File spoon-archives/marxism-international.archive/marxism-international_1997/marxism-international.9711, message 257


Date: Thu, 13 Nov 1997 11:06:06 -0500
From: Doug Henwood <dhenwood-AT-panix.com>
Subject: Re: M-I: Re: marxism-international-digest V1 #980


Chris Burford wrote:

>My understanding is that Greenspan issued a statement at the time of the
>recent shakeout on Wall Street, in order to steady nerves, worthy of Marx
>and Engels.
>
>I refer to the Communist Manifesto, section I,
>
>"And how does the bourgoisie get over these crises? On the one hand by the
>enforced destruction of a mass of productive forces..."
>
>I heard Greenspan to argue reassuringly that it was a good thing for the US
>economy that there had been a fall in stock values, because this would
>steady the market and avoid the need for other deflationary measures, thus
>permitting the 6 years of continuous growth in the US economy to continue.

Since when is the stock market a "productive force"?

Greenspan liked the crashlet because he thought it reduced somewhat the
overvaluation of U.S. stocks. The Fed is in a situation not unlike the late
1920s, when it was anxious about the bubble, but afraid to do anything to
burst it (i.e., raise interest rates) because its friends on Wall Street
were making so much money, and because it was afraid to hurt the real
economy. So it dithered through 1927, 1928, and early 1929, before
tightening in the summer. Just a 1/2 point rise in its discount rate was
enough to precipitate the crash.

I think Greenspan's hope now is that the Asian melodrama, and the modest
falloff in the stock market, will be enough to slow the U.S. economy - the
former through the drag on U.S. exports, the latter through a negative
wealth effect (stockholders spend more money when their portfolios are
swelling, and less when they're shrinking). That would take matters out of
his hands. But the direct effect of the Asian crisis will probably amount
to only a couple of tenths of a percentage point on U.S. GDP growth, and
the wealth effect is a lot weaker than many think it is (because stock
ownership is so concentrated).

This is a very difficult situation to read. There are plenty of "anecdotal"
reports of tight labor markets, and even tight product markets (like the
transportation bottlenecks that Jon quoted). Despite this, there's no real
evidence of any kind of inflationary pressure, though the last employment
report did show a pretty stiff increase in average wages. The very absence
of inflationary pressure suggests that the deflationary undertow may be
pretty serious, one aggravated by the Asian crisis. When the Fed announced
its non-tightening yesterday, the financial markets reacted in a very
deflationary fashion, with stocks falling and bonds rallying. But it's
unlikely the Fed will ease any time soon to offset the deflationary threat,
with markets as tight as they are, and U.S. GDP now running slightly above
its long-term trendline. Greenspan has his hands full.

Doug





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