Newsgroups: alt.activism,sci.econ,talk.politics.misc
Subject: <None>
From: demon@desire.wright.edu (Stupendous Man)
Date: 22 Aug 92 02:13:34 EST
Organization: Demonic Possesions, Inc.
Summary: Priming the pump when no one is drinking...

In article <1992Aug21.082708.2648@hemlock.cray.com>, rja@redwood26.cray.com (Russ Anderson) writes:
> 
> In demon@desire.wright.edu (Stupendous Man) writes:
> 
>> Most of the following is taken from _Forbes_, August 17, 1992.
> Interview with Nobel Prize-winning economist Milton Friedman.
> 
>> FORBES: How's the economy?
> 
>> 	Friedman: If you look closely, and pay attention to the short-term
>> money supply movement, it looks very scary.
>> 	President Bush has a policy I've been calling reverse Reaganism.  It
>> promises slow growth in the 1990s.  Now, on top of that, the short-term cycle
>> came down sharply, then started to go up, but has been severely retarted by
>> slow monetary growth.  It may indeed turn into another recession.
>                          ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
>> 	[Federal Reserve Chairman Alan] Greenspan has ben more successful than
>> Volcker in avoiding excessive volatility in the money supply.  But while I
>> share his objective of long-run zero inflation, in the short run the money
>> supply has grown much too slowly....
> 
>       Money Supply Growth Rates (Source: Federal Reserve Board)
> 
> M2 growth (4Q/4Q)  M3 growth (4Q/4Q)
> -----------------  -----------------
> 1988  5.2%         1988  6.4%
> 1989  4.8%         1989  3.6%
> 1990  4.0%         1990  1.7%
> 1991  2.8%         1991  1.2%
>  *    1.4%          *   -0.3%   (* 11/91-6/92)
> -----------------  ------------------
> 
> Even more ominous is that the 3 month growth rates through June 1992 
> (from the chart) shows:   M2 -1.8%  M3 -3.0%
> 
> Now I may not be a rocket scientist, but if M2 and M3 growth rates are
> going negative, the Fed will have to respond with *yet another* drop
> in interest rates (M1 3-month growth rate dropped from 20% in March
> to 6% in June) to try to increase M2 & M3.
> 
> I also find it hard to believe that the economy can maintain positive
> economic (GDP) growth in the face of negative M2 and M3 rates.  
> (*Deflation* even looks like a possibility.)

	It depends on what else happens.  Say Bush gets reelected and drops
taxes by 10%, and mandates a 10% spending cut (and backs it up with many
vetos).

	Then another drop in the interest rate will help spur the new economic
growth generated by increased consumer spending.

	(Flashback: I remember opponents of Reagan's tax cuts making fun of how
"little" each taxpayer was going to get.  And odd position from the same people
who are apt to claim a small increase in taxes will give them a substantial
amount of new revenues.)

	However, if we get no tax cuts, or tax cuts without spending cuts, or a
tax raise....
	Then you see *inflation*, and at a substantial pace.  We'd be back to
double digits within 8-12 months.

	Long term rates have stayed high, in the anticipation of such events. 
Rising debt will spur inflation, stagnant economic growth will reeducate
consumers with stagflation, and the cost of financing the deficit/debt will
rise as people turn to that as a form of investment.

	Heck, why invest in a bear market when you can make uncle same pay you
for the privilige of borrowing your money?

	Greenspan said last year that the Fed had done all it could do, and he
wasn't going to push for further reductions.  He had the right idea.  It
doesn't matter how low the rate goes if no one is prepared to
invest/borrow/fund.  And they'll stay that way as long as people perceive that
any gains they make will be wiped out by taxes, or their new business would go
under for lack of customers.

	Let's face it, you have to convince the customer that the utility of
the produce is worth the risk/investment.  Otherwise they don't care how low
the price/cost is.

Brett                                                      
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