Chairman of the board of governors of the Federal Reserve System is truly a wonderful job. Not only is it at the center of power, money, prestige and mystery, but the occupant can do no wrong. He is always praised for the good times, never blamed for the disasters. Nowhere else in American public life is there a position so similar to that of the pope. Or, perhaps, to the president of Mexico, back in the old days: a high priest while in office -- and a complete nonentity as soon as the sash is removed.
Greenspan knows this, of course. For what other reason would he, at 78, choose to linger on in his marble palace? He has survived, after all, the Internet bubble and crash, and four years of stagnation since then. We are in that brief, happy moment that follows the onset of war and that often precedes elections: The country's growth rate is fairly high, and even employment has been rising these past two months. Now, for the first time since Greenspan was last reappointed in 2000, retirement would not imply admission of defeat.
Not only this, but the future isn't rosy. High oil and gas prices are percolating through our structure of costs, generating low-grade but perceptible systemic inflation. The dollar continues to fall against the euro. Meanwhile, China is quite sensibly converting some of its dollars into a strategic petroleum reserve. This and other stockpiling will work to keep oil prices up (always allowing for that promised gift from the Saudis of a few months' price cut just before the election) while further driving the dollar down.
Greenspan is already telling us, as clearly as he ever does, that the Fed will shortly repeat the mistakes of the last oil price shock, back in the 1970s. Faced with inflation -- even just a small amount -- it will raise interest rates. This is called "fighting inflation." The headline writers will say so endlessly, until you almost think it is true. But the effect is just the reverse. As higher rates drain funds from many companies, they will respond by raising their prices even more. Only much later, when the effect of high interest rates is to clobber demand, growth, employment and commodity prices, will inflation finally decrease.
Stock prices rose in 2003 in part because the dollar was falling. Hence U.S. transnational corporations could convert their euro earnings into more dollars, making their earnings look terrific. (No doubt, the administration's cutting the tax rate on dividends also helped.) A rise in rates and the dollar will unravel this effect. And higher rates may also hit the banking sector, depreciating banks' assets (including mortgage-backed securities) while increasing their costs. Will banks respond, as they did in 1994, by increasing their lending? It's doubtful: Pent-up demand for new loans does not appear to be there, as it was 10 years ago.
The outlook, therefore, isn't for another noninflationary boom. It's for stagflation -- the combination of low performance and rising prices some of us dimly remember from the Vietnam War. Thanks to Iraq and his own longevity, Greenspan is now likely to go out on a sour note: the man who stayed too long.
Greenspan will probably retire in 2006, according the arcane rules governing his tenure. But there is one good thing about this reappointment now. It means that President Kerry will be able to place his own man or woman in the job relatively early in his term. But then Kerry will still face the dilemmas Greenspan bequeathed: How to restore the tax system Greenspan helped unravel. How to protect Social Security from the unrelenting Cassandras of whom Greenspan is the ringleader. And how to maneuver between the devil of stagflation and the deep sea of a sinking dollar.
About the writer
James K. Galbraith is Salon's economics correspondent. He teaches at the Lyndon B. Johnson School of Public Affairs at the University of Texas at Austin.
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