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Greenspan Spotlight Off Japan

March 2, 1999

Alan Greenspan wants us to believe he's got a boring job, but I'm not buying it.

The Fed chairman was on Capitol Hill last week, waxing cautiously optimistic as ever while forecasting moderate growth in the U.S. economy.

Millions were doubtless all eyes and ears, straining to detect the slightest evidence of his enthusiasm for the rate hike that would purport to dampen inflationary pressures.

All that stressful attentiveness was hardly worth it. What the chairman said was: Maybe we'll raise interest rates, and maybe we won't. It all depends.

It was the kind of anticlimactic performance we should long since have come to expect from Mr. Greenspan: lights, drum roll and a finale carefully crafted to make us wonder why we had even bothered to watch.

Boring it was, but not without purpose. Had Mr. Greenspan played ringmaster and trained the spotlight on the center ring where it properly belongs, our flesh might have blanched at the remarkable spectacle aloft.

For up in the rigging we would see the chairman of the Bank of Japan, poised to dive 30 meters into a wet sponge.

An accountant's version of this death-defying feat is a matter of record: With a historically unprecedented torrent of new credit-money, the Bank of Japan recently pushed short term rates to near zero and dramatically reversed an uptrend in yields on 10-year bonds.

In effect, noted The Wall Street Journal's George Melloan, "any bank that wants money from the central bank can get it for practically nothing."

Japan is literally going for broke in an effort to dislodge its mortally sick economy from the vise-grip of deflation.

Moreover, the unprecedented monetary stimulus is occurring at the same time the government has opened the fiscal spillway with a $500 billion rescue of the banking system and untold financial guarantees for -- as Melloan observed -- "just about everybody and everything in sight."

That is the scary spectacle from which Mr. Greenspan would seek to distract us with fuzzy talk about moderate growth in the U.S. But regardless of whether we choose to acknowledge the desperation of Japan's reflationary spasm, its outcome may determine whether the world's economic system survives the millennium in its present form.

For global risks have increased with each failure of Japan to stimulate its economy back to health with loose credit.

The result is that, in the last 18 months, deflation has spread to Japan's major trading partners in Southeast Asia and financial chaos has idled the productive machinery of Russia, whose creditors have thrown in the towel.

And now the psychological fallout threatens to inundate Brazil, where a run on the currency a couple of months ago consumed most of a $41 billion supposed rescue package from the International Monetary Fund.

One might think the lingering smell of countless hundreds of billions of dollars gone up in smoke in Latin America, Asia, Russia and Japan would alert the rest of the world to the ravenousness of the deflationary maw.

But those huge liquidations are as yet dwarfed by the gains millions of investors have reaped collectively in the financial markets of the U.S. and Europe since 1995, when their respective bull markets shifted into high gear.

For most Americans the bonanza has obscured the threat of deflation, which at full strength implies excess capacity, weak demand, and the collapse of prices, asset values and wages.

All of those symptoms have plagued Japan in recent years, suppressing economic growth and hollowing out the collateral on which the country built a colossal credit edifice during the 1980s.

Here, however, it is only the most benign effects of deflation that have been felt: a pervasive softness in the prices of most raw materials and finished goods, and a moderation of wage demands.

Indeed, the deflationary pressures of a struggling global economy have forced many U.S. workers to settle for raises they would have sneered at a decade ago.

Meager increases of 2 to 3% are the norm these days. But why should workers gripe when their stock portfolios have been producing returns of 15% to 20% or more for most of the last decade?

That's a huge spread between the market value, respectively, of labor and capital, but its anomalousness has yet to hit home, so pleased have Americans evidently been with the spectacular swelling of their paper assets.

Of course, the good times could continue more or less indefinitely if the nascent recovery now under way in Korea and Thailand takes root and begins to spread.

If that is the perception by summer, I wouldn't be surprised to see U.S. share prices up 50% within two years.

But if Japan's current last-ditch effort fails and its economy flatlines, as I believe is more likely, it will be the worst blow yet to the global economy and to the bullish psychology that has sustained the Dow Industrial Average near record highs for most of the last twelve months.

That a global deflation could end our prosperity with punitive speed is still a minority view, but it is has recently been affirmed most forthrightly by no less authoritative a source than The Economist.

For years the magazine's editors have searched vigilantly for signs of the inflation that Mr. Greenspan would have us fear but which has so far failed to materialize.

Now they've evidently had a change of heart, heralded by a cautionary essay that casts the inflation bogeyman aside: "The world economy is precariously lop-sided. Even as Americais economy continues to surge, much of the rest of the globe is drifting towards deflation. It is scary that Americais boom, fueled by an unsustainable stock market, is now the main prop for global demand.

"For how much longer? Global deflationary pressures are already choking American profits, making its share prices look ever more overvalued. This could yet topple the stock market. No wonder American policymakers are urging Japan and Europe to reflate."

One cubic foot of gold weighs more than half a ton (1,306 pounds).
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