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Greenspan, Fed Governors Warn on Government Spending (Update2)
Nov. 10 (Bloomberg) -- Federal Reserve Chairman Alan Greenspan says the
growing U.S. budget deficit might destabilize the economy. Fed Governor
Susan Bies says Congress spends like it's dipping into a ``a cookie
jar.'' St. Louis Fed President William Poole says Social Security is in
jeopardy.
In the last two months, Greenspan and at least seven other Fed officials
have warned lawmakers about tax and spending policies that have led to
record budget and current account gaps.
As Greenspan, 78, in January begins his last year atop the central bank,
the comments suggest Fed members are concerned his successor will have
less room to guide an economic expansion should they have to raise
interest rates to counter a plunging dollar or surge in spending. Fed
policy makers are likely to raise the benchmark rate by a quarter point
to 2 percent when they meet today in Washington, a Bloomberg News survey
shows.
The policy making Open Market Committee began meeting at 9 a.m.
Washington time, a Fed spokesman said. The committee's decision on
interest rates is expected around 2:15 p.m.
``If you get to a point of fairly significant long-term structural
budget deficits, it begins to impact on the level of long-term interest
rates,'' Greenspan told the House Budget Committee on Sept. 8. That
means the government must pay higher rates to borrow money, leading to
even higher deficits, he said.
``If you get into that sort of debt maelstrom, it is a very difficult
issue to get out of,'' he said.
Record Deficits
The Open Market Committee has already raised rates three times since
June to restore its benchmark rate to a level that neither slows growth
nor sparks inflation. All 89 economists surveyed by Bloomberg predicted
Greenspan and the FOMC would increase the overnight rate again at
today's meeting because a more-than-expected gain of 337,000 jobs in
October signals the economy is starting to use up spare capacity.
Budget surpluses from 1998 to 2001 helped Greenspan orchestrate the
longest economic expansion in U.S. history. When the boom ended in 2001,
low inflation allowed the Fed to cut the benchmark rate to 1 percent,
the lowest since 1958, limiting the recession to just eight months.
Then the surpluses evaporated. President George W. Bush, who will choose
the next Fed chairman, won passage of $1.85 trillion in tax cuts and
raised spending for wars in Iraq and Afghanistan. Defense spending rose
12.4 percent in fiscal 2004 to $437 billion, the Congressional Budget
Office said.
The budget deficit widened to a record $413 billion in the fiscal year
ended Sept. 30, with government spending rising 6.2 percent from the
previous year. The deficit amounted to about 3.6 percent of the
country's $11.8 trillion gross domestic product, the highest percentage
since 1993.
Policy `Out of Whack'
Social Security, the main government-funded retirement program, will
spend more money than it takes in starting in 2018, according to a
report by the program's trustees. Unless taxes are increased or benefits
cut, trust-fund assets for retirees, now at $1.4 trillion, will fall to
zero by 2042. A report by trustees of Medicare, a federal
health-insurance program, shows their hospital insurance fund spending
will exceed income by 2012.
``There are a number of things that are just extraordinary, beginning
with the fiscal imbalance,'' said Representative Jim Leach, an Iowa
Republican and former head of the House Financial Services Committee,
which oversees the Fed. ``The Fed has less credible discretion the more
out of whack fiscal policy gets.''
....Part 2...

Possible Successors
Bush, 58, who won re-election on Nov. 2, hasn't mentioned a likely
successor to Greenspan, whose nonrenewable term as governor ends Jan.
31, 2006, after a tenure spanning four presidents.
Alan Blinder, a Fed vice chairman from June 1994 to January 1996, said
possible successors include Harvard University economist Martin
Feldstein, 64, a Bush adviser on Social Security, and John Taylor, 57,
Treasury undersecretary for international affairs.
Blinder, a 59-year-old Princeton University economist who was an adviser
to Democratic nominee John Kerry, also named Fed Governor Ben Bernanke,
50, and former Fed Governor Lawrence Lindsey, 50, as potential
candidates, at a Sept. 28 meeting of the Council on Foreign Relations in
Washington.
Greenspan's successor must steer the economy through the effects of
deficits, high oil prices and global terrorism, Leach, 62, said.
``These are extraordinary times,'' he said. ``Virtually all the risks in
the world economy are on the downside.''
Crude oil for December delivery reached a record $55.67 a barrel in New
York on Oct. 25. While prices have since slipped to $47.37 a barrel
yesterday, oil is still 53.4 percent higher than a year ago.
$88.5 Billion Tax
San Francisco Fed Bank President Janet Yellen, 58, said the surge would
result in a temporary boost in broad inflation and, as long as prices
stay high, a tax on U.S. consumers. Greenspan said that tax amounted to
about $88.5 billion this year, equal to 0.75 percentage points of GDP.
Former Dallas Fed President Robert McTeer flagged the record $166.2
billion deficit in the U.S.'s current account, the broadest measure of
trade, as a threat to stability.
The current-account shortfall was equal to 5.7 percent of the economy in
the second quarter, up from 5.1 percent in the first three months. The
U.S. trade gap unexpectedly narrowed 3.7 percent in September to $51.6
billion as oil imports fell and exports of goods and services rose to a
record, the Commerce Department said today.
Economists, including Ian Shepherdson at High Frequency Economics Ltd.
in Valhalla, New York, said the trade deficit would rise again in
October, suggesting the broader current account deficit is unlikely to
fall.
The U.S. needs to attract about $1.8 billion a day from overseas to plug
the gap. If other nations sour on U.S. securities, the value of the
dollar may plunge.
``The current account deficit is going to cause problems,'' said McTeer,
62, who resigned Nov. 4 from the Fed to run Texas A&M University in
College Station, Texas. ``Flows will turn against us, and there will be
a crisis that will result in rapidly rising interest rates and a rapidly
depreciating dollar that will be very disruptive,'' he said on Oct. 7.
Dollar Drop
Bush's pledge to make his tax cuts permanent also has traders predicting
the dollar will continue to decline. The currency may fall to its lowest
level ever against the euro for a second consecutive week after Bush
signaled he would expand policies that fueled the deficits and the
dollar's decline of about 20 percent against a basket of currencies
since he took office in 2001, according to a Bloomberg News survey. Bush
will also seek more funding for the war in Iraq.
Sixty percent of the traders, strategists and investors questioned on
Nov. 5 from Tokyo to New York advised selling the dollar against the
euro.
``A second term for Bush doesn't bode well for the dollar,'' said
Samarjit Shankar, director of global foreign-exchange strategy at Mellon
Financial Corp. in Boston, which manages $625 billion. ``There's no way
of convincing the market additional spending on the war can be paid for
if you have a lower tax base. It's a fundamental mismatch between
spending and revenue.''...Part 3...

Can't Go On
Greenspan urged Congress on Sept. 8 to rein in spending and return to
the ``pay-as-you-go'' system that was in place during President Bill
Clinton's administration, whereby all new expenditures or tax cuts
needed to be offset by reductions in other programs or higher fee income
from government services.
``We cannot continue to just go on without saying, `We can have this,
but not this,' and pay-go embodies that mechanism,'' the chairman said.
The costs of Social Security and Medicare are likely to balloon as the
84 million members of the baby-boom generation -- those born between
1946 and 1964 -- begin to retire in 2010, pushing federal government
obligations higher, even as the taxpaying workforce shrinks.
``If we have promised more than our economy has the ability to deliver
to retirees without unduly diminishing real income gains of workers, as
I fear we may have, we must recalibrate our public programs so that
pending retirees have time to adjust through other channels,'' Greenspan
said in an Aug. 27 speech in Jackson Hole, Wyoming. ``If we delay, the
adjustments could be abrupt and painful.'' Greenspan was chairman of the
Commission on Social Security Reform from 1981 to 1983.
`Cookie Jar'
Since then, Poole, 67, of the St. Louis Fed, has made two speeches
advocating an increase in the retirement age as a way to reduce the cost
of Social Security.
Fed Governor Bies blamed lawmakers for sometimes spending taxpayers'
money for political gain during the past four years.
``The part of it that has gotten me so upset is that in this whole
election debate, nobody's been talking about the spending side,'' Bies,
57, said after a speech to investors in Rosslyn, Virginia, on Oct. 23,
10 days before the presidential election.
``If you take out Homeland Security and Defense, it has been a cookie
jar over the last four years,'' she said. ``Everything has gotten loaded
in. Money has gone into these appropriation bills that are funding
everything under the sun.''
Another challenge facing Greenspan in his final year is the behavior of
the labor market. The economy has created just 814,000 net payroll jobs
since the end of the last recession in 2001, even with average
annualized GDP growth of 3.3 percent. That's the slowest pace of any
expansion of the last 60 years.
Presidential Pressure
Presidents and Congress have sought to influence Fed chairmen throughout
the central bank's 90-year history to try to promote their own economic
policies. Low interest rates can help finance budget deficits, stimulate
economic growth and help offset the negative impact of tax increases.
Harry Truman, the 33rd president, invited Federal Reserve policy makers
to the White House in January 1951 to try to persuade them to continue
to keep yields on Treasury securities low to help finance the Korean War.
Former President Richard Nixon said he respected Arthur Burns's
independence when he appointed Burns to the Fed chairmanship. Then Nixon
said: ``I hope that independently he will conclude that my views are the
ones he should follow,'' Fed historian Allan Meltzer, a political
economy professor at Carnegie Mellon University in Pittsburgh, wrote in
a recent paper.
Too Accommodating
Lyle Gramley, who worked as Burns's speechwriter before becoming a Fed
governor, said: ``He'd talk to the president, and the president was
concerned about where the economy was going. There was evidence of a
good bit of pressure directly on him. He clearly in retrospect ran a
too-expansive monetary policy.'' Gramley is now an adviser to Schwab
SoundView Capital Markets in Washington.
Greenspan also faced political pressure early in his term. Former
Treasury Secretary Nicholas Brady criticized the Fed for not lowering
interest rates fast enough in 1992, when George H.W. Bush ran for a
second term and lost to Bill Clinton...Part4...

Economic Hurdles
Greenspan's successor is likely to feel that kind of political pressure
as long as there are economic hurdles to overcome, said Senator Richard
Shelby, an Alabama Republican.
``Whoever is in there is going to face a lot of challenges,'' said
Shelby, chairman of the Banking Committee, which has oversight authority
on the Federal Reserve. ``There will always be political pressure,
whoever the Fed chairman is, unless the economy is just robust.''
``It is going to be a period when the president will need someone who is
going to work closely with the executive branch,'' said James Galbraith,
an economist at the University of Texas at Austin who worked with the
framers of the Full Employment and Balanced Growth Act of 1978, which
reiterated the Fed's goals.
``Is there going to be a problem in getting an adequate growth rate and
turning the next administration into a political success?'' Galbraith
said. ``Yes.''

good luck!

Strater · Guest

mac · Guest

part 2-----

My Current Thoughts
By David Webb of Verus Investment Management, L.L.C.
In the six weeks running up to the end of October, the Federal Reserve
made net purchases of $11.4 billion in U.S. Treasuries, annualizing to a
run-rate of $99 billion. This represents just below 1% of U.S. GDP, and
over 20% of the funding deficit of the U.S. government. In the
comparable six weeks of the prior year, the Feds net purchases of U.S.
Treasuries were $2.9 billion; so we are seeing nearly a four fold
increase. (see FRB SOMA 2004)
Meanwhile, in those six weeks, foreign purchases of U.S. Treasury and
Federal Agency obligations fell to $10.6 billion from $38.6 billion in
the comparable period of the prior year. So our own central bank is now
buying more U.S. Treasuries than all other central banks combined.
While the U.S. citizenry apparently does not know, understand or,
perhaps, care, that the Fed is printing money to buy the debt issued by
the U.S. Treasury, those outside the U.S. holding our debt are beginning
to act on their understandable concerns. In the past week following the
election, there is evidence that some foreign central banks have not
just diminished their buying of U.S. debt, but have begun selling. This
may be the kick-off of an outright dollar crisis. The following charts
of currency values against the dollar support this conclusion. The first
chart is presented as the value of the Euro in U.S. Dollars, while the
other charts are the value of the U.S. Dollar against the Japanese Yen,
Hong Kong Dollar, and Canadian Dollar.
The bottom line is that, because of the serious inflation it has
engendered in their economies, it is no longer in the interest of
foreign central banks to print more local currency in order to buy U.S.
Dollars and Treasuries.
The Feds monetization of the deficit is likely to become the focus of
discussion in the weeks ahead; it wont be a pleasant one. That the U.S.
is going into a period of austerity is inevitable. The events unfolding
now may prove to be analogous to the dollar crisis in 1932 which began
the worst part of the Great Depression. Capital was withdrawn from the
U.S., the dollar fell, and interest rates rose on a heavily levered and
chronically over-stimulated economy. The stock market lost over half its
value over the following weeks.
Will our Federal Reserve somehow prevent equity, bond and housing values
from correcting? Aside from whether that could be done, it is not their
intention. Consider the following recent remarks of Federal Reserve
Governor Donald L. Kohn at the European Central Bank Conference on
Monetary Policy and Imperfect Knowledge on October 15, 2004 in Würzburg,
Germany. The full text of this speech can be accessed at Speech
³Šwe have chosen to react to the asset price correction when it occurs
rather than to try to head it offŠTo be sure, adverse consequences for
resource allocation, and perhaps even for the stability of output and
prices, will occur if private agents overestimate the ability or
willingness of central banks to damp volatility in asset prices or the
economy.²
³Šexperience should have taught market participants that risk management
by central banks does not prevent sharp movements in asset prices.
Policy actions in 1987, 1998 and 2001-03 cushioned the economy, but they
did not stop major declines in the prices of risky credits in 1998 or
equities in 1987 or 2001. Any asymmetries in central bank reactions were
aimed at stabilizing the economy, not achieving particular asset-price
configurationsŠTo be sure, [central bank] actions cannot be allowed to
compromise the primary long-run policy goal of preserving price
stability.²
Perhaps such statements are not made casually in such a setting. Are we
seeing them now because the point has been reached at which it is
impossible for the Fed to hold interest rates down? Why impossible?
Because the rest of the world can not continue buying our debt, and the
Feds buying will soon become difficult to explain. The alternative is
for the Fed to reduce its intervention in the Treasury market, allow
interest rates to rise, officially recognize that inflationary pressures
are building, and then follow the bond market with short term rate
increases. The message is that the Fed anticipates the ensuing bust and
will deal with it when it occurs.
It is difficult to imagine a greater disconnect between public
perception and the reality of our circumstances than that which we have
presently. Our ³airship² economy is not soaring; it is out of run-way
without a take-off. In the quarter just past, nominal GDP was reported
at 5% with a deflator of 1.3%, resulting in headline GDP growth of 3.7%.
Now, do you believe that the inflation rate is 1.3%? Households and
businesses in the U.S. are experiencing rising costs at high single
digit or double digit rates. In the hot-spots of the world economy, the
inflation rate is higher still. In short, we have a serious and
worsening stagflation problem. As for the much hyped jobs report number,
time will show that this was heavily skewed by election and campaign
workers, an effect not being mentioned by the media. In truthful, real
terms, the U.S. economy is contracting. Take away debt financed
spending, and real sustainable economic activity is smaller still.

Larry Horse · Guest

To damn LONG!

"mac" <mac@infiniteloop.com> wrote in message
news:mac-C8E1EE.17400110112004@newsclstr01.news.prodigy.com...

mac · Guest

In article <xzQkd.21717$5b1.9079@newssvr17.news.prodigy.com>,
"Larry Horse" <larry_horse@Pollyanna.com> wrote:

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