Mr. Greenspan, I Think You Are Being A Bit Sanguine


Abstract needed here …


Senate Banking Committee, Washington, DC July 16th.

Mr. Greenspan, I think, has lived out his luster. Sir Alan, actually. (Knighted by the Queen, you know!) This last committee hearing put the final tarnish on his crown. Geoffrey Wolff recently said, “writers intrinsically differ from other people…by a vocational obligation to be dissatisfied.”[1] So, it’s my vocational obligation to offer this critique. I am up here in Canada for part of the summer, the new home of libertarianism, so I might be influenced with free spiritedness as well as from the Canadian press slants, especially from one of my favorite news papers the Globe and Mail-for you Yankees down there, that is the business savy national daily, which partners with the Wall Street Journal.

Committee hearings are part of the dialogue between the three branches of government. They occur as one branch contemplates policy change. Frequently, Greenspan is summoned to the hill by various committees to comment, as well as give various Senators a crack at influencing Sir Alan before he performs his single act of terror-raising or lowering interest rates. He also likes to use these sessions to ‘signal’ what he will do next, to avoid shock waves. Of course, in this economy, that is like signaling a coma patient that a feather fell. Those of you who still have full-time jobs don’t have the opportunity to see the live action on C-SPAN or MSNBC to arouse your frustrations. So, I will arouse them for you. I recommend you call your state Senator or contact committee members after reading this, and tell them how you feel-whatever your point of view is on this topic.

(Committee member statements in bold):

Greenspan: Goods consumed that are manufactured outside the US has been increasing for sometime now. Manufacturing productivity is rising and growing at a faster rate than the rest of the economy. These two factors have created a reduction in demand for US jobs. (Duh!) These issues are compounded by currency issues and money supply. Greenspan waxed on the nature of the economy is becoming increasingly conceptual… And I think that is good for the economy.

Conceptualization in industry is firms who basically make their money from ideas-software, entertainment, financial and consulting. The problem is they really don’t make up a huge % of the Global 500[2]. In the top 100 there are about 14 conceptuals-5 are American[3]. Out of the Global 500, financial institutions are distributed fairly evenly across the G7, and our big conceptual company-Microsoft is ranked 137.

Senator Dodd of Connecticut responded:

But if your job is lost because you work for a firm that makes stuff-if your job depends on making stuff-that is not conceptual to that person. Thank you Senator Dodd!

Senator Schumer of New York thinks that part of the reason we are losing jobs is trade with China. China has pegged their rate to the US dollar, which allows them to continue to have favorable pricing next to US labor costs, product price etc. contributing to the trade imbalance. But corporations seem to be doing ok. High corporate profits with high unemployment lead to a concentration of wealth. Incomes of a few continue to rise, yet more people in the middle class are losing jobs and experiencing loss of income. How long can that continue? He queried Greenspan:

With rising output the GDP will keep rising and eventually more jobs will be created. Really, from where?

Senator Sarbanes of Maryland interceded in this intellectual whimsy by stating
Mr. Greenspan, I think you are far too sanguine, considering the dire situation of the economy. We have a 2.6 trillion deficit-that’s 25% of our GDP. Our current account deficit is $544billion!

Senator Shelby of Alabama, the committee chair, pointed out: We are becoming more and more dependent on the interception of foreign governments and lenders like Japan and private funders. The ‘R’ word was not used, but concerns were definitely expressed. It definitely gives us pause, when you see charts like this (figure 2) from the Department of Labour Statistics. Figure 2

Sorry, readers from Utah, your Senator Bennett, should win the Herbert Hoover Award to Economics! His basic position, in agreement with Greenspan, was that we are in a recovery. He compared the US to Germany. The Germans would rejoice at a 6.2% unemployment. Germany, in fact, is in a recession. But we added 30,000 new members to the unemployment roles last month. And Europe overall is not too hot-we are too interconnected to feel competitive with any major nation.

The committee got into rants on currency manipulation, free trade policy etc., and whether we are too accommodating to China, and whether the Fed-Sir Alan-will change his strategy. So, Greenspan promised “to keep interest low until the recovery is established to ensure the reelection of the US President George W. Bush-oops, sorry-to promote satisfactory economy performance” (a bit of interpretation from Globe and Mail writer Simon Tuck) They again miss the beat here.

The premise here is that a lower dollar will make goods more attractive to export, thus stimulating the manufacturing base. That just hasn’t worked, since countries like China peg their currency to ours. That means the value of the currency is always in relation to ours. It basically reset the whole game on an even playing field. And these guys in DC were discussing that China should be strong enough to free float like the rest of us-and that would help our problem. China has been so malleable in the past, right? And even so, all these circular dialogues again miss the point. And so does Bush. Consumer spending in our economy unfortunately has mostly been fueled by debt. Those low interest rates are way too attractive! Think car loans, house loans and credit card debt. I am not an economist, but I don’t get how higher government debt, corporate debt and personal debt is going to lead to a brighter future.


  • Debtor nations wants to borrow-but can only deliver 1% interest-lenders lose interest…in that kind of investment.
  • The government whines that Americans are not ‘savers’ and then does everything it can to encourage spending-exacerbating debt. As our dollar falls, so does Canada, and most of Asia and South America.
  • So the dollar free-fall strategy will not produce the desired outcomes. Desperately seeking decent devices to invest in, investors ran to the market, which does not have a sustaining theme.
  • Remember, the last overheated market created an environment for corruption-unlikely this time-CEO’s are not making too many promises this time. But it also created many post-high losers! P/E rations are already high.
  • Watch-out! Mattress, Etc, I think they have an 800 number you can get 24 hour delivery!

Point of View

In reality, the big hunks of the global economy are the usual suspects-Makers of Stuff-auto, industrial equipment, ships, motors, airplanes, computers, telco equipments etc.; oil and chemicals; and stores to sell stuff. And as it turns out, the Global 500’s top 10 employers in the U.S. don’t look like conceptuals-Wal-Mart, US Postal Service, McDonalds, and UPS. Add to that the largest employers in all sectors-Federal and Local Government, Educational institutions, DoD, and agricultural sector and it challenges the conceptual economy theory. As a conceptual worker, myself, I am pretty grateful to the people who grow, make, deliver and haul away the remnants of used stuff. I want them all to get a fair deal! We have gone through various philosophies over several administrations on the role of government in the economic zone. George Bush Senior lost the election for failure to offer strategies to help the recessionary outlook of his times. Bill Clinton endorsed government and World Bank supports during Asian, Mexican and South American crises. Early Bush Junior strategy was to play hands off. The ousting of O’Neill was the signal of a more engaged government. When times are tough, US citizens want some kind of action from DC.

If the government is to truly help in the issue of shrinking industrial base, they need to think about how the mechanics of corporate performance issues can be influenced and translated to policy, to impact that performance. The game is focused around corporate performance, where winning by a sliver counts-margins, market share etc. Capital investment, transportation cost (a factor of energy costs) and other issues can make a market more or less attractive for industry (beyond the obvious labour cost issue). Acting poor (other countries should change for us to get better) but talking rich with other trading countries (who are also struggling) will not solve the long-term issue!

1] Vanity Fair, July 2003

[2] Fortune Magazines most recent list was published July 21, 2003

[3] CitiGroup, which shrank by 10%; AIG- Insurance, that industry getting a great ride. JP Morgan, which shrank 14% since last year; and AOL Time Warner and Freddie Mac, which grew.

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