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Wednesday, September 19, 2007

The Age of Turrabull-ence

Tuesday night on the Daily Show, Alan Greenspan, former Chairman of the Board of Governors of the Federal Reserve (1987-2006) was asked a fundamental question about the rewards of capitalism and how they're affected by the federal interest rate.

The US switched from a gold standard to the federal interest rate system we have today. For the sake of argument, let's say that $1 holds the value of one gram of gold. When the feds lower the interest rates by 0.5%, during an economic recession, after 9/11 for example, the actual value of $1 depreciates to 0.995 grams of gold. It may not seem like much, but this artificial inflation is able to stabilize the stock markets by increasing the dollar costs of stocks, even though the value has not changed.
While this is supposedly beneficial for the market in the short run, it has the opposite effect on salaried and wage workers. They are paid the same dollar amount, but the value of those dollars, thus the value of the work - goods or services they provide - has diminished. It's almost like getting a 0.5% pay cut.
Additionally, the interest rates of bank accounts - workers' savings - are correspondingly reduced. So the dollar amount one saves in a bank has less value, and there is less return for account holders.
But at least the Dow Jones is back over 13,000, right? The perception that the US economy (embodied by the stock market) is doing alright distracts workers (other than investors) from the reality of the depreciation of the value of their work as well as their savings.

It's also worth examining the US Treasury's change from the gold standard, especially in relation to developmental economics. When top American economists and organizations like the IMF or World Bank attempt to pull struggling economies out of "dark ages" and into a US-modeled free market economy, they strongly encourage the use of the gold standard. However, as Greenspan notes, "the gold standard was strangling the economy" and in its place, "you need somebody to determine, or some mechanism of how much money is out there." So in countries like Bolivia and Poland in the 1980s, the gold standard was introduced to control inflation and make their economies more like the American "free market" model, which doesn't even use the gold standard, employing this other mechanism of inflation control.

Stewart: So we're not a free market then, there is an invisible, a benevolent hand that touches us.
Greenspan: Absolutely, you're quite correct, to the extent that there is a central bank governing the amount of money in the system. That is not a free market...
Stewart: It seems to me that we favor investment, but we don't favor work. The vast majority of people work and they pay payroll taxes and they use banks. And then there's this whole other world of hedge funds and short betting seems like craps. And they keep saying, "No, no, no, don't worry about it! It's free market! That's why we live in much bigger houses." But it really isn't [a free market] it's the fed, or some other thing, no?

Greenspan goes on to give his spin on the regulation required of a free market and the stabilization it necessitates. Government regulation reduces the uncertainty of the market, without which "economic activity, which is really dealing with people, just goes straight down."
Apparently a successful "free" market relies on fear, euphoria, and strict regulation.

More of this to be elaborated on later, including the laws of surplus value and necessary value...


DiploMattico said...

I can't tell whether Greenspan contradicted himself or not. He says that he's been working in the "forecasting" business for fifteen years using complex mathematical formulas. He also gives his psychological explanation of how people's perceptions of the economy fluctuate between euphoria and fear and that understanding this is more useful in his position than the math. But he uses the mathematical method because he hasn't yet figured out how to predict peoples perceptions of the economy. Yet, his explanation for the drop in interest rates (which seems to hurt the majority of Americans that are working) is purely a psychological explanation. So, does he use math or psych. Is he hurting the working majority by lowering interest rates or not? Corruption? Why don't I understand economics?

Also, if people don't change, as he so eloquently puts, why haven't we figured out a way to predict them? They're just sitting there, not changing....

DifferentiAtlas said...

Well, I believe he said 50 years, to exemplify how little we actually can predict after such a prolonged period of using mathematical models.
Additionally, we have to understand that people's fears and risk-taking vary tremendously - a crushing blow to one investor is another's pay day. Any "psychological" prediction model would forecast stagnation - the emtions would just balance themselves out with so many people involved, all becoming fearful and euphoric by different means.
The reason the fed drops the interest rate in most cases is to quell the fears of many - we are on the brink of a catastrophic housing disaster, the real estate market just isn't what it ought to be. Miami is the perfect example - there are dozens of new condo high-rises going up at any given point, and each condo inside running about a 1/2 million dollars. How long can that kind of construction and asking price really be sustained? The fed drops the interest rates "unexpectingly" at a time like yesterday for very calculated reasons - the uncertainty lies in when exactly that drop should come. Other instances are more predictable, like some after the dotcom crash, 9/11, and other economic recessions. Basically, the point is to inflate the dollar to make the martket appear to be more puffed up than it actually is. Lower interest rates also doop people into borrowing more and more money, simply because the interest they have to pay back is slightly lower. These lender booms cause huge problems further down the road as collecting time approaches.
So for the average worker, this seems like a good thing, at least in the short term, because perhaps they may not be aware of the full longer term consequences, or the meat and bones of what actually happens when the interest rate is lowered beyond a "market improves" understanding (the PR style Greenspan was trying to provide, tho Stewart was probing about the reality of it all).
I would shy away from calling it corruption, its merely the U.S. brand of capitalism, the way we decided to run the economy. Its not corruption on the part of the "investor class," just exploitation.
What Greenspan was alluding to at the end, I believe, is just a lack of his knowledge of the American consumer psychology. He's a numbers guy, maybe even a mathematical genius, but just because he can't understand human behavior and consumer trends, doesn't mean the American worker, consumer, and investor haven't changed over the past century, it just means he doesn't know how or why