Tuesday, March 18, 2008

Imaginary Productivity and WMDs...and their fruits

The crisis will leave many casualties. Alan Greenspan

Five years ago the global media machine was promoting the view that Iraq had WMDs and therefore the US needed to invade. As it turned out, this was not true. The question arises; was the Bush team deceitful or incompetent? What is not in doubt; hundreds of thousands have paid the price of this error.

The last thing I'd want to see at this point is a key member of the Bush team warning about the unfolding disaster without some sort of mea culpa.

With that in mind, consider the latest warning from Alan Greenspan; The current financial crisis in the US is likely to be judged in retrospect as the most wrenching since the end of the Second World War.

His warning concludes with this face saving view; But we cannot hope to anticipate the specifics of future crises with any degree of confidence.

Can we not? And could we not have seen this one coming?

I can't speak for anyone but myself, but I saw it coming. Judging by what I read, I'm not alone in seeing it coming either.

Returning to the subject of non-existent Iraqi WMDs, do you remember reading Paul Wolfowitz's view; For bureaucratic reasons, we settled on one issue, weapons of mass destruction (as justification for invading Iraq) because it was the one reason everyone could agree on.

I wonder if, for bureaucratic reasons, US economic official-dumb settled on one issue, increasing US economic productivity (as justification for allowing the US external imbalance, and coincidentally, US domestic imbalances, to grow unchecked) because it was the one reason everyone could agree on?

In Greenspan's, The Age of Turbulence, he describes the thought process that led him to revise US productivity data upwards:

I'd zeroed in on the primary riddle of the technology boom: the question of productivity.

The data we were getting from the Commerce and Labor Departments showed that productivity was virtually flat in spite of the long-running trend towards computerization. I could not imagine how that could be.......

It seemed that the government had been underestimating productivity growth for years.

In the words of George Tenet, increased productivity was a "slam dunk." And so the seeds of the current financial crisis were sown under cover of the darkness created by Greenspan's imagination- an imagination, mind you, which not only failed to see this crisis coming, but also asserts that we cannot hope to anticipate the specifics of future crises with any degree of confidence.

That is, the man who couldn't imagine a crisis imagined a productivity boom that was as apparent as Iraqi WMDs.

Let's help Greenspan imagine how US government stats showed flat productivity growth in spite of the long running trend towards computerization. Perhaps the data was right, and the productivity gains of technology application were getting swamped by other forces. Perhaps it might be more apt to argue that a reduction in competitive forces, in the form of increased external imbalances without pressure to repay, allowed profits to rise (the "sign" that led Greenspan to think that productivity was rising) without increased productivity.

It seems to me the practice at which we became quite "productive" was creating an illusion of the US$s value (the now, decade old "US has a strong $ policy" dogma). The Asian Crisis led many Asian governments to dramatically increase their US$ inflows, and, importantly build their reserves. The missing inflation Greenspan cited as sign of increased productivity can be explained, in part, via this mechanism. We exported inflation to Asia, while, in part, in response to their crisis, they, not us, became more productive, in the real sense.

Lately, the missing inflation Greenspan hung his "productivity" hat on is returning to our shores. Despite the Bernanke Fed's policy of fairly dramatically reduced growth in the monetary base, inflation continues to rise. When US economic officials were loathe to bail out financial firms last year, owners of those exported $s were ready to fill the Fed's shoes, so to write.

Thanks, in part, to Greenspan, foreign Central Banks, and foreign official investment funds, filled with our exported $s, are usurping the Fed's power. As Bernanke seems to be learning, the Fed couldn't deflate gracefully if it wanted to. The old trading mantra; "Don't Fight the Fed" may soon be replaced by; "Don't Fight the SWFs."

The man who replaced "Don't Fight the Fed" with "Don't Fight the SWFs," seems a fitting epithet for Mr. Greenspan. As the Maestro he allowed the US economic symphony to lose rhythm and harmony. Perhaps he should have smoked some of that dope his fellow musicians were enjoying and stuck with his clarinet.