January 18, 2003

Part 1. Global War and Bush

Part 2. Greenspan and Global Deflation

R L Norman

Jmkeynes@Secularstagnation.com

"Geopolitical risks, such as the threat of war with Iraq, tensions over North Korea and terrorism, have added to the list of business concerns," said Anthony M. Santomero, president of the Federal Reserve Bank of Philadelphia, in a speech on Tuesday.

As Washington decides whether to invade Iraq, uncertainty about a war is already weighing on the economy.

Adding to the uncertainty that is discouraging big companies from starting to invest again, Mr. Barbera [chief economist of ITG/Hoenig, an investment firm] said, are the huge differences between the best- and worst-case outlooks in the event of war.

Moreover, businesses can afford to take a wait-and-see attitude right now, Mr. Barbera added, because the economy is not exactly bursting with profitable opportunities.

Daniel Altman War, ‘Uncertainty Weighs on Economy’The New York Times, Web Site,

January 18, 2003.

Our main theme [i.e, the Friedmans main theme] was that the effect of whatever economic forces produced the contraction was magnified by the unprecedented decline in the quantity of money resulting from the
banking crises. Our ancilliary judgement was that the Federal Reserve System could have prevented the monetary consequences of the banking crises, but failed to do so.

Anna Schwartz, 'Understanding 1929-1933', The Great Depression Revisited, Karl Brunner, Boston: Martinus Nijhoff Publishing, 1981.

Introduction

Part 1. Global War and Bush

1. George Bush’s Legacy? : Pan-Arabism and No Alliances

2. American Military: Unbearable Stress and Unnecessary Risks

3. Has Bush Drifted into Megalomania?

4. The Republican Party: Source of the Disaster and The Jeffords Solution

5. Movement Activity and a Democratic Senate

Part 2. Greenspan and Global Deflation
1. Inflation or Deflation
2. Why Inject Money into the Banking System?
3. Deflation and Hot Money from 1929 to 1934: Possible Lessons for 2003
4. Greenspan, Deflation and Open Market Operations

5. Monetary Velocity and Deflation

6. Presidential Economics in 2004
7. Will it Work: Can Inflating the Money Supply Restart Creative Destruction In
2003 or is Secular Stagnation At Work Again
8. Would it Have Worked in 1930: Could Inflating the Money Supply Have
Restarted Creative Destruction ?
9. Would it Have Worked in 1930: No, Keynes was Correct
10. 1930s Model: Innovation and Stagnation, Not Innovation and Job Creation

11. Gold and Inflation
12. External Considerations: PRC and Hard Currency Holdings
13. Internal versus External $ U. S.

Introduction:

Deciding whether inflation or deflation is most likely over the next two to four years is the primary economic criteria for investing today. Trying to get a handle on American foreign policy is the most important political variable; for whatever policies created by Alan Greenspan to deal with incipient deflation, if George Bush’s chaotic, incoherent foreign policies continue, sheer disaster may wreck the entire global economy. This is a global problem, which must either be faced by the United Nations or by the American Congress in the upcoming session. If war in Iraq deteriorates immediately into a war of civilizations, as Samuel P. Huntington described in a 1996 book; Western civilization may suffer consequences of almost Biblical proportions, while Islamic civilization may suffer even more.

At this time America has an economic czar with almost fifty years of experience, Alan Greenspan, who is trying in the last years of his life, to try to guide the country and the globe through the first deflationary trends since 1941. At the same time, American foreign policy is being ‘guided’ by a neophyte, whose utter incompetence is threatening America’s global military position, wrecking alliances accumulated since World War ll, in a foolhardy expedition against a billion Muslims, to try to ‘modernize’ them through raw military force.

Part 1. Global War and Bush

1. George Bush’s Legacy? : Pan-Arabism and No U. S. Alliances

George Bush’s policies have basically driven off most of our allies around the world, leaving him recently to call for an ‘alliance of the willing’. Even he has recognized that NONE of the regional alliances of which the United States is a member, is willing at this time to lend political support, much less soldiers and equipment.

At the same time that Mr. Bush has basically destroyed the multi-lateral alliances which all American presidents have nurtured and coaxed along since 1940, he has so angered the Arab-Muslim world, that the 1950s dream of Egyptian leader Gamal Nasser of a Pan-Arab coalition, which transcended religious, ethnic and cultural lines; is in sight. Bush has performed a task in less than 24 months, which had eluded Arab leaders for most of the 20th century, a Muslim movement capable of transcending the long-term religious and the new secular, more modern-oriented sections of Islam. Saddam’s dream of becoming the new Saladin may yet show fruition, but he may owe more to Bush’s incompetence than to his own competence.

2. American Military: Unbearable Stress and Unnecessary Risks

Moreover, Bush’s incoherent policies have placed almost unbearable stresses on the only ‘partner’, the U. S. military, which has to go along with Bush no matter what. While it appears that the military was angry with Bill Clinton for sending them to so many small foreign engagements with so damned little financial support; Bush in 2003 makes Clinton of 1998 seem like the height of strategic practicality.

At this point Bush has managed to put the military in real danger of facing massive casualties in at least two theatres, Iraq and Korea, while leaving our country at risk of truly massive domestic attacks from Qeada. He has received seemingly reasonable advice from the intelligence services, as well as the military brass and seemingly he has ignored both. He is floating in a dream world, where by the U. S. military acting basically alone, can not simply ‘rebuild’ a single nation like Bosnia, but ‘rebuild’ the entire Islamic world of over one billion people, in an arc of territory stretching from the Western coast of Africa to China and Indonesia.

3. Has Bush Drifted into Megalomania?

Megalomania is defined as ‘a mania for great or grandiose performance’. When applied to a politician, the definition becomes more of a leader who has lost his grip on political reality and begins to apply military force in ways inconsistent with the actual capacities of his military. Adolph Hitler’s unwillingness to permit the army of Filed Marshall von Paulus to retire from Stalingrad in 1943 and his sending of a force into the Ardennes in winter of 1944 against the Allies in France, were both examples of a political leader who was not able to even remotely gauge his actual military capacity against the opposition forces. Saddam himself could well be seen as a political leader incapable of gauging military force with political objectives. No, this is not a statement that Bush is another Hitler, nor even that Saddam is, only that something is seriously amiss in Bush’s attempt to apply an American military force of less than five million in a way that has the distinct possibility of confronting one billion people in dozens of countries, even as Bush has shattered the alliances which might have been used in the effort.

The question is whether Bush has drifted into a state of megalomania and is actually no longer able to formulate foreign policy compatible with the survival of the country. In such a dangerous situation, something has to be done almost immediately to try to get control over policy with regards to Iraq, to begin to rebuild our foreign alliances and to relieve part of the burden the of American military.

4. The Republican Party: Source of the Disaster and The Jeffords Solution

It was from the Republican Party that this disastrous president arose and it is up to the Republican Party to do something to try to salvage the situation, and maybe help the party itself to survive. Probably the simplest solution would be for 2 or 3 current Republican senators to shift their affiliation to Independent, thereby giving control of the Senate back to the Democrats. Jim Jeffords had the courage to realize the George Bush was not capable of exercising the leadership required for a president and who shifted to Independent last year, allowing the Democrats to regain control of the Senate. Today, the political risks are far greater for the country than anything which Mr. Jeffords saw, the very survival of the United States in a modern global economy are the stakes. Nero’s supposed playing of a fiddle while Rome burned, looks like a symphony, compared with the idiotic policies of George W. Bush.

This shift by even one or two Republican senators would immediately allow the Democratic senate to combine with many other Republican senators, to work with the military in slowing down the rising tide towards war in Iraq, while leaving enough pressure on Saddam to prevent him from doing much against our already over-extended forces in the Gulf. It would also begin to refocus the mission upon Qeada, where the worst danger remains.

5. Movement Activity and a Democratic Senate

If the Republican Party is either unable or unwilling to try to put a muzzle on this man for the remaining two years of this presidency; large-scale, nation-wide movement activity may be necessary, to embolden the Democrats alone to seriously confront Bush’s policies and possibly to set up alternative links to the command and control system of the military. Somewhere in the ranks of the Democratic senators, there are people with which the military command could deal and begin to slowly unwind this disastrous mess, which George Bush has created. It does not seem likely that the country can survive in tact with another 24 months of unfettered Bush presidency.

Part 2. Greenspan and Global Deflation

1. Inflation or Deflation

From many views, deflation seems to be the biggest threat to the American economy and unless things improve markedly within the next six months, the Federal Reserve is likely to begin Open Market Operations (OMOs) to begin directly placing raw cash or ‘high-powered money’ into the vaults of banks around the nation. A ‘marked improvement’ would denote a large increase in business investment, leading to good increases in jobs. A ‘marked improvement’ at this time would almost been a miracle

There seems little doubt that the Federal Reserve has begun serious planning to deal with incipient deflation and is likely to continue in this mode, probably increasing the ‘high-powered money’ in the U. S. from 50% to 100% over the next 6 to 8 quarters. In simple terms, this means that the existing ‘high-powered money’ base of about $275 billion would increase to about $400 billion by 1st quarter 2004 and to about $500 billion by 1st quarter January 2005. The beginning of this 8 quarter time table could lag a few quarters more, but the Feds now seems almost obsessively focused upon deflation as the major problem in the global economy.

2. Why Inject Money into the Banking System?

The short answer that many economists seem to believe that the Federal Reserve did not inject enough money, fast enough; into the American banking system in 1930 and 1931 to ‘break the back’ of the economic deflation starting in those two years. Thus a logical conclusion of this belief, is that whatever needs to be done monetarily to try to resolve the supposedly rising deflation, must be done quite quickly.

3. Deflation and High-powered money from 1929 to 1934: Possible Lessons for 2003

In very rough numbers, from a 1975 book by Peter Temin, the 1929 GDP/GNP fell from about $104 billion to about $80 billion in 1934, or almost 25 percent deflation in dollar-denominated terms. The precise or even approximate volume of goods and services may or may not have fallen by this same percentage and I have not seen such volume numbers. At the same time, ‘high-powered money’ rose from about $7 billion in 1929 to about $9 billion in 1934, roughly thirty percent in four years. So if a roughly thirty percent increase in ‘high-powered money’ in four years allowed a 25 % deflation, then it seems logical in 2003 to try to more rapidly increase the ‘high-powered money’ supply; perhaps doubling it in two years. These are approximate numbers and are based upon a database of exactly one series, from 1929 to 1934; as far as I know. Whether or not a two year doubling of the ‘high-powered money’ would stop or even slow an incipient 2003 deflation in the United States is largely unknown. What is clearly known, is that if deflation is beginning in the United States, counter measures have to begin almost immediately, in ‘real-time’ and continue for an extended period of time; again perhaps 8 quarters.

Possibly there is no actual incipient deflation, despite the large number of economic markers suggesting so. But the very possibility that it might be coming, is sufficient to put the fear of G-d into anyone remotely familiar with the period 1929 to 1934. Severe inflation wreck’s economies sometimes, but jobs often survive along with aggregate demand, after a fashion. Deflation may be a ‘black hole’ from which whole civilizations may simply be ground into dust.

While hyperinflation severely damaged the German economy in 1923 to 1925, the existing social democratic Weimar government survived. Democracy was not able to survive the 1930 to 1932 deflation and died with the appointment of Adolf Hitler in 1933. A different path led to the fall of a somewhat democratic government in Japan in the 1920s, but the end result was similar, a war-infused nationalism and the beginnings of World War.

A 1984 book by Gilbert Ziebura discussed the 1920s American foreign policy. The general argument of the book was that the global system, which developed out of World War l, depended upon the United States acting as a financial 'hinge' between Southeast Asia and Europe, what Ziebura called the Washington System and the Versailles System respectively. [Gilbert Ziebura, World Economy and World Politics, 1924-1931: From Reconstruction to Collapse. New York: Berg & St. Martin's Press, 1990. [originally published as Weltwirtschaft und Weltpolitik 1924 bis 1931. Zwischen Rekonstruktion und Zusammenbruch, Frankfurt am Main: Suhrkamp Verlag, 1984, translated by Bruce Little.]

4. Greenspan, Deflation and Open Market Operations

Thus Greenspan and anyone likely to assume his position, should the unlikely and unfortunate occur prematurely; is probably going to run this two-year ‘high-powered money’ doubling, in the reasonable hope that deflation may be beaten; if hit hard, heavy and fast. If deflation is already here, then the worst that may happen from this course of action is that it might not work within two years. But then, that could mean that more stimulus probably needs to be injected into the banking system, not less. And the ongoing injection of ‘high-powered money’ into the banking system would then continue, perhaps going to $750 billion in a second 8 quarters series. And so long as this injection of ‘high-powered money’ into the banking system does not trend into hyper-inflation and the jobless rate stays above 10 percent, some level of OMO needs to continue, even if the money has to be ‘loaned’ to banks, which no longer have negotiable securities for the Fed to ‘buy’ in exchange for the money being injected.

5. Monetary Velocity, Deflation and 2003-2004 ‘High-Powered Money’

Another key variable in this thinking is the ‘velocity’ of money, a term developed in the 1930s by British economist John Maynard Keynes. Velocity is the number of times in which the currency ‘turns over’, ‘circulates’ or ‘recycles’ in a year. This means that the Federal Reserve need not have a separate piece of currency in circulation for each transaction. Velocity tends to speed up during booms and slow down during recessions and is a good measure of how well the economy is functioning.

Keynes believed that money injected directly into the working class was most important as stimulus, because of the margin propensity of the working class to spend; about 94 percent of all additional income. Thus most money directed at the working class would be spent and not saved. Keynes was in favor of the central government distributing large amounts of borrowed money to the working class, which would spend the money immediately and hopefully would then be respent multiple times during the year, encouraging business to invest in more jobs. This was Keynes’s way of using velocity.

Velocity in Keynes’s mind was an indicator (or a ‘dependant’ variable), showing the effective buying power of the working class. Trying to increase monetary velocity by adding ‘high-powered money’ to the vaults of the banking system, is not generally how Keynes might have tried to relieve or prevent a Depression. In Keynes’s mind, simply adding cash to the banking system, in the absence of the ‘animal spirits’ required for additional investment by the private sector, would have been like ‘pushing on a string’. If very low interest rates would not encourage investors to bring new innovations on-line, then inflation from more ‘high-powered money’ would not likely either. For Keynes, increased ‘aggregate demand’ tended to increase velocity and not the other way around.

Current Federal Reserve thinking therefore must be that more personal consumption can be encouraged from inflation, as people holding money may be more willing to spend it immediately, rather than loose buying power by holding on to the money . And this may well be true for a while, but if adding to the money supply with ‘high-powered money’ does not in some way increase either wage levels or the number of jobs in the economy, this initial burst of buying will not last. As working people spend at least part of their meager savings, consumption might increase marginally, but as their savings falls ever lower, they are unlikely to be willing to spend all of the savings.

Estimating ‘high-powered money’ needs in 2003 and 2004 is slightly differently when thinking from a velocity standpoint, since velocity would be being used as an ‘independant’ variable in trying to predict or project ‘high-powered money needs.

. A simple definition of velocity is to divide the GDP or GNP by the ‘high-powered money (HM)’ in the system, (GNP / HM). No doubt there are more accurate and sophisticated ways of seeing velocity, but this is a good rule of thumb. A very crude analysis of Peter Temin’s 1975 numbers, would say that velocity was about 15 in 1929 ($104 / $7) and was down to about 9 ( $80 / $ 9) in 1934. The idea that the monetary velocity fell by almost half, even as the ‘high-powered money’ was rising by 30 % (from $7 billion to $9 billion), is frightening. At a minimum, the 2003-2004 Fed policy needs to keep the existing velocity close to 35 ( $10 trillion / $275 billion ). Thus if the velocity seemed to be falling to 30, at a minimum, ‘high-powered money’ might need to be $335 billion. A more disastrous fifty percent falling of velocity towards 20 in 2004 as seems to have occurred between 1929 and 1934; would imply a ‘high-powered money’ base of $500 billion. These are extraordinary numbers to consider.

Despite the simple definition used in this paper, the actual relationship between falling velocity and deflation may be trickier than has been described here and may not be linear, thus a one percent fall in velocity may not lead to or project a one percent increase in deflation. Thus trying to use velocity as a prime indicator for ‘high-powered money’, may lead to inaccurate projections. Presently I have little data for arguing either way.

6. Presidential Economics in 2004

It might be noted that this Federal Reserve chairman is not likely to want to see this Republican president run with 10 % unemployment in 2004 and a rapidly deflating economy might well create that much unemployment for the next presidential race. After 1992, Greenspan was seemingly accused of not trying to revive the 1990 U. S. economy in time for George W. H. Bush to retain the presidency in 1992. This charge has always been faulty, ignoring the amount by which Greenspan lowered the Fed’s interest rates from 1989 to 1992, from about 10% to about 3 %, an historically unprecedented decrease at the time. The actual problem, was that the private banking system simply held their high 1990 interest rates high, and simply kept the rising ‘spread’ between their cost of money (i.e., the banks cost of money) and what they were charging companies and consumers. This increasing interest rate ‘spread’ was simply applied to the bottom lines of the banks and the economy basically stagnated through out the last 8 quarters of GWH Bush’s administration. Suffice it to say, Greenspan would not want a similar charge thrown at him or his immediate successor in 2005.

7. Will it Work:

Can Inflating the Money Supply Restart Creative Destruction In 2003

or is Secular Stagnation At Work Again ?

Greenspan’s two-word definition of economics might be ‘creative destruction’, a term whose origins traces through Joseph A. Schumpeter in the 1930s and back to Nikolai Kondratieff in the 1920s. Basically the term means that capitalism is capable of developing, deploying and ‘creating’ labor-requiring innovations faster than capitalism’s tendency towards job ‘destruction’ through increasing efficiency on the road to faster profits. This is a delicate process, which requires a strong and competent central banker, capable of correctly reading the myriad economic series and correctly increasing or decreasing the interest rates and the money supply. The term is more fully defined in several articles on www.Southernbanking.Com.

If the Fed is going to inject this much raw cash into the banking system, what is the likely result to the existing value base of people and companies. In short, can it work and will it work. The short reply is that it could work, but that it may not. A first consideration is the reaction of the People’s Republic of China (PRC), which controls at least $250 billion in hard currency. While this is among the world’s largest central bank reserves, it was pointed out to me on January 17, 2003, that China’s private banks are in poor shape, perhaps as serious problems as in Japan. PRC will be considered in a separate paragraph below.

8. Would it Have Worked in 1930:

Could Inflating the Money Supply Have Restarted Creative Destruction ?

What is most at issue is whether or not the currently likely-possibly prescribed 2 year doubling of ‘high-powered money’, would have actually succeeded in the 1930 to 1934 period. I believe that it would not have, again for reasons explained at length in 4 papers written between 1996 and 2000, on www.Southernbanking.Com. The theoretical question devolves around the accuracy of Milton and Rose Friedman’s general belief that poor monetary policy may have either ‘caused’ the 1930s Depression or at a minimum deepened its level of joblessness. Peter Temin’s 1975 book attempted to statistically test this idea. The available data, was poor, in that the series was annual and not monthly or even quarterly and the likely worst effects of poor monetary policy would have been felt within 8 quarters of the Crash of 1929, thus only giving 2 points in time to run a regression.

As it was, Temin seemed to have used data from the whole 1930s decade and the result was not to accept the Friedmans’s theories of poor monetary policy as a major causative factor in the Depression. Given all the weaknesses of the data, Temin seemed to have trouble coming to a conclusion; but the data seemed to have been better fitted with a traditional leftist theory, ‘over-production’ or ‘under-consumption’, an ‘archaic’ theory in Temin’s estimation. Temin was no friend of left-wing ‘archaic’ theories, but his book seemed to be more supportive of this ‘archaic’ theory than that of the Friedmans. Temin later quoted in a Wall Street Journal article, which was more supportive of the Friedmans, and he may well have published other academic articles after the 1975 book, which were more supportive as well.

9. Would it Have Worked in 1930:

No, Keynes was Correct

Still it is possible that Temin’s results were actually consistent with an ‘over-productionist’ view of political-economy and that monetary policy could not have resolved the early 1930s problem. John Maynard Keynes’s ideas of secular stagnation and the ‘liquidity trap’ would suggest that monetary policy alone cannot resolve certain levels or types of crisis in capitalism. Better monetary policy might have delayed the effects of stagnation, but would not necessarily have encouraged investors to invest in more production in an already over-producing manufacturing system. Cheaper money would not necessarily have encouraged the jobless to borrow more to consume, in the absence of a likely or at least a possible job in the foreseeable future. In the 1930s, jobs were hard to foresee for many people, and what those with jobs often saw in the future, was being laid off. It was not a time when even very good monetary policy might have resolved the crisis, even in 1930 or 1931.

10. 1930s Model: Innovation and Stagnation, Not Innovation and Job Creation

The major issue was that a new application of an older, labor-needing innovation, previously used largely as a ‘consumer’ item; became used on the assembly lines in the early 1920s. Small electric motors spaced widely along the long assembly lines of manufacturing plants, driving efficiency up about 50 percent between 1922 and 1927. This efficiency was at first seen as bottom line profits, driving stock prices in 1928 and 1929. It soon manifested itself as massive over-production, and in the early 1930s the entire private sector became addicted to increasing efficiency each year, within a declining GNP, resulting in declining job each year, which fed into the next year’s declines. Profits were maintained for a while in the monopoly sector in this fashion, but at the expense of increasing unemployment in the United States, nearing 25 percent at the worst of the Depression. Over efficiency had created a model of private investment where innovations were increasingly made to cut labor costs from an existing labor base, not create new products and jobs. Business was in a ‘liquidity trap’, and neither lower interest rates nor more money available from the banks was going to encourage the private sector to increase borrowing for new production.

The way that Keynes saw to break the cycle, was for the central government to borrow money and distribute it in some fashion to the jobless masses, knowing that they would spend almost every dime, which they could obtain, because they needed it. They were poorly shod, had poor medical treatment and were often semi-hungry. And simply giving the private sector a lot of tax ‘giveaways’ in the 1930s was not going to encourage the ‘animal spirits’ to invest in jobs again. Too many factories were already empty. There was no ‘need’ to build more empty factories.

11. Gold and Inflation

Seemingly the ‘gold bugs’ are forever pushing gold as a source of investment or at least as ‘ hedge’ against ‘fiat’ currency fluctuations. Is gold a good bet in this evolving economic environment. Probably the answer is a qualified maybe, to a qualified yes, but only as a way of preventing a fast inflating national currency from hurting the value of a given persons or companies holdings. Very few sources of value are likely to gain value over the next ten years, and simply holding current 2003 value, albeit lower than value in 2000, may seem as a major victory for anyone’s portfolio in 2010. Gold has often been a small percentage of many portfolios, often less than 5 %. These gold holdings are frequently not the actual gold, but stock in one of more gold producing companies. But over the five years, a 10 % gold position might not be unreasonable.

Gold might follow the inflation of the dollar, and with a possible increase in U. S. ‘high-powered money’ from 50% to 100% between 2002 and 2004.

12. External Considerations: PRC and Hard Currency Holdings

A major wild card in all of the above is what will the PRC do with its had currency holdings in its national bank, perhaps $250 billion or more. The PRC has been running huge export surpluses for several years and has ‘banked’ much of this money in the form of hard currency reserves. I am not aware of what has occurred with Hong Kong’s hard currency reserves, about $75 billion in 2001. Hong Kong’s currency $HK has been held by a ‘peg’ of about $7 HK for each $ US in its reserves. This ‘currency board’ system hurts Hong Kong when the $US is strong, but would help Hong Kong greatly if the $ US was to inflate. I do not know if PRC counts the Hong Kong reserves in its reserves at this time, or what degree of control PRC exercises in any event. At this time, the PRC currency (the yuan or remimbe) is not convertible, while the $HK remains so.

How the PRC decided to deal with a large increase in $ US ‘high-powered money’ or raw printed cash, is probably the biggest question mark over the next five years. The PRC is split two directions over the issue of the relative strength of the $ US. PRC needs perhaps $100 to $150 billion in net exports to the U. S. for several more years, and thus needs a strong dollar, which discourages U. S. exports back into China. However should the rest of the world begin to dump dollars, if China held back and did not dump at least some of its dollars, China could lose a lot of value on the retained dollars.

13. Internal versus External $ U. S.

Another major issue is what happens to the about $400 billion in ‘high-powered money’ not in the U. S., but in the global economy. This external U. S. currency is often two-thirds of all U. S. dollar ‘high-powered money’. One way of looking at this money, is a $400 billion loan by the rest of the world to the United States, interest free. Another way of seeing this money, is that the $ US is the single currency most often negotiable around the globe and that there has to be a global reserve currency and that at this time, only the U. S. has the capacity to support a global currency.

Still, reserve currencies have been known to fall as well as rise. For many years in the 1800s and early 1900s, the British pound sterling was the primary world currency. Some economists place a major cause of the 1930s Depression on the idea that the pound had fallen too far by 1930, while the dollar had not become strong enough politically to pick up the role of the pound at the time of the 1929 crash.

Conclusions: Greenspan and Bush

For different reasons, the leaderships of both Greenspan and Bush are heading into directions unlikely to be sustainable. For Greenspan, the belief based upon the continued existence of labor-based long waves, that Open Market Operations can redirect this deflating economy is possibly incorrect. This is because labor-based, long waves ended in the Great Depression and only a pseudo-long wave based in massive Keynesian debt from World War ll kept the capitalist system afloat from about 1946 until about 1966. The economy stagnated until Ronald Reagan then started a new debt-based long wave, unfortunately giving the value of the debt to the very rich.

Greenspan took the helm of the Federal Reserve in 1987, just as Reagan’s mountain of debt began crashing the economy and it was Greenspan who stabilized the crashing banking system between 1987 and 1989. In 1989, he began trying to restart the economy and lowered the Federal Reserve rate from about 10 percent to about 3 percent. Greenspan gradually brought the economy back, but not quite soon enough to save George H. W. Bush’s 1992 reelection campaign. As the economy finally began moving in late 1992, the new president, Bill Clinton, basically deferred much of his economic policy towards Greenspan throughout much of his eight years.

If Mr. Greenspan is mistaken in his leadership in trying to defeat deflation, he at least is fighting what appears to be the right battle and with a full arsenal of economic theory, and will certainly look in different directions if his prescriptions seem to be failing. And if it seems to be necessary to largely repudiate Friedmanite monetarism to save the economy, it will be done and Greenspan will move in another direction. Greenspan is probably the only real hope for moving the economy forward through the deflation.

Bush is simply ignorant of most 20th century history, the scion of a wealthy influential Texas oil family. He has no serious analysis of how to lead the country and may well wish that he had never left the Texas governorship. The country desperately needs for George Bush to rethink his lack of policies and/or just resign. Alternatively, the Republicans can try to get control over foreign policy, the Democrats can make the attempt and/or large nation-wide protests can significantly impair Bush’s ability to drag the U. S. military off-mission into a quagmire in Iraq. There are no easy answers to the situation the United States finds itself in 2003, but there had better be some answers before George Bush’s foreign policy forecloses whatever possibilities Mr. Greenspan has to start moving the global economy through the deflation.