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Tuesday, May 03, 2005

More from the UK

by Calculated Risk on 5/03/2005 10:29:00 PM

Independent: ... but in Britain, retailers see worst slide in sales for nearly 13 years

Scotsman: Double hit hints at rates cut

Scotsman: What slowdown means: now's the time to get real

And a harsh review of Greespan's tenure - Jeremy Warner's Outlook: As the world economy falters, Greenspan, the grand illusionist, faces his Waterloo

"Fast forward 20 years and how will historians come to judge Alan Greenspan, chairman of the Federal Reserve? As things stand, Mr Greenspan's report card reads "outstanding performance so far, but jury still out on the final verdict".
Just to put this in perspective, even with the Fed funds rate now at 3 per cent it is still "only" 2 per centage points higher than a year ago. By historic standards, rates remain incredibly low. Yet even at this level of interest rates, with inflationary pressures apparently building, US growth continues to look fragile. It's going to be hard to raise rates much further without sending the economy into a tailspin.

Back in Britain, we are seeing something of the same phenomenon. Interest rates remain low by historic standards, but the economy seems extraordinarily sensitive to anything higher. Just six months ago, everyone was talking about the return of inflation. Now the City wonders whether we have not already reached the peak of the interest rate cycle. Retail is suffering some of its worst trading conditions in years and manufacturing seems to be slipping back into recession.

With Mr Greenspan, the question is whether he can ever now hope to wean the US off its addiction to low interest rates ... continued growth has been achieved only at the cost of mountainous current account and budget deficits and an ever growing housing market bubble.

As he tightens once more, Mr Greenspan again finds the economy beginning to suffer. The magic is beginning to wear thin, and, like an illusionist whose sleight of hand is uncovered, scepticism is now palpable: Mr Greenspan may have succeeded only in delaying the pain, not in removing it.
Can Mr Greenspan succeed in engineering a soft landing for the US economy, where there is gradual correction of the present imbalances, or has he lost control of the aircraft as it careers towards the runway? The judgement of history awaits."