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Today's Commentary: 05.20.04
The Weight of Words
According to Reuters, there are three events that will have some sort of effect on the debt markets, all occurring within the 24 hours. They are as follows: In Houston, Federal Reserve Bank of Dallas President Robert McTeer will give a speech to the Houston World Affairs Council offering "An Update on the Economy". Seattle Federal Reserve Board Governor Ben Bernanke will also be out talking up the Greenspan stance in a speech co-sponsored by the Federal Reserve Bank of San Francisco's Seattle branch and the University of Washington Economics Department called "Gradualism: Why the Fed Tends to Move in Small Steps". And the Chairman himself, Alan Greenspan will speak in Philadelphia at the Eisenhower Fellowships Awarding of the Dwight D. Eisenhower Medal for Leadership and Service.
And while they are speaking, using words that may or may not speak in clear tones, the weight of their words is clearly more of a concern that the derivation of them - especially of late. But that hasn't stopped folks from reacting to the slightest change in vernacular. It has however been far louder than transparent
Twice in Barron's this past week, two of their writers decided to clear the air about certain terminology that is often used to extremes when trying to describe the financial world around us. And with good reason. There is little left to take the knife to than words used by voices that are loud but not transparent.
The Fed governors are trying to help us with our understanding of the word "measured", turning it into something more calculated and clear as the markets sit and ponder the true meaning of their speeches. Their boss lacks either the willpower to admit he may be on the verge of another disaster that he may have to take the blame for or is unwilling to own up to the fact that the Fed might well be obsolete. I am not alone in arguing their obsolescence and that the Chairman has run his course. Unless of course you are the President. His re-nomination of Greenspan for another term comes at a time when inflation is picking up speed, when deflation has been battled into submission, and the cost of oil is reaching its natural albeit higher than acceptable price.
There was a time in this country's history when the markets worked without the help of a Central Bank. Before the Fed was created in 1913, there were naturally occurring periods in the economic cycle with swings in inflation and deflation. They were easy to predict and have become an antiquated argument for the benefits of wartime economies. Companies could always count on higher prices as the country sent its soldiers to foreign lands (inflation) with the exact opposite happening upon their return (deflation).
Rising and falling prices have a place in the economy and should occur without tinkering. And while the Fed doesn't per se tinker, they do control the supply of money. If you are asking the question "how have they done?", the answer will vary widely and depends on who you are.
If you are a consumer, you are thrilled that the economy can recover without any real impact on prices at the register. Inflation is there, mind you, but it is mostly excluded from the meaningful numbers as food and energy are excluded from the Consumer Price Index.
If you are a manufacturer, you have seen productivity rise significantly without the need to create jobs. That productivity was further enhanced by very cheap interest rates allowing many businesses to keep inventories at a 'just-in-time' level. This has hampered these manufacturers from allowing prices to rise naturally.
And while the Central Bank does not print money, they help those that do, the lender, create a much deeper indebtedness than this country has ever seen. James Grant of the Grant Interest Rate Observer warns that the current one percent rate, while comparable to a similar one in place in 1958, has created twice the amount of debt in this country and in turn eating twice the amount of GDP.
Thomas Donlan of Barron's took a look at the root word of inflation and deflation, flatus, as a metaphorical suggestion that these events are blown out of proportion with "self-importance, pomposity and pretentiousness". In other words, if the Fed is playing with money, they are essentially playing with fire.
Mr. Greenspan and company, with their cryptic mumblings and behind the curve reactions have shaken those with an appetite for cheap money. These insatiable beasts will not react kindly to the current round of measured hikes. Without allowing the markets to adjust to the natural laws of money, any promises made, speeches given, or references to historical norms are only words with an undetermined consequence and very little in the way of weight.
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