Financial Daily from THE HINDU group of publications
Wednesday, May 28, 2003
Financial Daily from THE HINDU group of publications Wednesday, May 28, 2003 |
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Money & Banking
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Economy Columns - Financial Scan Greenspan nimble to deflation threat S. Balakrishnan
AS ever, the US Fed Chairman's testimony to the Joint Economic Committee of Congress last week was closely watched and analysed by the market. The Economist had a novel way of detecting impending recessions. It ran a count of the word in leading newspapers and magazines around the world and found that its frequency had a high correlation with the actual occurrence of recession. Today one could say that about deflation. Suddenly, out of the blue, it has come to the centre stage in economic discussions and policy. It is not just Japan, which is already in deflation, but the US, Europe, China, Hong Kong and Taiwan, which are susceptible to the infection. A pretty long list indeed, and comprising the world's biggest economies. No wonder, Mr Greenspan's latest appearance attracted more attention than usual. He has always been a star draw for financial market players and media the world over and it was even more so this time. His testimony was reassuring. He thought that there was every chance that growth would pick up in the second half of this year, given the ultra low interest rate environment. He also repeated his warning of the risk of deflation taking hold in the US economy, although he estimated the probability of that happening to be rather low — a "minor risk" in his words. More comforting to markets and investors must have been his statement that the Fed is hard at work deciphering the causes of deflationary pressures and psychology and how to "defeat" them and has made "substantial progress" on these fronts. We must now await public disclosure of the weapons in the Fed's armoury to combat deflation. Some are already known. The Fed acted fast in cutting interest rates once it realised and understood the speed of the US economy's decline. In contrast, Europe is paying the price of the ECB's inaction. Growth rates are near zero in Euroland and inflation is dropping. Yet, the ECB has maintained interest rates and has only now started talking of the need for cuts. The Fed's focus seems to have shifted from the short to the long end of the yield curve. Mr Greenspan thinks revival of capital spending by business is crucial. He and his colleagues have been quite explicit that long rates should not rise, especially in such a low inflation environment.
Towards this, there has been talk of the Fed stepping in and buying Treasury bonds from the market. This has led to a big bond rally in the last couple of weeks. At 77, Mr Greenspan seems to be as alert and responsive as ever to the needs of emerging and fast-changing economic conditions. The US President, Mr George Bush, has decided to reappoint him well ahead of the expiry of his current term. A fitting recognition of possibly the best central banker the world has ever seen.
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