Verily the high are cast as low, and the low are cast as high. Wall Street fell to wailing and much gnashing of teeth again this summer, although it skipped the sackcloth and ashes. It’s far too hot and humid down there by Battery Park in August. Some even suggested it was time to go for a dip.
Yup, it’s apocalypse time, when pundits speak in tongues, preferably bifurcated, and investors are on the horns of a bull, if not a dilemma.
But then some prophets sing hosannas and burn incense at the altar of the Great Greenspan for an ‘amazing’ US economic performance. In awed tones they report a long-term US growth rate of two and a half a percent. Wow!
For comparison, as the financial papers in London and New York sing the Fed’s praises for this feat, the oracles report South Korea’s economic problems with almost pathological Schadenfreude. The plummeting Korean annual growth rate of ‘only’ 6 percent has the pundits reacting like Calvinist preachers gloating at sinners’ souls lining up at the gates of Hell. Conventional wisdom is that the sky is falling in on Seoul because those Koreans have not been doing exactly what they were told they should do by Wall Street’s hallelujah chorus.
There is, as they say, a ‘disconnect’ here. But there is also an explanation of sorts. Korea’s growth rate is usually much higher than the paltry figure it has fallen to; while the US’s deflationary measures have become such a part of the business landscape that business people, especially those in manufacturing, have come to have little or no expectation of any growth at all.
And why should they? On taking the helm at the Fed a sluggish decade ago, Alan Greenspan sarcastically dedicated his term to those who ‘have the capability of repealing the laws of arithmetic.’ This barb was aimed at those who thought you could have a growing economy and a stable currency as well as reduced unemployment.
Those of us who thought what he preached sounded more like voodoo economics than sound theology, let alone arithmetic, should not be surprised to find that, as it turns out, a stable currency and growth can go together.
In the real world, currencies reflect economic strength, not vice versa. And we can add up too. A 6 percent growth rate like Korea’s is indeed a lot more than 2.5 percent. We might even go so far as to suggest it is more than double. Even India, with all its problems and its bureaucracy, managed to grow at twice the US rate for the first five years of the 1990s. Malaysia did even better at 8.7 percent and China led the pack with a rattling 12-plus percent.
Simple arithmetic seems beyond so many economists in the US, which is perhaps why we have the ever-amazing spectacle of so many Wall Street walkers stricken with gloom even at the underwhelmingly amazing 2.5 percent. They are afflicted with trepidation that, Heaven forbid, too many people have got themselves jobs, and that too many other people are making a decent amount of money after several decades of income stagnation.
If all these types persist in reacting to good news so dourly, they are in serious danger of provoking a revival of American socialism. However, they would explain that they are preemptively anticipating the Fed chairman, who they expected to react to good news with an increase in interest rates. Their well-founded fears were – this time at least – not borne out.
After stunting the growth of the US economy for the better part of two decades, the Fed has recently failed to put the brakes on. But, then again, one could hardly accuse Greenspan of putting his foot down hard on the gas, either.
In effect, the US economy has been driven by Mr Magoo, who keeps seeing obstacles on the road that aren’t there. Or edging forward very slowly so that he never actually reaches the place he originally wanted to get to.
Basking in the glory of a 2 percent inflation-free growth rate, Greenspan is taking the credit for what is at the very best an entirely negative virtue. He did not put up interest rates again because the bedrock assumption that he has used to choke growth for so long is being proved completely wrong by the real world.
The purpose of raising interest rates is to stifle demand and investment and raise unemployment, which will hold down pay rates and thereby, the tenuous chain of illogic goes, stop inflation. Nobody has ever really explained why skyrocketing executive pay is non-inflationary while a rise in wages and salaries is, but economics is as dismal as science in every sense of the world. After all, no-one has ever proved inflation hurts anyone but bondholders, lenders and people who hide their cash in mattresses.
For all these years it has been assumed that anything less than 6 percent unemployment will lead to wage hikes which are ipso facto inflationary which is, ipso facto again, a bad thing. This chain of assumption has always been very creaky, so now that it has actually been tested and found wanting, the miracle is really that anyone bought this alchemical bull excrement in the first place.
In short, if it were not for the deflationary stranglehold of central bankers like Greenspan, the US economy should have been growing much faster than it has. For a country with huge economies of scale, massive natural resources, and the ability to tap the financial and intellectual resources of the world, 2.5 percent should be seen for what it is – an absolutely abysmal failure.
The Speculator
