Friday, November 04, 2005
The inflation rate, properly measured, at this particular stage, has been very close to zero for a very long period of time.
Alan Greenspan, November 3, 2005
Fed Chairman Alan Greenspan, set to retire in just a few months, made a final appearance before the Joint Economic Committee in Congress yesterday, stating that despite hurricanes Katrina, Rita and Wilma, the economy is continuing a healthy expansion.
"These events are likely to exert a drag on employment and production in the near term and to add to the upward pressures on the general price level. But the economic fundamentals remain firm, and the U.S. economy appears to retain important forward momentum."He warned that given current spending and entitlement plans, the government may have already promised more than it can deliver to baby-boomers, set to retire in the years ahead.
"We owe it to those who will retire over the next couple of decades to promise only what the government can deliver. The present policy path makes current promises, at least in real terms, highly conjectural. If fewer resources will be available per retiree than promised under current law, those in their later working years need sufficient time to adjust their work and retirement decisions."Once again, the prepared remarks offer little in the way of news - the headline "Greenspan warns Congress on deficits" seems to have been playing in a continuous loop for the last few years with little effect (pay no attention to the recently rosy White House budget predictions, things are about to take a turn for the worse).
The only real news during yesterday's appearance was during the Question and Answer session, which, as we've seen before, often provides interesting insight, yet does not seem to get much attention from the mainstream financial media.
Early on in the Q&A session, it is revealed that the yield curve is no longer a useful indicator of the future health of the economy. More specifically, if the short-term interest rates controlled by the Fed (currently at 4 percent) are pushed upwards past the long-term interest rates controlled by the bond market (currently near 4.5 percent), this should not be interpreted as an indication that a recession will follow.
So, despite having been the most reliable indicator of upcoming economic weakness in recent decades, it should no longer be viewed that way.
This has been mentioned on several occasions in recent months as long-term rates have failed to move upwards after repeated hikes to the short-term rates - part of the "conundrum".
A short time later came this exchange with committee chairman Jim Saxton:
Saxton: Given the need for the Fed to preempt inflation, to what extent is the Fed now addressing inflationary expectations or fears that may not be fully evident in the current available data.So, long-term interest rates (relative to inflation protected Treasuries) are still useful for setting "inflation expectations", but long term interest rates (relative to short-term rates) are no longer useful for setting "economic weakness expectations".
Greenspan: Inflationary expectations are reasonably well measured, concurrently, and in real time. In a sense, we pick it up from a variety of different sources but mostly from the structure of interest rates, very specifically, the differences between interest rates that are defined in real terms such as the TIPS (Treasury Inflation Protected Securities) and what we call additional compensation required for inflation.
Seems kind of arbitrary doesn't it? It's as if once the data starts yielding a result that you don't like you discredit it.
So why not discredit long bond yields in their role as an indicator for "inflation expectations"?
Mrs. Maloney then asks an interesting question, one which many of us have been asking:
Mrs. Maloney: The question that my constituents ask me, I'm going to ask you, "If the economy is so good and inflation is so well behaved, and there's price stability, then why does everything cost so much more when you go to buy something?" They're feeling pressures in their lives and the question I hear from my neighbors and friends and constituents is, "When we have so many economic indicators that are unhealthy, how are we having a healthy economy?" ...Well there you have it - do not be concerned about rising prices because when looking at all the inflation data, these rising prices are just not showing up. When the rising prices show up in the inflation data, then that will likely be cause for concern, but until then, everyone just relax.
Greenspan: ... The reason people are seeing, think they're seeing, prices rising is that they are. They're seeing them, however, for a lot of petroleum related products. The one statistic that everyone is able to audit is the price of gasoline. It's a homogeneous product and it's listed up there on the signs at service stations all the time, and that needless to say has been fluctuating all over the place. But, the Bureau of Labor Statistics does an excellent job in trying to truly get what is the structure of price change in this country, and those data from the BLS, are as best as we can do.
So I think that it's mainly a selective view ... is what people often see in a period like this. But when you look at all of the data, it doesn't show the concern of acceleration, that I often hear as you do.
When asked by Ron Paul why a 1987 dollar is now worth only 55 cents, and if we are cheating people who save money:
Greenspan: Well Congressman, I think the first thing that we have to recognize is that the inflation rate, properly measured, at this particular stage, has been very close to zero for a very long period of time. In other words, as I said earlier, those numbers (the Consumer Price Index) are biased upwards; because of the way we calculate it.In the long history of Alan Greenspan vs. Ron Paul, it appears that it's going to end up as a draw. As seen here, here, and here, it seems there is so much more for these two to talk about. Will they ever get togethor over drinks and settle their differences?
So, while it is true that a number of statistics you quote go back well before the inflation rate stabilized and are reflecting very substantial inflation pressures that existed, especially in the 1970s when the inflation rate was double digit, but the level of nominal GDP has gone up roughly the same, after certain kinds of adjustments, with what the real underlying GDP, properly measured, would have done, and that tells me that we are not unduly inflating the system.
Paul: Well, I don't think that reconciles with the facts that I can get from the Federal Reserve that shows that our dollar is worth 55 cents compared to 1987. If that's not the reverse of what you see in rising prices and inflation, my dollar just doesn't buy as much anymore and the trend is continuous since 1914, so I don't see how you can say there is no inflation.
Greenspan: You and I have discussed this issue at length many times over the years, and I agree with you in part, but I disagree with you in the other part.
Paul: Can you say anything favorable about gold?
Greenspan: I'm sorry?
Paul: Can you say anything favorable about gold today?
Saxton: The gentleman's time has expired, and we're going to go now to Mr. Hinchey.
Hinchey: Mr. Greenspan, I just want to say that we are going to miss you - really miss you. I think that you've probably been one of the most effective chairman in the history of the Federal Reserve ...