|
PureBytes Links
Trading Reference Links
|
It is important to understand the problem faced by Greenspan.
The market goes up in an 'irrationally exuberant' way. He says he will
take away the punch bowl as soon as he sees signs of the party getting
out of hand, ie, when he sees inflation rise.
The economy keeps growing at a healthy pace. But inflation doesn't rise.
Instead, the increase in wealth from the stock market is reinvested, not
spent.
This leaves Greenspan with a dilemma. Does he raise interest rates
anyway, risking stifling the economy and creating a deflationary
environment? Or does he wait for signs of the stock market bubble
translating into artificially higher asset prices?
Obviously, he has done the latter. But inflation is not there. The
wealth effect is much smaller than economists would have expected.
The FT recently had an article saying that spending patterns of
individuals reflect a 75% expectation of a serious market downturn.
Perhaps it would have been better to assume that raising interest rates
would not have an important economic impact. Perhaps not...
Regards
DanG
|