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Generational Dynamics Web Log for 21-Oct-04
Economists increasingly skeptical about Fed Chairman Alan Greenspan

Web Log - October, 2004

Economists increasingly skeptical about Fed Chairman Alan Greenspan

"Greenspan's modus operandi now is always to play down problems," said Stephen Roach at Morgan Stanley.

"Greenspan's trying to soften fears," says Josh Stiles, a bond strategist with IDEA Global in New York, adding, "There just doesn't seem to be that much that worries him."

As we wrote yesterday, Greenspan's colleague, Fed Governor Ben Bernanke has been saying repeatedly these last few months that the Fed will say anything it wants, even misleading things, to influence the economy,

We can feel pretty certain that's what was happening on Tuesday, and that Greenspan doesn't believe what he was saying.

The question is this: Given the bizarre, crazy things that Greenspan and Bernanke have been saying, just how much of a state of denial are they in? Are they completely oblivious to what's going on?

I wouldn't be asking this question if it weren't for the fact that I've studied what happened in 1929. The bright economists, financiers and bankers of that day were totally duped. They had no idea what was coming, and even after the crash occurred, they thought it was temporary. It took them three months just to figure out what was happening. And then there was a second crash in 1937. The economy didn't fully recover until around 1950.

From the point of view of Generational Dynamics, I've been predicting since 2002 that we're entering a new 1930s style Great Depression, and that stocks will fall 50% by the 2006-07 timeframe. I see no reason to change that prediction.

Consumer Price Index (CPI) shows modest growth

Meanwhile, inflation has continued to be modest, though higher than in the past. The Consumer Price Index for September grew only .2%, and the "core index," which excludes food and energy items, increased 0.3%. These increases are larger than those of the preceding three months, but still far lower than the much higher rates that would be expected from the near-zero interest rates of the last couple of years, and the over-$50 per barrel oil prices.

The following table shows the values of the PPI (Producer Price Index) and CPI for each month so far in 2004:


                        Changes from preceding month    
                                    2004                
                     Jan. Feb. Mar. Apr.  May June July  Aug Sept
   ----------------- ---- ---- ---- ---- ---- ---- ---- ---- ----
   PPI                .6    .1   .6   .7   .7  -.3   .1  -.1   .1
   ----------------- ---- ---- ---- ---- ---- ---- ---- ---- ----
   PPI "Core index"   .3   -.1   .3   .1   .4   .2   .1  -.1   .3
   ----------------- ---- ---- ---- ---- ---- ---- ---- ---- ----
   ----------------- ---- ---- ---- ---- ---- ---- ---- ---- ----
   CPI                .5    .3   .5   .2   .6   .3  -.1   .1   .2
   ----------------- ---- ---- ---- ---- ---- ---- ---- ---- ----
   CPI "Core index"   .2    .2   .4   .3   .2   .1   .1   .1   .3
   ----------------- ---- ---- ---- ---- ---- ---- ---- ---- ----

As we've said before, Generational Dynamics predicts that we're in a deflationary period, and that prices will fall by about 30% by 2010.

Private foreign investments drop sharply

In a surprise, private investments in America fell sharply in August.

The fall was dramatic -- - to $37.4 billion in August from $72.9 billion in July. Asian central banks made up the difference, saving the dollar currency from disaster.

Maybe this was a one-month blip, but if it continues then it could be the trigger for a serious problem. America's level of public debt is astronomically high, and it's being supported by foreign investors. If those investments fall off, then the American economy will fall sharply, generating a domino effect that will be felt throughout Asia and Europe. (21-Oct-04) Permanent Link
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Generational Dynamics Web Log for 21-Oct-04 Economists increasingly skeptical about Fed Chairman Alan Greenspan

Consumer Price Index (CPI) shows modest growth

Private foreign investments drop sharply

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Generational Dynamics Web Log for 21-Oct-04
Economists increasingly skeptical about Fed Chairman Alan Greenspan