Yesterday,
with his veiled warnings of a more rapid tightening of monetary policy, Alan
Greenspan chose to practice his own version of Teddy Roosevelt’s “big
stick policy.” But unlike TR, Greenspan speaks loudly and hopes no one
notices that his stick has been confiscated by President Bush, who fears
its use will wreck the “recovery,??? and jeopardize his reelection.

Greenspan’s warning that the Fed is ” prepared to do whatever is required
to fulfill our obligation to achieve the maintenance of price stability” is
nothing more than an empty threat aimed at calming the currency market’s
growing realization that the Fed is miles behind the inflation curve. So
far, the tough talk is working, as the dollar, which was falling to a new
three-month low against the euro prior to his words, reversed course and
has since risen approximately 2%. However, as his current easy money policy
is the most inflationary in Fed history, Greenspan’s actions speak much
louder than his words. Thus far, the only efforts Greenspan has made in
pursuit
of price stability is his lobbying to change the way CPI is calculated.
In so doing, he hopes to fool the markets and the public by creating the
illusion
of price stability.

Greenspan’s strategy is simple, talk tough about his willingness to fight
inflation, while at the same time denying that there is any. As a result,
he never has to act on his rhetoric. If the Fed chairman were really concerned
about inflation and price stability he would have raised rates long ago,
or better yet, would never have lowered them this much in the first place.
However, the naked truth is that when it comes to achieving price stability,
Greenspan is as impotent as a eunuch in the playboy mansion. This condition
results form the fact that never before have the Federal government, corporations,
hedge funds, financial institutions, homeowners, and consumers been so highly-leveraged
with short-term debt and so completely dependent on the perpetuation of cheap
money. As reported yesterday in an opinion of the chief economists at investment
bank CIBC World Markets, even moderate increases in interest rates would
be more than enough to send the economy into recession. Since far more aggressive
rate increases would be needed to try to put the inflation genie back in
her bottle (if that is even possible), Greenspan can bark, but he knows he
can’t bite.

In fact, a level of interest rates high enough to restrain inflation, would
produce even higher inflation, as the massive federal budget deficits produced
by the ensuing recession, exacerbated by the higher interest payments necessary
to finance them, would ultimately be monetized by the Fed. Ironically, Greenspan
risks higher inflation by fighting it than by ignoring it. So far, his barking
is keeping currency traders at bay, but it will not be long before the markets
call his bluff.