SWAjet

How Not to Ruin Your Life
by Ben Stein

I Love You Alan Greenspan, But ...
by Ben Stein

Thursday, October 27, 2005
[Ben Stein] So Ben Bernanke, a distinguished economist and Princeton professor, will soon become Chairman of the Federal Reserve Board. Good for him. Shows where winning the North Carolina spelling bee, as Dr. Bernanke did many years ago, can take you. But for the next few months Alan Greenspan is still in charge.

Now, I am the world's greatest fan of Dr. Greenspan. He is a brilliant man, a kind man, and a thorough patriot. He wants what is best for America and the American family. But I am puzzled by what the Federal Reserve is doing in its relentless march up Interest Rate Hill.

Supposedly, these interest rate increases are an effort to maintain control over inflationary pressures. But there are a variety of reasons why that rationale simply does not make sense.

First, the real pressure on prices has come from increases in the cost of oil and natural gas. These price increases have risen dramatically since the start of the year and are now working their way through the consumer prices we all pay. But oil and natural gas prices are world prices set on a world market. There is little sign that demand in the United States is driving up these prices, at least not by itself.

It's Overseas Demand That's Rising

The real startling growth in the demand for energy commodities has come from China and India. To be sure, their demand is far smaller than that of the U.S. -- far, far smaller. But, with the exception of the last few months, it is Far Eastern demand that is at the margin (as we economists say) pulling up prices. It is Far Eastern demand that is growing at double-digit rates each year and that is forecast to grow by 150 percent in the next 15 years. To be sure, China is still a very small economy compared with the U.S. But it is still the second largest oil consumer, and its use is growing like a monster.

If demand from China and India is what's boosting the world price of oil, how will restraining demand in the U.S. reduce oil prices and thus reduce inflation?

Second, if we assume just for the sake of argument that it is U.S. - and not Far Eastern -- demand that's pushing up prices, this demand would be happening despite an economy that is not growing at inflationary rates. Thus, to push us into a recession or a slowdown to lower oil prices may simply not work.

And why should we do it anyway? The futures prices of oil are already falling rapidly, telling us that future prices at the pump will be falling -- not rising. To put it simply, the engine behind inflation is already slowing down so why put the whole economy into a slowdown to accomplish something that is already being accomplished?

Is Inflation Really to Blame?

The genius economist and Nobel Laureate, Milton Friedman, has often said that, "Inflation is always and everywhere a monetary phenomenon." By this, he meant that inflation is always caused by excessive monetary growth. But -- and this is a huge "but" -- there is not anything like excessive monetary growth. In fact, by most standards, monetary growth has been extremely slender in recent years. It has been worrisomely slow. Then, why clamp down on an economy with a money supply growth rate that is already slow?

Now, all of this is not just academic hot air. Higher rates could slow down an economy which has already slowed down in some of its most sensitive areas, especially autos and trucks. A rapidly rising short-term rate will raise the dollar against the Euro and the Yen, and this will create an even more stunning trade deficit. Mortgage rates are already rising rapidly and could slow down or stop the major good news in the economy: The real estate sector.

So, why is the Fed doing what it's doing? Well, I asked two major powers at the Fed just this week. One said, "There's evidence of rapidly rising wages in some fields."

"What fields?" I asked.

"CPAs who really know Sarbanes-Oxley well and finance MBAs," he said.

"And that's it?"

"Well, it's not a lot compared with energy," the man said and shrugged.

The other man said that the Fed was raising rates to slow down inflationary expectations in energy.

"But energy prices are already falling, and the growth in demand is coming from China," I said. "Are you trying to control Chinese demand?"

He smiled and shrugged.

By the way, I don't think it's in the Fed's charter to try to control Chinese demand.

I don't get it. Dr. Greenspan. I love you, but I just don't get it.