Will Greenspan Lose His Wreath Of Honour Before He Retires?

Monday, August 29, 2005

Exhausted by the myriad of reports from the Fed-weekend in Jackson Hole I managed to follow at least partly - while "clearing the brushes" on my modest plot of land - one core issue arose that did not get covered in those blogs who otherwise did an outstanding job of bringing us everything newsworthy from the event. Hat tips to Mark Thoma, David Altig, Tim Iacono, and Michael Shedlock. Sorry, I adhere to a 5-day week.
Will chairman Alan Greenspan, once even hailed as "the maestro" be able to save his wreath of honour into retirement which is 155 days away? Given the developments in the energy sector, the housing market, the non-core inflation outlook and the delicate fragility of economic growth lately it could as well happen that the public (and especially politicians with plummeting approval ratings) will look for a target that they can aim their rotten apples, eggs or tomatoes at.
Why is it that the echo of all the voices and writings about Greenspan suddenly sounds far less reverential than it did only a few weeks ago? Half the world has been abuzz the housing bubble in the US for quite some time. Greenspan has only recently strenghtened his speech from tame "regional bubbles" to "froth" and now to "the bubble" when he was talking about the property boom.
It seems as the world is finally coming face to face with the fact of record oil prices, the federal, local and personal indebtedness in the US, a wealth illusion built on low interest rates and a decaying infrastructure while under competitive pressure from the two emerging Asian giants China and India. Compiling these facts and several handful more listed in the post "FRB's Kohn: When the Unexpected Inevitably Occurs" it is understandable that people will begin to look for excuses.
Looking for a scapegoat is quite easy in hindsight. "Easy Al", so the maestro's new nickname has done too little, too late, a concern voiced first by his predecessor Paul Volcker who said in April, "Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot. What really concerns me is that there seems to be so little willingness or capacity to do much about it." In a TV interview Volcker then had also warned about "the lot of dollars we recently printed."
There is a growing concern that the acting Fed chairman was too accommodating in removing the accommodative interest rate policy of the new millennium with his 25 basis point hikes.
Greenspan's final days at the Fed could now indeed become a race with history. At $60 per barrel Greenspan said this could shave 0.75 percentage points of GDP growth. So what will $70 oil do to the economy, assuming the official forecast still stands at 3.5 percent growth in 2005, before taking into account adverse oil effects?
As there are more reasons for seeing oil trending still higher or at least plateauing on the current levels than for anything else, Greenspan faces the difficult task of balancing adverse growth effects with a worldwide desire to reduce dollar holdings. Russia has again rebalanced its currency basket to 30 (20) percent Euros in August and the Chinese were even better at that game, announcing a currency basket for the Yuan exchange rate without giving so much of a hint about the individual weightings. Korea is diversifying out of the dollar and so is Indonesia and several other Asian nations. This is bad news for the happy spenders in the White House. The US has to attract $3 billion every day (!) just to keep running. You don't get that kind of money when investors begin to think about uncertainty of the greenback's fate.
Greenspan will not be able to have the cake and eat it too. Either he keeps the dollar propped up by making it more attractive to foreign investors through higher interest rates and risks to pop the housing bubble and with it consumer spending; or he delivers to the economy and will stop raising Fed Funds above the 4-percent mark which is considered the lower end of the neutral zone. But that does not leave enough ammo in the holster for his successor in order to even out the next downturn of the economy that seems to be written on the wall.
NOTE I: I am overwhelmed by the emails that are still filling my in-box regarding the widely read post "Iranian Oil Bourse Could Kill The US Dollar" which also appeared in Asia Times, Financial Sense Online and spread from there onto still more websites. Please be patient; I hope to have answered all email by the end of this week.
NOTE II: Thank you to all my readers as I have crossed the 50,000-page load mark today. From my hometown to Mongolia, from NY to LA, from South Africa to Burkina-Faso or from Mexico to Chile, The Prudent Investor has gained a readership spanning the whole globe, including a good part of the Wall Street firms, countless federal authorities and governments as well as several central banks. A special salute goes to all fellow bloggers who helped me in this process by linking to my blog.


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