russell's take on greeny's speech

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    Remarks by Chairman Alan Greenspan
    Before the Economic Club of New York, New York City
    December 19, 2002
    Issues for Monetary Policy

    Although the gold standard could hardly be portrayed as having produced a period of price tranquility, it was the case that the price level in 1929 was not much different, on net, from what it had been in 1800. But, in the two decades following the abandonment of the gold standard in 1933, the consumer price index in the United States nearly doubled. And, in the four decades after that, prices quintupled. Monetary policy, unleashed from the constraint of domestic gold convertibility, had allowed a persistent over-issuance of money. As recently as a decade ago, central bankers, having witnessed more than a half-century of chronic inflation, appeared to confirm that a fiat currency was inherently subject to excess.
    But the adverse consequences of excessive money growth for financial stability and economic performance provoked a backlash. Central banks were finally pressed to rein in over-issuance of money even at the cost of considerable temporary economic disruption. By 1979, the need for drastic measures had become painfully evident in the United States. The Federal Reserve, under the leadership of Paul Volcker and with the support of both the Carter and the Reagan Administrations, dramatically slowed the growth of money. Initially, the economy fell into recession and inflation receded. However, most important, when activity staged a vigorous recovery, the progress made in reducing inflation was largely preserved. By the end of the 1980s, the inflation climate was being altered dramatically.

    The record of the past twenty years appears to underscore the observation that, although pressures for excess issuance of fiat money are chronic, a prudent monetary policy maintained over a protracted period can contain the forces of inflation. With the story of most major economies in the postwar period being the emergence of, and then battle against inflation, concerns about deflation, one of the banes of an earlier century, seldom surfaced. The recent experience of Japan has certainly refocused attention on the possibility that an unanticipated fall in the general price level would convert the otherwise relatively manageable level of nominal debt held by households and businesses into a corrosive rising level of real debt and real debt service costs. It now appears that we have learned that deflation, as well as inflation, are in the long run monetary phenomena, to extend Milton Friedman's famous dictum.

    To be sure, in the short to medium run, many forces are at play that complicate the link between money and prices. The widening globalization of market economies in recent years, for example, is integrating a growing share of previously local capacity into an operationally meaningful world total. That process has, at least for a time, brought substantial new supplies of goods and services to global markets. In addition, the more rapid rate of technological innovation, so evident in the United States, has boosted the pace at which our productive potential is expanding. These shifts in aggregate supply--whether foreign or domestic in origin--influence the relationship between money and prices. Moreover, the tie between money and prices can be altered by dysfunctional financial intermediation, as we have witnessed in Japan. Thus, recent experience understandably has stimulated policymakers worldwide to refocus on deflation and its consequences, decades after dismissing it as a possibility so remote that it no longer warranted serious attention.

    Russell Comment: So what Greenspan is really saying is that although going off the gold standard allowed the Fed to "over-issue" paper money, the Fed is able to control the situation so that inflation can be held in check. But recently, deflation has crept into the equation. From here, Greenspan conveniently leaves the subject of gold.

    This, then, is what Greenspan tells himself when, in the silence of his lonely room, he attempts to justify position now with his former lover-affair with gold. What Greenspan doesn't say is that since 1940 the dollar has lost 90% of its purchasing power. Nor does Greenspan mention the huge infusions of bank credit which occurred during 1995 to 2000, infusions which generated what was probably the worst speculative orgy in US stock market history.

    It's interesting that Greenspan conceded that under the gold standard the price level was stable from the period of 1800 to 1929. The fact is that the price level (although obviously there were ups and down in the market and economy) was relatively stable and the gold-backed dollar retained its purchasing power for over 200 years.

    In his speech, I sensed that Greenspan is somehow trying to console himself and justify his entrance into the world of fiat paper currencies. The capacity of human being to BS themselves is truly amazing.

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