Re: Neglected prophets!

["ÁÎ×Ó¹â HenryC.K.Liu ¹ù¤l¥ú" <hliu@xxxxxxxxxxxxxx>]

thorthor wrote:

> >  paul davidson wrote:
>
> > if the government insists on attempting to maintain a surplus ... to >produce a
> deflationary (oversaving) force --- , then who -- or what >sector - will ....
> maintain the high level of effective demand that >the US has enjoyed in the last 2-3
> years?
>
> An interesting development in all of this is that  government expenditure is still
> growing briskly, despite the accumulating surplus.  The government could
> theoretically have a much larger surplus.

Greenspan just told the Senate today in his Humphrey-Hawkins testimony that instead of
increasing expenditure, the government should cut taxes.  Now cutting taxes is just the
fiscal way of easing monetary policy.  What is the sense of  budgetary easing when the
Fed is supposed to be tightening by raising ST rates, while the Teasaury is lowering
long term rates with buybacks of 30 year bonds?  Is this Keystone Cops policy making?

> As for the over-saving argument, the households and corporations seem to be picking
> up the slack, having become large dis-savers. The Fed Chairman recently opined this
> was not a problem as a non-trivial share of the new credit was going towards
> investments, raising potential output.

Greenspan's definition of investment is very loose.  Much of NADAQ is really Las Vagas
style investment.

> As for Godley´s argument about the seven unsustainable processes, not everyone agrees
> with the timing or inevitability of adjustment. While he may eventually be right
> (even tomorrow), the fact is that the US is a special case in the global economy, and
> international politics seems to play a non-negligble part in keeping the game going.
> After all the policy of ´benign neglect´ has been practiced for
> many decades, the last two of which have been attended by ever larger imbalances.

Yet the "special case" characteristics can cut both ways.  It can make the US economy
seem invulnerable, and it can also make it the anchor that will drag the rest of the
world to the bottom of the sea. If the US economy starts to behave like the Japanese
economy, God help us all, assuming there is a God.  There is no natural law that says
the interlinked global economy cannot collapse all together.

> Monetary policy is another element in all this. It can be still characterised as
> being accommodative.  Along with the fiscal policy stance, the two represent a
> ´gradualist´ macro-policy approach, which has the sole aim of deftly defusing
> inflationary pressures, while allowing the economy (and potential output) to grow,
> while at the same time avoiding a full-blown correction in the stock market.

The National Association of Busness Economists survey has resulted in half of the
respondents questioning the Fed's stewardship of the economy.  These skeptics think the
Fed tends to act "asymmetrically" towards the equity markets, easing in the event of a
market collapse, but not tightening to keep the market from rising too high.  Such
asymmetry contributes to a speculative bubble by leading investors to assume the
central bank would minimize their risks in case of a collapse (maket moral harzard).
NABE respondents have identified market bubble as the most serious threat now.


>
> All we can say is: ´so far so good´. More recently, however, the increasing
> divergence between the tech sector and the blue chip stocks must be an unwelcome
> development in the financial markets. This kind of divergence is also becoming
> prominent in Japan and Europe. Maybe we have entered the ´tulip mania´ phase?

Greenspan calls this the evidence of positive Schumpetrean creative destruction.
He says high tech productivity will keep us going happily till the middle of the
century.
Of course "so far so good" is the last sentence uttered by the bomb squad before the
device blows up.

>
> > the surplus ... is the fundamental problem
> > ... one manifestation ... would be the greater volatility of capital markets..
>
> I actually think the surplus is a welcome development, and which I am sure JM Keynes
> would have encouraged during boom times. As for the market volatility argument, while
> share price volatility has increased, the implied volatilities of the major share
> price indexes remain well below that seen in the second half of 1998.

This is of course the standard comfort argument, but it is misleading.  The
volitilation as related to income has greatly increased.  I personally know a lot of
perfectly respectable people whose paper gain or loss in a day in the stock market
exceeds their annual earned income.  That cannot be healthy, win or lose.  Surgeons in
Hong Kong are routinely using their cell phones to check the markets in the middle of
open heart operations.

> I guess a correction will come when equity risk premia (a la Gordon) begin to climb
> from their current low levels. The gradual withdrawal of a risk-less reference
> instruments, like US Treasury Securities, could indeed contribute to such a
> development, but much more is needed in my opinion. I would be worried about
> investors losing their nerve if inflation suddenly spiked or a substantial exogenous
> negative shock were to hit.
>
> Well that´s my two centimes worth, anyway.

Greenspan thinks that if the market requires a risk free replacement of the 30-year
tresaury, the market will create one through its unfailing ingenuity.  Amazing faith.

Henry C.K. Liu