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Greenspan's peculiar economic philosophy holds that sound money is everything. This from someone who in the '60s was advocating a return to the gold standard. We can deduce that he would just as soon have zero growth if it meant a sound dollar with no inflation. Rationally speaking, as long as the growth rates are higher than inflation rates, there is no problem for anyone except people who buy bonds on fixed interest, and those who keep their money under the mattress. For the majority of us who do neither, our assets and incomes will rise with inflation. For people like Greenspan, and bond-buyers, this is obscenity, an immoral assault on the foundations of capitalism.

And what if Greenspan followed through on his threat? If the Fed spikes interest rates, it may tempt some money from the equity markets into bonds. The problem is that the Treasury isn't issuing as many of them now that federal budget surpluses are paying down the national debt. But rate hikes reduce capital spending as companies face higher interest charges. That means that unemployment goes up, and, so does any tendency for employees to ask for more money. The increases are unlikely to have any direct effect on consumer spending since American consumers run up so much credit, and because most banks are charging a usurious spread -- the highest ever between what they pay for money and the rate at which they lend it to others.

The chain of cause and effect gets more tenuous with every link, which is why economics is as exact a science as phrenology or astrology in its application. It can always provide a retrospective explanation, but is lousy at prediction.

And no one has mentioned the biggest macroeconomic problems that the country has. The U.S. trade deficit is running near $30 billion a month. If any other country ran such a deficit and such an overseas debt, the International Monetary Fund would be enforcing austerity measures and calling for reduced government spending. This deficit is paid for because foreigners are prepared to accept the U.S.'s biggest and most distinctive export -- greenbacks. But a rate increase has its most immediate affects on the manufacturing industries that are struggling to keep up with consumer demand. If their efforts are hampered, and consumers keep spending, then the deficit could get worse.

If the market correction continues, and only the gamblers and the high-fliers lose their money, then the rest of us may not have to worry. But there is the lemming effect on the economy. There may be a Darwinian effect as the people who put their money into dot-com IPOs are weeded out of the financial gene pool. What we really have to watch is the damage that may be caused to the real economy by Greenspan's irrational and obsessive despondency.
salon.com | April 17, 2000

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