I think it is a rock solid appointment. Being concerned about the stability of the Dollar is about the only function the Fed Reserve should execute. Covering for spendthrift politicians should be the least of its' concerns.

Greenspan keeps his eye on the ball and ignores certain commentators, who tend to give opinions that are not in there area of expertise.

I agree Greenspan needs to be replaced. That said, changing the Fed Chairman in the middle of an election year might have caused problems for Bush as the Dems could have attacked his replacement and used it to bash Bush on economic issues. I believe most of America, which doesn't follow economics closely, has a good opinion of Greenspan.
Hopefully Bush did this just to get through the election after which Greenspan will retire and Bush will come up with someone else.

h:

He's caused two slowdowns fighting non-existent inflation.

Just because it's apparently non-existent doesn't mean we shouldn't fight it. And this time, conditions are more than apparent. Plus, any turmoil in China will have more of an effect on the US economy than any free-fall in the baht or 'collapse' in Russia. Greenspan has to make sure than any inflation is due to shortages, not currency debasement - there is a tremendous difference between the two, even if the public doesn't sense it right away.

If it's non-existent and you fight it you stifle your own economy. You cause real human pain because of your delusion.

Give the recovery time, so that people take a good economy for granted. Then Greenspan can get his gold watch and a hearty handshake. Until then, he's a security blanket for a lot of people.

Just because inflation is low, doesn't mean it's non-existent. And it doesn't mean that it can't increase. Inflation may not be a present danger, but it is needful to be aware of it, and to have ready and sharpened the tools for combatting it.

The inflation was non-existent because Greenspan snuffed it out before it could get going.

Besides, he's such an icon among the political class right now that no president has the stature to replace him.

Apparently non-existent is not the same as absolutely non-existent. Inflation is not a phantom that we can sweep away by waving our hands. Now you sound like one of the 9/11 families, playing on pain.

The problems of the late 60s and mid-70s through 1983 had to be fought. And preventing such a mess again is worth fighting, even if inflation seems dead on any given day or week or month.

Is Alan Greenspan the best 'fighter'? I am sure there are others. But given the fecklessness of Congress with respect to fiscal policy, the Fed. needs to be imperious when it comes to monetary policy. Maybe not the most democratic system, but it works better than anything else.

OJ, what do you call it when housing prices, food, commodities, medical care all go up in price? What does milk cost in your neighborhood nowadays?

Inflation is an increase in the money supply relative to demand. We have inflation. The money supply has gone through the roof since 1995. Inflation causes higher prices, which we are starting to see accelerate. It is a trailing effect, but once it gets going, it is very difficult to stop. At this point there is little Greenspan can do but continue to inflate the currency. The only other alternative is a deflationary debt liquidation and depression.

jim:

1983.

Robert:

Discrete price increases caused by government intervention aren't inflation. No worker can coimmand higher wages, no manufacturer higher prices. Inflation is dead. Reflexive worries over momentary blips in inherently volatile prices are silly.

New bumpersticker idea - "Start Seeing Inflation".

It is there, to those who are willing to see. http://cbs.marketwatch.com/news/story.asp?guid=%7B4F9F34AC%2DC631%2D4F36%2DB67E%2D7F38E381EBBD%7D&siteid=mktw

OJ:

How old are you? This is what inflation looks like. This is what it looked like in the 1970's and this is what it looks.

Deflation was last year's meme. Let's look at the numbers. Dow Jones Spot Commodities index up 26%, Reuters UK 16%. the 10% gap should be due to dollar depreciation/inflation. All but one or two of the cash commodity prices listed in the WSJ were up yer over year.

15 year Treasures yield 5.58 but inflation indexed they yield 2.37, an implicit inflation prediction of 3.2% 10 years 4.77 and 2.0 for 2.8% and 5 years 3.85 and 1.21 for 2.6%

We have inflation. The fed needs to begin to tighten up.

Robert:

Will a gallon of gas cost more or less this time next year?

This guy says it much better than I can:

"The fix is in.

Alan "Bubbles" Greenspan has been officially appointed to another term as head of the Fed. If he survives to serve his term, he will be the longest-serving chairman the Fed has ever had.

Readers need not worry about an interest rate shock before the November elections. If it comes, it will come from Mr. Market, not Mr. Greenspan...or over Mr. Greenspan's dead body.

Maybe Mr. Greenspan will be the one whose mug ends up on Mt. Rushmore. He is already the most famous public employee since Pontius Pilate. Surely a man who has done as much damage as the Fed chairman deserves some sort of monument.

Of course, the prevailing view of the man is positive, almost psychophantic (our own word...don't bother to tell us it is misspelled).

"Alan Greenspan has done a superb job as chairman of the Board of Governors of the Federal Reserve System," said George W. Bush as if he would know, "and I have great confidence in his economic stewardship."

Translation: the little schmuck can be counted on not to raise rates before the election.

The New York Times:

"Greenspan has arguably been Bush's most powerful ally, reducing interest rates to their lowest levels since 1958 and keeping them low long after the economy began to grow rapidly last summer.

"Defying long tradition, Greenspan's policies of rock- bottom interest rates greatly softened the economic downturn of 2001 and a success (sic) of economic shocks since then. Even though corporations drastically cut back on both investment and hiring until late last year, cheap money from the Fed kicked off a boom in housing and home- refinancing that pumped billions into the U.S. economy and kept consumers spending."

There you have it: the U.S. economy, 2004, as interpreted by the New York Times.

Is that all there is to it?

An economy has to breathe, dear reader. It breathes in...expanding its lungs with new credit, new jobs, new industries. Then, it has to breathe out the mistakes...the used up air and the bad ideas. Expansion...contraction. Boom...bust. Bull market...bear market. That's how it works!

By the end of the 20th century, the U.S. economy had breathed in so much of the heady air of the New Era, it was practically giddy. It had to exhale. But the out-gush of the respiratory cycle is no fun. Debts have to be paid. Errors have to be reckoned with. Voters get irritable. Politicians are kicked out.

So the genius of modern Keynesian economics is to try to avoid exhalation...by bringing in tanks of oxygen just when the lungs begin to contract. So instead of breathing out, the lump takes a another deep toke on the credit hookah...and goes into another dreamlike hallucination, where his house goes up in price, his stocks rise, and his debts never have to paid off, ever.

Now, he's deeper in debt than ever. And his lungs are ready to burst. Thank you, Mr. Greenspan."

From the Daily Reckoning - http://www.dailyreckoning.com

"Will a gallon of gas cost more or less this time next year?"

I say more. OJ, maybe you can have a contest on this. Since gas prices vary, you should use the spot price of a barrel of crude oil, in $. My vote is $50.

OJ: I do not know which Robert you were directing your question to. If you do not mind I will answer it.

My teacher taught me that inflation is always and everywhere a monetary phenomenon.

To the extent that the Dollar price of oil has gone up because the value of the Dollar has gone down due to that phenomenon, then, if, the Federal Reserve System takes apropriate action to slow the growth of monetary agregtaes the Dollar price of oil will decline.

Whether the Federal Reserve has the will and ability to take those actions remains to be seen.

Robert Schwartz:

Correct. It will go down. Thius there is no inflation.

Robert D:

Your position is especially lunatic--we've an artificial bubble in housing and equity prices that will burst at any momernt, wiping out most of the wealth in the American consumer base that is the only thing driving world economic growth, in particular China, which is completely dependent on exports to us, will tank as a result, yet this is an inflationary period. It's like you're predicting both that the Titanic will hit the iceberg and that it will set a speed record from London to NYC.

Robert S,
I think that it is probably too late for any action by the Fed to stop inflation. The system has been primed with too much liquidity for price increases to be nipped in the bud. The Fed raised the discount rate from 4.5% as of Dec 17, 1972 to a maximum of 14% on May 5, 1981 before inflation came under control. Besides, there is too much debt in the system to agressively raise rates - it would lead to the collapse of the stock, bond and real estate markets. He is out of options.

OJ
On the principles involved you seem to agree with both Roberts and myself. Granted one Robert is making predictions. I don't do predictions of markets in the future (wish I could).

But Greenspan's track record seems good to me. He continued Volker's crackdown on the money supply in early 80's. (that reduction in money supply was definitely started by Volker) He was faced thru no fault of his with a very difficult savings and loan "bankruptcy". Don't forget the tremendous Reagan deficits also. And of course the 90's. Yes he did slowdown the money growth and caused us to have a recession. (I think mild recession). That sums up my view. I think he did fine.

One other thing. That slowdown in the late nineties was not an arbitrary decision on his part. The fact that you don't see the depreciation of the value of the dollar might be that he succeeded. His instincts are good, trust me if we replace him with another Burns, or Miller nothing good is going to happen.

h:

Yes, but the principles are hilariously wrong.

RobertD:

So you are indeed predicting a massive deflation/depression, right?

h:

No one proposes replacing him with people who were still fighting the Great Depression--that's the point. Fed Chairmen fight the problems of their youth.

OJ, I wouldn't rule it out, but the more likely scenario is hyperinflation.

Robert:

Presumably you've plenty of canned food in the bunker?

No, I'm putting on extra layers of fat.

OJ
Some people would like to look at the evidence, before drawing conclusions. Greenspan has been the head of the Fed for over 20 years and that has been a time frame in which there has been tremendous growth, with historically low inflation.

What precisely do you think he has done wrong, other than apparently not propping up some ridiculous High-tech stock you might have bought?

h:

The rooster believes it brings the dawn.

Inflation ended when Reagan fired PATCO and Thatcher crushed the miners and then they got free trade going. No wage increases, no price increases.

Inflation ended when Volker brought money creation to a screaching halt. Granted he was a Carter appointment, but what can you do when inflation is headed towards 20%. Actually it stopped at about 12%, but it was headed to 20%.

I have no problem with Reagan's action on PATCO, but his smartest move was Greenspan.

OJ and Mr. Duquette: Once again, I keep faith with my teacher (Milton Friedman), inflation is, everywhere and always, a monetary phenomenon.

The late 1970's high interest rates did not equate to tight money. Indeed, the country was on the verge of a hyperinflationary blowoff in late 1979. Gold reached $800/oz., silver $50/oz. and other commodities were behaving similarly. Interest rates were around 20%

It was at that point that Carter efectivley resigned as president and handed the federal reserve and control over the economy to Paul Volker. He shut the valve off pretty abruptly, but he eased off during the summer and fall (one can only assume that was part of the deal) and hit the brakes real hard in early '81 which sent the economy into a sharp recession.

Patco was an effect not a cause. The real hero was Reagan who was willing to let Volker turn off the spigot and cause a recession in order to stop inflation and set up the basis for 20 years of prosperity.

What does the future hold. I do not know. It really depends. If luck holds, Ray Fair is right and that Providence which watches out for drunks, children and America continues to bless us, Bush will be elected with a substantial number of conservative senators. Greenspan will tap on the brakes a couple of times lightly in the summer and fall and hit them hard after the election. There will be a mild recession in 2005 and a recovery in 2006.

But all of this depends on choices that will be made in the future and no one knows what will happen. NO ONE!

I second Robert Schwartz, much clearer thinker and writer than myself.

Robert, I don't dispute that noone can predict the future, but I will say that the current debt situation, both governmental, corporate and personal, put severe restrictions on the directions that possible future outcomes can take. Where I disagree with you is that the future will largely be decided on choices that will be made in the future. I think that our economic fate in the next 10 years will largely be decided on decisions that have been made in the past 10 years. An economy is like a massive supertanker at sea, there is a long delay between directions given at the helm and the resulting movement of the ship. If inflation takes off, full stop will not keep the ship from plowing into that iceberg.

Inflation is everywhere and always a monetary phenomenon. But where is the evidence, today, that prices are rising because too much money is chasing too few goods. I don't see it.

The price of steel is up dramatically in the last six months; it has more or less doubled and some steel products have tripled in price. The reason has nothing to do with monetary policy. Rather, the price increase has been the proper price mechanism response to booming worldwide demand, coupled with some decreased capacity and shortages of critical inputs. This is a price increase that is not inflation, and treating it as inflation is just going to spell trouble for the economy. Combined with the fact that real interest rates are and have been relatively high for the last few years and that inflation is overstated, and I am left skeptical of the need for the Fed to announce higher interest rates in the near term.

David, you are not taking into account the falling dollar. Excess liquidity, burgeoning budget and trade deficits, and rampant consumer debt creation will continue to push the dollar lower. What effect do you think that will have on prices?

David:

This is precisely what an inflationary economy looks like. It is what it looked like in the 1970's.

A metaphor. It rains 40 inches a year here. It does not rain .005" an hour. Some times it rains 2" in an hour and some times it does not rain for days on end. In the spring, when it is rainy, cloudbursts are more frequest, dry spells less frequent. In August, the whole month can go by without a cloud.

In an inflationary economy, money like water flows to the lowest points. Oil is very typicaly one and has attracted money during every inflationary burst during the last 40 years. Steel is an area this time. Look what happens. Money is cheap and depreciating. Steel is dear and appreciating. Speculators arbitrage the markets. Steel makers ramp up production. Steel users hedge invetories and so it goes. It looks like a real world thing.

When the monetary agregate growth slows, the bubble bursts. Speculators reverse their arbitrages. merchants dump their inventories. Users slow down or stop purchases. Producers shut down less efficent facilities and discontinue overtime.

It all looks like it happened in the real economy, but it was all driven by the monetary agregates.

Robert Duquette:

Yes, it takes time to turn the Queen Mary II, however, we are not going nearly as fast as we were in 1979 and we are already begining to slow down. Furthermore, there is more flexibility in the economy now than there was then. There are many fewer fixed price contracts now. Most leases and loan agreements have automatic escalation clauses. Unions have little power in the private sector. Bankruptcy is a more efficent and faster process now than it was in the 1970's.

If I we are lucky as above, I look forward to a breif recession in 2005. But the matter still lies in the future.

Mr. Duquette: My deeply, deeply held belief about nominal exchange rates is that they are so ambiguous as to be meaningless. This is especially true for the dollar, the international reserve currency, for which there is no substitute.

Even if I cared about exchange rates, the Euro, at $1.24 is plainly overvalued (the Euro central bank agrees, but is politically impotent) but not too far off its original value; the yen at 112 is not particularly close to yen parity; and the loony is still worth about 73 cents. The Yuan, which is probably the most important foreign currency for inflationary purposes, is fixed at great cost to the ChiComs.

Mr. Schwartz: Huh? The proper analogy for the point you're making is to an argument that global warming is catastrophic because it's 30 degrees warmer in May than in February. Why, at that rate we'll be averaging 120 degrees by next February.

There is no reason to think that the price of steel is responding in any way to monetary effects. There is a big demand for it and the price is increasing as a result. That is simply not inflation; that is efficient resource allocation.

David:

Good points. Back in the late 1960s and mid-70s through 1983, there was no economic 'competitor' out there (Europe was not really on its own like today), and the problems the US dealt with were self-generated. Today, rapid economic growth in China does impact us (i.e., steel and concrete supplies and prices). But equally true, in the 60s and 70s, currency problems in Thailand were unlikely to be noticed outside of the Wall St. Journal, and certainly were not going to impact Peoria. It is different now. The commodities markets and the currency markets both impact us today, in ways we often don't realize until the wave has gone by.

The average American is not going to know the difference, but the Fed. darn well better.

Sigh:-(

The dollar will not significantly weaken from its current strength, and is very likely to appreciate, especially against the Euro.

On 21 May '05, oil will be between $ 32 - $ 38 a barrel.
To believe that oil would go to $ 50 a barrel and stay there is to believe that there will be widespread chaos in the Middle East, or that somehow markets won't function as they always have in the past.

The housing bubble isn't as damaging as it might seem, although it could prevent people from trading up in the mid-future; Few people will lose their shirts if their homes decrease in value by 10% - 20%, nor their ability to meet the mortgage payments.