Greenspan notes the possibility of a “double dip” recession… is he partially to blame?
By Micah Hanks
Expressing hope that current economic indicators are evidence of a “pause” in the world’s largest economic system, former Federal Reserve Chairman Alan Greenspan seems concerned nonetheless. In spite of marked growth in the month of June, growth expected by economists was still below predicted numbers. Accumulation of inventory, Greenspan says, has stopped, with production “flattening out” also, according to quotes from an interview that appeared recently at Bloomberg.com.
If indeed the American economy is looking at a pause, then perhaps July, August and September should look better progressively, especially as the heat of summer pushes holiday tourists to different locales. Cities like New York and Vail, Colorado have been vocal about seeking creative ways to try and boost revenues from tourism and draw people in, with numbers apparently on the rise since 2009 in many parts of the country. However, taking into consideration the oil spill in the Gulf, there still may be great damages felt by the seafood industry, in addition to compromised access to southern beaches–both vital assets to coastal states during the tourist season. All things considered, fear abounds that we’re not seeing any sort of “pause,” but more likely a wave cresting into the a “third depression,” popularly described by New York Times op-ed columnist Paul Krugman as the result of “a failure of policy.”
Commenting further, Greenspan made a jab at China’s currency, noting that it remains “undervalued,” a sentiment mirrored by a report released by the U.S. Treasury Department. However, the United States, having maintained control over the dollar as an international currency standard, has long engaged in its share of currency manipulation. Following the Great Depression in the 1930s, Keynesian economic influence spurred greater governmental control over the economy, with hope of maintaining an adequate level of employment in the United States. This, unfortunately, also would encourage greater manipulation of the dollar, something the Federal Reserve and its member banks have long championed; in spite of the fact that even present Fed Chairman Ben Bernanke asserts that the Fed’s monetary policies prior to the 1930s likely contributed to the Great Depression, rather than helping to stave it off.
With the end of the Bretton Woods system in 1971, America divorced its dollar from any backing by gold, silver, or other tangible wealth, granting it a new elasticity by which it could be measured and controlled for international trade purposes. In the decades that followed, the US dollar’s value declined steadily. When a country’s currency is undervalued, it causes the cost of imports from other countries to rise; though this can be beneficial to the receiving party, the goods being exported from supplying countries cost more, and thus become less competitive, an activity that essentially amounts to a non-tariff barrier to trade.
In spite of US currency being devalued in similar ways for decades, in 2008 a proposed China Currency Manipulation Act introduced in the Senate accused China of “protracted large-scale intervention in currency markets, thereby subsidizing Chinese-made products and erecting a formidable nontariff barrier to trade for United States exports to the People’s Republic of China.” According to an argument presented by the Heritage Foundation, this perception of China’s actions doesn’t hold water, since China “is purchasing U.S. dollars or U.S. government securities, so the Chinese government payment is ultimately going to the U.S. government.” Additionally, though China’s currency is certainly undervalued, this actually benefits the U.S. in many ways, since we end up paying less for Chinese goods brought into the United States.
Regarding non-tariff trade barriers that result from the undervalued Chinese renminbi, economists will note that, since China isn’t the only country the US trades with, the country’s undervalued currency may not present quite such large scale economic disparity after all. Ambassador Terry Miller, Director of the Center for International Trade and Economics, noted in 2008 that “The U.S. dollar has been in a broad decline against both the euro and the yen, keeping U.S. goods highly competitive from a pricing point of view.” Additionally, Miller points out that the last decade saw U.S. exports to China increase more than 400 percent.
Testifying before Congress in 2008, Greenspan admitted during a pointed exchange with Rep. Henry Waxman that he may have been wrong in his estimation of economic controls during his years with the Fed. “Yes, I found a flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak,” he said. A devotee of Ayn Rand’s Objectivist philosophy, Greenspan had once been a strict advocate for maintaining a gold standard in the US, having authored articles with titles such as 1966′s “Gold and Economic Freedom.” Years later, Texas Congressman Ron Paul recounted Greenspan’s assertion that he had since learned to make fiat currency behave as though gold and silver still backed it; one must consider now whether this was the “flaw” which he sheepishly admitted to before Congress two years ago.
“I was shocked,” Greenspan famously declared, “because I had been going for 40 years or more with very considerable evidence that it was working exceptionally well.” In truth, much changed in those 40 years, both in the world economy and in Greenspan’s own philosophy, and as the current economic crisis clearly indicates, this brought with it devastating results. No doubt, Greenspan and others will continue to point the finger at China and other foreign nations, blaming their undervalued currency for many of our current economic woes; but thanks to “flaws” such as those expressed by one humbled former Fed Chairman, it appears we made our own bed–or more appropriately–it was made for us. Now, setting aside all accusations of who, why, or when, we are faced with the sobering conclusion that we’ll have to sleep in that bed regardless, and hope future economists will learn from the tragic mistakes of those who preceded them.
