Two Years!

This blog is two years old today! Like a toddler entering his third year, The Mess That Greenspan Made is entering a critical phase of development.

According to Wikipedia, just prior to the phallic-oedipal phase (that sounds like fun) come the terrible twos, characterized by "a toddler's mixture of positive and negative feelings focused on the same person" where "the child is in conflict: wishing both to be independent and to retain the complete devotion of the mother. In this stage, ambivalence is considered to be normal."

It's hard to imagine ambivalence being the norm in the next year, but then again, maybe it's already begun. You'd think that the description of the "terrible twos" above would inspire some sort of a weird Ayn Rand/Alan Greenspan metaphor, but there is internal conflict about whether to proceed or what to do.

It looks like it's going to be a terrible year.


Freud might argue that yesterday's homage to Stephen Roach was not entirely a random selection. It would be hard to disagree with that assessment.

Two years ago today, the post It Didn't Have to be this Way showed up at this blog - sort of like an eight pound baby boy exiting the birth canal. Waaah!!!

Here it is in its entirety:

An appropriate first post - Stephen Roach hits another home run with his latest missive "The Test". The last paragraph serves as an excellent premise for this blog:

"It didn’t have to be this way. The big mistake, in my view, came when the Fed condoned the equity bubble in the late 1990s. It has been playing post-bubble defense ever since, fostering an unusually low real interest rate climate that has led to one bubble after another. And that has given rise to the real monster -- the asset-dependent American consumer and a co-dependent global economy that can’t live without excess US consumption. The real test was always the exit strategy."

Yes, it's easy on the way up. Ever increasing liquidity to meet every emerging problem and everyone gets rich - not rich in the old sense, of course, with higher real income and savings, but through higher asset prices for stocks and homes.

"Asset markets around the world are now quivering at just the hint of an unwinding of this house of cards. And they quiver with the real federal funds rate barely above zero. What happens to these markets and to an asset-dependent US economy should the Fed actually complete its nasty task of taking its policy rate into the restrictive zone? "

All aquiver, that's right. Paul Volker must be so proud of his successor ... about to bring down the whole house of cards with quarter point increases to the Fed Funds rate in the low single digits.

"I still don’t think America’s central bank is up to the task at hand. In the face of disruptive markets or growth disappointments, this Fed has repeatedly opted to err on the side of accommodation. I suspect that deep in its heart, the Federal Reserve knows what’s at stake for the US -- and for the world -- if the asset-dependent American consumer were to throw in the towel. "

This is my central belief on this issue, and the motivation for this blog - that given the choice of some economic pain and a long slow death by inflation, the Fed will opt for the latter. It will never be able to raise interest rates like Paul Volker did, in order to put this fiat currency system back on a track that is sustainable for another generation or two - instead, we will continue to swim out to the deep water and hope for the best.

Hmmm...

Just a little hint of the "royal we". This must have been a phase entered after the first year, apparently driven by a "need-fulfilling anaclitic relationship between the child and its object, which is based on the child's imperative body needs".

Seriously, that's what it says.

The comments for the first post should be interesting to anyone who's followed bubble blogs over the last couple years. When was the last time you saw Ben Jones of The Housing Bubble leave a comment on someone else's blog.

Ben Jones said...

Excellent post and site Tim, thanks for the Roach link..Ben
March 27, 2005 11:01 AM

Dan said...

Tim,

I read a lot of articles with similar views. They all say that things will end up badly. But how exactly?

Dan
March 27, 2005 12:32 PM

Tim said...

Dan,

Well, if anyone tells you exactly how this is going to end, don't believe them - and don't buy anything from them. All you can do is read, listen, and learn, then place your bets. I've heard so many people predict so many things and if you ever go back and check up on their predictions, they are almost always wrong.

I am sure that this global fiat currency system will not survive much longer in its current form, but who knows when or how. Look at the last hundred years of history, and every 30 years or so, there is a major shakeup - we've been operating under the current "US Dollar Standard" since Nixon closed the gold window in 1971, and wars usually precipitate big changes to monetary systems, so I think we are due.
March 27, 2005 1:12 PM

It's not clear that this first effort was all that excellent, but Ben was probably just being generous.

Dan? Are you still around? Were these words helpful at all?

This look back in time prompts the question of whether anything has really changed in the last two years. Aside from an overwhelming number of housing bubble blogs to go along with an overwhelming number of problems in the nation's housing market that have been noticed only recently, everything seems to be pretty much the same.

Waaah!!!