In prior congressional performances, upbeat testimony from Alan Greenspan’s always elicited rave reviews from currency traders. However, Greenspan’s testimony today, which as usual was scripted to imply a false sense of U.S. economic vitality, failed to produce its expected reaction. Instead of rallying, the dollar sold off. After opening higher ahead of his testimony, it reversed direction, beginning its decline immediately following the release of the text of his testimony, and accelerating as Greenspan himself began speaking.

Is this simply a trading phenomenon of buying the rumor and selling the fact, or is it something more significant? Or is it that Greenspan’s self-serving rosy assessments of the U.S. economy have finally begun to ring hollow in the ears of America’s creditors. If this is so, the question arises, how much longer can the dollar maintain its value? Since Greenspan’s rhetoric has recently provided the “hot air” necessary to keep the dollar bubble inflated, today’s decline could well signal the end of the dollar’s recent bear market rally. That leaves its fate in the tenuous hands of foreign central banks, whose grip will ultimately loosen as their emotional desire to throw good money after bad ultimately fades.

In the face of mounting indications of a softening economy, Greenspan’s assertion that his greatest concern was a drift in US policy toward protectionism, all the while, knowing full well that such policies are highly unlikely to ever be implemented, is most likely his attempt to misdirection attention from his real, and far more daunting concerns about accelerating inflation, rising interest rates, the real estate bubble, the trade and current account deficits, an over-valued stock market, the high concentration of short-term U.S. debt in foreign hands, falling real wages, inadequate domestic savings, and ballooning household debt levels.

Some words of truth inadvertently slipped in to Greenspan’s testimony as he talked about the potential for stagflation. Such honesty, however, was tempered by references to stagflation as merely being a possibility, as he is well aware that were it not for bogus government numbers, stagflation’s existence would already be acknowledged as a painful reality.