>>Methinks the bloke is experimenting with the idea of gently pricking a
>>bubble ...
and Doug replied:
>Yeah, he tried that about 6,000 Dow points ago, with his tortured
>"irrational exuberance" remark.* Didn't work very well, did it?
>
>----
>
>*AG, 12/5/96: "Clearly, sustained low inflation implies less uncertainty
>about the future, and lower risk premiums imply higher prices of stocks and
>other earning assets. We can see that in the inverse relationship exhibited
>by price/earnings ratios and the rate of inflation in the past. But how do
>we know when irrational exuberance has unduly escalated asset values, which
>then become subject to unexpected and prolonged contractions as they have
>in Japan over the past decade? And how do we factor that assessment into
>monetary policy? We as central bankers need not be concerned if a
>collapsing financial asset bubble does not threaten to impair the real
>economy, its production, jobs, and price stability. Indeed, the sharp stock
>market break of 1987 had few negative consequences for the economy. But we
>should not underestimate or become complacent about the complexity of the
>interactions of asset markets and the economy. Thus, evaluating shifts in
>balance sheets generally, and in asset prices particularly, must be an
>integral part of the development of monetary policy. "
----
Yeah, but there's a qualitative difference here, doncha think? Now he's talking about imminent inflation concerns and hinting at an interest rate hike in June or July. And he was then talking about 1987, whereas now, hundreds of thousands of traders have their nesteggs (not to say borrowed money) in stocks. If that absolute number is not a great worry as yet, the remorseless rise in people going in for a piece of the action must be ('the complexity of the interactions of asset markets and the economy' is ever all the more so). They'll be the ones who got in above the levels at which they'll have to get out - and I'm sure the stats don't exist with which we can determine how many of 'em are Ponzis and how many of 'em are playing with their retirement independence.
The Oz market dropped finance stocks en masse on Friday (admittedly putting a lot of it back into resource stocks) - I'm wondering if they're thinking along the above lines, that's all.
I would be.
And if Greenspan doesn't hike rates in June/July (with the Dow at 12000, with a possibly demonstrable nascent inflation, a tight labour market, a recovering Euro, and a spiralling foreign debt), he won't have covered his arse from history at all, will he, Henry?
Greenspan has had an easy road so far - he's gonna have to do something soon - regardless of the immediate politics of it. If he waits until we have a new president, he could be leaving the new boy with a structural crisis beyond all bail-outs. That is, if Japan, a Russian default or a Latin American currency crisis doesn't intervene ... American euphoria might be predicated on floundering foreigners, but all hell will be to pay if countries suddenly go under. Or if the sociological dimension of Y2K is a bit bigger than anticipated ...