[Another dive back into the archives begins as my wife and I head to the Great White North for some outdoor adventure in the Canadian Rockies. This time, writings from the month of August and early-September over the last six years will be recalled, many of them related to past Federal Reserve gatherings in Jackson, Wyoming, where, later this week the central bank will meet again. First up is an item originally published on August 19th, 2005 that provides a good setup for what is to come later this week - both here and in Jackson Hole.]
So, here we are in the summer of 2005, nearing the end of the 18 year term of Alan Greenspan. We cannot help but marvel at two things – how lucky Mr. Greenspan was to have started his term when he did, and what a poor job he has done in the last ten years.
The reason we say this is that his term has benefited from one notable condition, low inflation (as measured by consumer prices), and Mr. Greenspan has responded to this condition in an inappropriate manner that has resulted in a series of asset bubbles and global imbalances that his successor will inherit.
Some say that the Greenspan Fed has been “fighting” inflation, and that is why it has remained low. This is far from the truth. Paul Volcker “fought” inflation by raising interest rates to near 20% and inducing a recession. The Greenspan tenure at the Fed has been marked by moderate energy prices and inexpensive imported goods from Asia, which have offset other rising prices to keep overall consumer prices relatively low. Some statistical slight-of-hand with inflation calculations and deliberately misleading reporting of inflation (i.e., emphasizing “core” inflation) has helped keep a lid on “reported” consumer prices as well.
Both of the first two factors, inexpensive energy and imports, are beyond the control of the Fed and are not likely to continue.