism for determining the price of
> capital. But the chief consequence we're concerned with
> today is the profits crisis in American business and the
> cannibalization of America's capital stock.
>
> My favorite Austrian economist (everyone should
> have at least one), Dr. Kurt Richebacher, highlights
> this well. Dr. Richebacher points out that profits are
> essentially value added. Where there is a lack of
> profits, there is a lack of value being added. If
> profits are eventual savings, and savings are investable
> resources for the future, then a chronic lack of profits
> now indicates America is consuming its capital; eating
> its seed corn.
>
> Value - wealth - is being consumed, increase in
> "productivity" or no. Interest rate policies have, in
> effect, made us appear wealthier today with fat
> investment profits made by cheaply borrowed money. But
> corporate America has been systematically impoverishing
> itself, living a fevered financial existence in search
> of short-term financial gains.
>
> Dr. Richebacher points out that pre-tax profits of non-
> financial corporations have slumped to their lowest
> level in the post-World War II period. In the 1960s,
> before-tax profits were 9% of GDP. At the nadir of the
> recession in 1991 they had plummeted to 4%. Currently,
> profits are less than 3% of GDP.
>
> But there's an even scarier figure. In 1991,
> manufacturing pre-tax profits were $93.5 billion. Retail
> trade profits were $27.7 billion. By 2001, after a
> decade-long orgy of financial speculation at
> artificially low interest rates, manufacturing profits
> had been nearly halved to $50.3 billion while retail
> trade profits more than tripled to $84.5 billion.
>
> Nothing could more clearly illustrate the shift away
> from production (manufacturing) and toward consumption
> (retail). In the 1990s, the substructure of the economy
> changed entirely. Corporate America and the American
> consumer became infatuated with consuming now instead of
> saving for later.
>
> The structural damage to the U.S. economy is far more
> serious than the Federal Reserve is willing to say,
> especially given their current bias for keeping rates
> low. When you spend ten years consuming your own capital
> stock - and borrowing from foreigners to finance it -
> chances are likely you've done serious long-term damage
> to your economy.
>
> You've drawn down the pool of investable savings and
> squandered capital on projects that don't grow wealth.
> You've sacrificed the future for a new couch from
> Pottery Barn or percale sheets from Bed, Bath and
> Beyond.
>
> Not exactly a good trade, even by Vegas standards.
>
> Dan Denning
> for The Daily Reckoning