Outlook: Alan Greenspan; This Time It's Serious
Alan Greenspan, chairman of the Federal Reserve, rarely gets quoted entirely accurately on anything. So it was perhaps inevitable that his uncontentious observation yesterday that it was not realistic "to look for a continuation of stock market gains of anything like the magnitude of those recorded in the past couple of years" should have become distorted on some of the more unreliable news wires to the bald assertion that stock prices were "unrealistically high". Plainly, there is a world of a difference.
All the same, what he actually did say was sobering enough. Mr Greenspan's normally delphic testimony to the US House of Representatives was, for a change, unambiguous. Mr Greenspan is not a believer in the "new paradigm", the theory that the US has abolished the business cycle, that the economy is on a sustainable glide path of low inflation and high growth out into the indefinite future. Mr Greenspan is far too wise an old bird to call the theory so much hooey; the American public doesn't like to hear that kind of thing. But he might well have done.
Choosing his words carefully, Mr Greenspan said: "Short of a marked slowing in the demand for goods and services and hence, labour - or a degree of acceleration of productivity growth that appears unlikely - the imbalance between the growth in labour demand and the expansion of potential labour supply of recent years must eventually erode the current state of inflation quiescence, and with it the solid growth of real activity". What he is saying here is that to head off inflationary pressures in the US economy, the Fed needs to slow the demand for labour. …