Contrary to first blush analysis, the 7.2% GDP growth in Q3 2003 is not a
positive sign that the U.S. economy is recovering from the excesses of the
bubble, but is in reality a harbinger of a much deeper recession looming on
the horizon.

In order to delay the badly needed correction of the excesses of the bubble,
the Fed cut interest rates sharply and the federal government ran massive deficits.
These irresponsible actions have merely delayed and unfortunately exacerbated
the ultimate recession which is sure to ensue. The 7.2% growth rate, which
will probably be the peak for this cycle, was achieved by overly-indebted Americans
borrowing and spending at even greater levels. This latest spending binge was
fueled by another wave of cash out re-financings, and the U.S. government going
deeper into debt by spending money on expanded programs, the “War on
Terror,” and by the issuance of taxpayer refund checks. Again, the problem
with the U.S. economy is not the lack of consumer borrowing and consumption,
but its excess. The remedy is more savings and production, which have merely
been postponed, and which, as a result of this 7.2% “growth,” will
be that much more painful to achieve.

If the U.S. economy were actually growing at 7.2%, the fastest pace in nearly
20 years, would Alan Greenspan really be worried about the fragility of the
recovery? Given the falling dollar, surging commodity prices, and a steadily
rising gold price, is it logical that he should be fearful that inflation is
too low? If the economy were really growing at 7.2% would so many people still
be unemployed, and would there still be so few jobs being created? In reality,
it’s not the economy that’s growing, but merely consumption and
debt.

The real growth is occurring outside America, were savings and production
are making this spending binge possible. The reality is that Greenspan realizes
how vulnerable this phony recovery really is, and how the ultimate collapse
in the dollar and resulting surge in interest rates will cause this bubble
economy to blow up in his face. That is why he will say and do anything
to postpone the inevitable, no matter how much worse such a postponement causes
it to become.

Greenspan undoubtedly realizes that while the American economy has survived
large current account and budget deficits in the past, that its ability to
do so now is highly doubtful. Historically, the U.S. financed its deficits
by offering its creditors higher rates of return than those which prevailed
in their own markets. However, current monetary policy results in U.S. yields
being lower than those abroad. Add to this a stock market which is substantially
overvalued when compared to those of its creditors, and you have a major crises
about to unfold. The heavily- leveraged American economy, so dependant on low
short-term interest rates, makes it impossible for the Fed to raise interest
rates to defend the dollar.

In 1980, the Fed needed to raise short term interest rates to near 20% to
save the dollar, which had lost about 70% of its value as a result of the inflationary
fiscal and monetary policy of the 1960’s and 1970’s. Imagine what would happen
if the Fed tried that today? In fact, given the greater excess of current policy
and the far weaker underlying financial position of the U.S., rates would have
to rise even higher today! The irony is that if the Fed tried to save the dollar
with dramatic rate hikes, the severe recession that would certainly ensue would
cause massive capital flows out of the U.S., sending the dollar even lower.
So the Fed is dammed if it does and dammed if it doesn’t. This is why the Fed,
which would rather deal with a larger disaster in the future than act preemptively
to permit a somewhat lesser disaster now, will do nothing to prevent the dollar’s
value from evaporating. Savers beware.