>Any comments on this?
>
>NEW YORK (Reuters) - U.S. stocks crumbled on Friday, dragged down by
>technology issues, after a report showing an inflation-free economy
>failed to ease growing worry that interest rates may keep rising.
Judging from Greenspan's comments the other day <http://www.bog.frb.fed.us/BoardDocs/HH/2000/February/Testimony.htm> he seems really serious about reining in the stock market. Some excerpts follow. Thanks to Enrique for pointing out Paul Kasriel's dissection of these often odd remarks <http://www.ntrs.com/rd/rd35/pos2000/pos_econ_17feb.html>.
Doug
AG:
>Yet those profoundly beneficial forces driving the American economy
>to competitive excellence are also engendering a set of imbalances
>that, unless contained, threaten our continuing prosperity.
>Accelerating productivity entails a matching acceleration in the
>potential output of goods and services and a corresponding rise in
>real incomes available to purchase the new output. The problem is
>that the pickup in productivity tends to create even greater
>increases in aggregate demand than in potential aggregate supply.
>This occurs principally because a rise in structural productivity
>growth has its counterpart in higher expectations for long-term
>corporate earnings. This, in turn, not only spurs business
>investment but also increases stock prices and the market value of
>assets held by households, creating additional purchasing power for
>which no additional goods or services have yet been produced.
>
>Historical evidence suggests that perhaps three to four cents out of
>every additional dollar of stock market wealth eventually is
>reflected in increased consumer purchases. The sharp rise in the
>amount of consumer outlays relative to disposable incomes in recent
>years, and the corresponding fall in the saving rate, has been
>consistent with this so-called wealth effect on household purchases.
>Moreover, higher stock prices, by lowering the cost of equity
>capital, have helped to support the boom in capital spending.
>
>Outlays prompted by capital gains in excess of increases in income,
>as best we can judge, have added about 1 percentage point to annual
>growth of gross domestic purchases, on average, over the past five
>years. The additional growth in spending of recent years that has
>accompanied these wealth gains as well as other supporting
>influences on the economy appears to have been met in about equal
>measure from increased net imports and from goods and services
>produced by the net increase in newly hired workers over and above
>the normal growth of the work force, including a substantial net
>inflow of workers from abroad.
>
>But these safety valves that have been supplying goods and services
>to meet the recent increments to purchasing power largely generated
>by capital gains cannot be expected to absorb an excess of demand
>over supply indefinitely. First, growing net imports and a widening
>current account deficit require ever larger portfolio and direct
>foreign investments in the United States, an outcome that cannot
>continue without limit.
>
>Imbalances in the labor markets perhaps may have even more serious
>implications for inflation pressures. While the pool of officially
>unemployed and those otherwise willing to work may continue to
>shrink, as it has persistently over the past seven years, there is
>an effective limit to new hiring, unless immigration is uncapped. At
>some point in the continuous reduction in the number of available
>workers willing to take jobs, short of the repeal of the law of
>supply and demand, wage increases must rise above even impressive
>gains in productivity. This would intensify inflationary pressures
>or squeeze profit margins, with either outcome capable of bringing
>our growing prosperity to an end.
>
>As would be expected, imbalances between demand and potential supply
>in markets for goods and services are being mirrored in the
>financial markets by an excess in the demand for funds. As a
>consequence, market interest rates are already moving in the
>direction of containing the excess of demand in financial markets
>and therefore in product markets as well. For example, BBB corporate
>bond rates adjusted for inflation expectations have risen by more
>than 1 percentage point during the past two years. However, to date,
>rising business earnings expectations and declining compensation for
>risk have more than offset the effects of this increase, propelling
>equity prices and the wealth effect higher. Should this process
>continue, however, with the assistance of a monetary policy vigilant
>against emerging macroeconomic imbalances, real long-term rates will
>at some point be high enough to finally balance demand with supply
>at the economy's potential in both the financial and product
>markets. Other things equal, this condition will involve equity
>discount factors high enough to bring the rise in asset values into
>line with that of household incomes, thereby stemming the impetus to
>consumption relative to income that has come from rising wealth.
>This does not necessarily imply a decline in asset values--although
>that, of course, can happen at any time for any number of
>reasons--but rather that these values will increase no faster than
>household incomes.