Greenspan Q & A
Jude Wanniski
June 15, 2004


I watched Greenspan’s Q&A this morning before the Senate Banking Committee and hope to watch it all on C-SPAN later. CNBC’s "Squawk Box" cut out so often that I am afraid I may have missed something interesting. He was masterful throughout, reminding me how close he came to being a great Fed Chairman, and how much is left in him in the two years he can serve at the Fed once he is confirmed for a fifth term. The most important thing that he did was to stop in its tracks all discussions about the Fed raising the funds rate June 30 by 50 basis points instead of the 25 that now seems baked in the cake. The market reacted as we would expect: from the beginning to the end of his testimony, the dollar/gold price climbed from $383 to $389. As the threat of a sharper rise in the funds rate dissolved, both equities and bonds rallied significantly. The financial markets shouted that they do not see any need for the Fed to be more aggressive.

There still are two weeks before the FOMC actually sits down and looks at the world and decide on policy, but unless there is a sharp decline in oil prices and/or gold in this period, we will have to hope for no more than a 1.25% rate and pray that will be the end of the increases this year. Greenspan`s very last comment today, in answer to a question on what he hopes he can accomplish in the remainder of his tenure, was a bit disturbing. All he could think of was ending the Fed`s "accommodation" in as nice a way as possible, as if he might be in agreement with Fed Governor Bernanke that a 3.5% funds rate would bring the system back into some theoretical "equilibrium." Alas, there was nobody on the Banking Committee to ask Greenspan why he is worried about fighting inflation when the gold price is down $45 from the $430/oz. it touched earlier this year. He knows that all inflationary periods begin with a rise in the price of gold, and if gold is declining, it can very well mean the market is curing itself with the expanding economy`s demands for more liquidity.

In today’s Wall Street Journal, Chicago Fed President Michael Moskow wrote that the funds rate cannot be held this low "indefinitely," and at the same time swipes at the gold signal as having any useful informational content: "Indeed, given its frequent ups and downs, one could say... that the price of gold has predicted nine of the last five bouts of inflation." He is right only in a model that does not contain the concept of an "optimum gold price." If the optimum is $350/oz., and gold falls to $250 and then rises back to $350, the $100/oz. rise would not be inflationary. It simply would nullify the previous deflation. There is not a single Fed governor who employs this concept, including Greenspan, which is why we have to rely on the markets providing other signals that push Fed policy toward the optimum.

Otherwise, Greenspan was terrific, observing that the current budget deficits are not of great concern because the economy is growing nicely, with revenue increases to follow. However, he did express concern that the Social Security/Medicare liabilities would need to be addressed soon. He warned lightly against repealing the tax cuts on capital and marginal income tax rates, said the trade deficit would correct itself, and that China`s currency fix to the dollar is no problem. He did not leave much for the Democrats, except the long-term fiscal problems he cited. I will check back after I review the whole transcript if I see anything I missed in the choppy Squawk Box viewing.

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