Thai Guru's Gold und Silber ... (Informationen und Vermutungen)

From the informative and entertaining King Report:

There are two important stories in the Employment Report that are largely, if not totally, being ignored. Most importantly, wages increased only 0.1% (0.2% exp). Whatever jobs that are being created in this recovery have been largely in low paying gigs like leisure & hospitality, retailing, health & social services and government ( for the election in 2004).

Secondly, the CES Business Birth/Death Rate contributed 16k more jobs this Dec (78k vs. 62k last year). What evidence is there for 26% job growth in small businesses in Dec 2004? We see none. And anecdotal evidence, namely the past few months of economic data, shows an ebbing economy globally. Now the real story – The Chicago Tribune on Saturday noted that for the first 47 months of Bush’s reign, the US has lost a net of 122k jobs. If less than 122k jobs were reported on Friday, Bush would’ve been the first president since Herbert Hoover to have less jobs at the end of a term. If Hoover had the benefit of BLS chicanery, namely the Biz B/D Rate, he too like Bush, would’ve avoided job loss ignominy.

Bush’ job creation is even worse when one considers, as the Trib points out, that during Bush’s term the US population has grown by 12 million.

NY Times: "3.6 million American workers who ran out of unemployment insurance benefits last year, the most in at least three decades, said Isaac Shapiro, a senior fellow at the Center on Budget and Policy Priorities…As of November, about 1.8 million, or one in five, unemployed workers were jobless for more than six months, compared with 1.1 million when the recession officially ended in November 2001…Since the start of the recession in March 2001, the average length of unemployment has risen to 20 weeks from 13." http://www.nytimes.com/2005/01…obless.html?oref=login&th

NY Times Magazine: "What makes China so troubling for American and other foreign companies is that the country is both a potential rival, with an alternative legal approach to intellectual property that limits their prospects in China and weakens their competitive strength globally, and a haven for pirates and counterfeiters." http://www.nytimes.com/2005/01…FEIT.html?pagewanted=2&th

The Chicago Tribune ran a fascinating economic story in its "Arts & Entertainment" section on Sunday.

The article asserts that ticket fees for events have increased sharply and now account for as much as 47.5% of ticket prices. The Trib cogently, but ignorantly [of BLS consequences], notes that though fees are increasing sharply; the amount of service is declining sharply as people must use computers. Where is this accounted for in CPI? There should be a double whammy – higher costs and a negative hedonic adjustment. But we all know that there are only positive hedonic adjustments when it comes to CPI.

Earnings reporting season commences this week. Though there could be some nano-term positive reactions for bang-out earnings, overall the reactions should not be sanguine because The Street expects 2005 earnings to recede and inflation to increase. Ergo, disappointments in earnings and guidance will be punished; good news will have only an ephemeral effect…

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JUST IN LATE:

Charlie McCarthy Snow is a man on a mission:

NEW YORK, Jan 10 (Reuters) - U.S. Treasury Secretary John Snow on Monday reaffirmed the government's strong dollar policy and said he would focus on fundamentals to support the dollar.
"We reiterate our long-standing policy. We're focused on the fundamentals of the economy," Snow told a press briefing at the Nasdaq Marketsite in New York.
Snow did not say, as he often has in the past, that the dollar's rate must be set by markets. His omission of this comment last Friday sparked a rally in the dollar.
Asked if administration policy would exclude the possibility of intervention to stem the dollar's decline, Snow said "I'd rather not speculate on what we might or might not do under different circumstances."

-END-

-Fed warns 'measured' rate action is not a pledge
By Alister Bull

WASHINGTON, Jan. 10 (Reuters) - The Federal Reserve has never pledged to hike interest rates only at a measured pace and is closely watching inflation, a top policy-maker said on Monday in a possible sign of faster rate moves than expected.

Atlanta Fed Bank President Jack Guynn, who votes at the next two Fed policy meetings as a stand in for the Dallas Fed, warned markets not to assume the U.S. central bank will continue raising interest rates in quarter-percentage-point increments.

"It is vital that we maintain the flexibility to respond with the best policy action that comes from each FOMC (Federal Open Market Committee) discussion, even if sometimes that has the potential to surprise some in financial markets," he told the Rotary Club of Atlanta.

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Chief Executives' Confidence Declines Further, The Conference Board Reports

NEW YORK, Jan. 10 /PRNewswire/ -- Chief executives' confidence in the nation's economy, which had fallen to 63 in the third quarter of 2004, fell again in the fourth quarter, finishing at 61. A reading of more than 50 points reflects more positive than negative responses.
The Conference Board's quarterly measure of CEO Confidence covers nearly 100 CEOs in a wide variety of industries.
"CEO confidence has now slipped for three consecutive quarters," says Lynn Franco, Director of The Conference Board's Consumer Research Center.

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Summary of this late news:

The Fed and Treasury are talking a big game here. Fixing deficits, raising interest rates more than expected, etc. Meanwhile, the economic news is modest at best. The stock market action is already wobbly. If this sort of perception catches on, look out below.

From a knowledgeable Café member who is outraged about the World Gold Council’s GLD, who continues to buy along with Goldman Sachs:

1/7 StreetTRACKS adds 11 more tons today!

Here we have it. The gold ETF we all wanted is obviously part of the gold CABEL and uses the ETF as a physical piggy bank to help the bad guys toss the gold prices too and fro. Of course, they have the help, support and insider information from their buddies at the ESF and the FED to make sure they are on the right side of EVERY TRADE!

The prospectus says GLD would "track the price of gold". I never saw in the prospectus the part about GLD INFLUENCING the price of gold!

WHERE IS THE OUTRAGE?

***

PART TWO:

THE NAKED HEGEMON
PART 2: The center of the doughnut
By Andre Gunder Frank

(PART 1: Why the emperor has no clothes )

All Ponzi schemes build a financial pyramid. Many who pay into them also live in a financial world themselves, but others need to derive their in-payment through earnings from production in the real world. In today's world of financial transactions that every day are a hundredfold more than all payments for real goods and services put together, the financial ones put the real ones into the shadow behind their brilliance.

Moreover, to oversimplify a very complex matter into more intelligible layperson's language, options, derivatives, swaps and other recent financial instruments have been ever much further compounding already compounded interest on the real properties in which their stake and debts are based, which has contributed to the spectacular growth of this financial world. Nonetheless, the financial pyramid that we see in all its splendor and brilliance, especially in its center at Uncle Sam's home, still sits on top of a real-world producer-merchant-consumer base, even if the financial one also provides credit for these real-world transactions…..

http://www.atimes.com/atimes/Global_Economy/GA07Dj01.html

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Hi Bill,
Thought you might be interested in this one from Barron’s.
It will be interesting to mail this back a year from now – nice of them to give a mailing address.
Best Regards,
Dave.

MONDAY, JANUARY 10, 2005

MARKET WATCH
A Sampling of Advisory Opinion
Edited by ANITA PELTONEN

Cumberland Advisors
614 Landis Ave., Vineland, N.J. 08360

JAN. 4 - Gold , Aristotle and Shakespeare: Gold bugs beware -- don't mix your 'glitter' with your 'glister.' Gold is not money. It is a metal. Today's monetary world is one of paper currency and its electronic-blip equivalent. The world does not have a metal standard. It is not about to get one.

The governments of the world and their central banks hold huge hoards of gold . This is a leftover from the days when gold was money. From time to time they sell a little. They do not often buy any. Theirs is a political decision. Right now, they seem to be sitting on the sidelines and watching the price. The higher it goes, the sooner they will sell again.

Gold has a lid, based on the political decision of those governments to disgorge some of the hoard. Gold has a floor based on the marginal cost of mining an additional ounce at the marginal mining company. In between those two levels, gold can be priced by market forces based on market liquidity and speculative-trading factors. In between, the market is relatively thin, so that intensified buying or selling will move the price abruptly and significantly.

Gold has great historical meaning. That cannot be denied. There were times when holding some gold enabled a person to save his or her life. Within the last century, you could make that statement about stronger paper money as well. Still, gold maintains a mystique; it has its fans.

So why has gold been so strong? That one is simple. The dollar has been so weak. In today's world the price of gold reflects a weakening paper currency, not an appreciating metal.

-- David Kotok

No Mr. Kotak, you could not be more wrong. The central banks are NOT sitting on the sidelines. There is a Gold Cartel out there aggressively managing/suppressing the price to suit their own hidden agenda.

Good grief, the commentary on gold from the mainstream investment world is beyond dreadful. It is disingenuous and continues to reveal a complete lack of understanding of the real market. Gold investors/companies can thank the World Gold Council and the rest of the establishment gold world for not publicly countering such drivel over the years.

There’s that word again:

January 8
Lawyers conspired with Newmont: Locals

Tony Hotland and Muninggar Sri Saraswati,
The Jakarta Post/Jakarta

What started as a collective struggle was replaced with a battle of words when Buyat Bay residents accused their lawyers of conspiring with gold miner PT Newmont Minahasa Raya (NMR), which has been accused of polluting the North Sulawesi bay.

On Friday, the dispute resulted in a decision by the residents to replace their attorneys from the Legal Aid Institute for Health (LBHK), which had unilaterally arranged a settlement in a Rp 5 trillion (US$537.34 million) civil suit filed by three Buyat residents against the U.S. mining firm.

Anwar Stirman, a Buyat resident, alleged that the lawyers had agreed to a settlement with Newmont that disadvantaged the three plaintiffs -- Rashit Rahmat, Masna Stirman and Juhria Ratumbahe. The three insist they were not consulted about the settlement.

The South Jakarta District Court stated on Wednesday that the residents had agreed there was no evidence that mine tailings from Newmont's activities were the cause of any diseases they suffer.

Meanwhile, Newmont had agreed to withdraw a separate defamation suit against Iskandar Sitorus of LBHK, the court said.

The plaintiffs and the lawyers had previously intended to settle the case amicably, but under the condition that Newmont fulfill their demands for financial assistance in, among other things, health and education needs during a period of time.

The lawyers said the residents had mulled over settling the case given the possibility of a lengthy period of court trials and of losing the case. Furthermore, they had also discussed compensation worth some $6 million in health coverage from Newmont.

However, said Anwar, the contents of the court statement was different from the deal they had discussed. The court also did not require Newmont to provide compensation for the villagers.

He alleged that their lawyers had manipulated them and altered the initial agreement. Therefore, Anwar said the plaintiffs would appoint new lawyers and file a new suit.

On the contrary, Iskandar claimed the plaintiffs had signed a deal containing the exact same information as in the court statement.

"If they say it's different, then they're lying. They signed the agreement in front of other Buyat people," he said.

Sitorus said his team had planned to discuss the verdict later on with the Buyat people and Newmont, as well as to calculate and formulate the health coverage for around 250 sick residents.

However, Newmont lawyer Mochamad Kasmali told The Jakarta Post there was never any deal nor discussion about the firm paying health coverage for Buyat people.

He also denied any allegations of conspiracy with the lawyers.

Oddly, neither the lawyers, Newmont nor Anwar possess a single copy of the agreement signed by the plaintiffs.

Despite the surprising court statement, which follows the recent victory by Newmont in a lawsuit that concluded the police investigation into the case was illegal, the Indonesian government has said it would continue to pursue the criminal suit against Newmont.

The first trial is expected to start in the next two weeks at the Manado District Court, which will be presided over by select judges who attended training programs in environmental laws.

-END-

Oops, there it is again. But, Dennis Gartman says there are no conspiracies!

Former AOL, PurchasePro Employees Charged in Accounting Probe

Jan. 10 (Bloomberg) -- Prosecutors charged six former Time Warner Inc. and PurchasePro.com employees with fraud and conspiracy, accusing them of inflating earnings by improperly booking advertising sales.

Prosecutors indicted two former officials at Time Warner's American Online unit, as well as four former employees, including the chief executive officer, of PurchasePro.com, a bankrupt Internet software vendor…

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From Richard Russell on Friday:

I've received a lot of e-mails questioning my stand on stock valuations. Let me enter a paragraph from Dr. John Hussman's latest report to his followers (and I consider Hussman one of the best analysts and practitioners in the business). The sentence below was written at on December 27, 2004.

"With the S&P just over 1200, the price-to-peak earnings on the Index has returned to 21. Aside from the 2000 bubble peak, this multiple exceeds valuations seen at any historical market peaks including 1929, 1972, and 1987."

Translation -- This is one of the most overvalued markets in Wall Street History. Stocks today are price to bring not gains but frustration to long-term holders.

One of the great mysteries of the markets is shown below (this one fooled the great majority of pros). If business is as good as is claimed, how is it that interest rates have remained so low, and how is it that the bonds have held up so well? Below we see the 30 year T-bond going back a year. This bond bottomed in May of '04, climbed into the September period and has been going sideway ever since. As of today, the yield on the long T-bond is only 4.85%. And the long bond is higher than it was six months ago.

Has foreign buying held up the bonds? Is it liquidity that's "floating" the bonds up? Is the Fed manipulating the bond market? Or is the bond market simply looking ahead and saying, "I don't see any big pick-up in business, and I don't see any inflation ahead."

When this bear market started back in late-1999 I said that I expected the Fed to fight the bear "tooth and nail." And that's exactly what they have done. Now it is January 2005, and I've stated that Wall Street has a huge stake in holding this market together. The last thing Wall Street wants to see is a down-January. Therefore, I'm thinking we could see quite a bit of manipulation ahead. After all, with a group able to buy a thousand or five thousand S&P futures in the space of a minute, manipulation was has never been easier….

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What is hard for me to fathom is why Mr. Russell can cavalierly speak of bond and stock market manipulation, yet when it comes to gold, it seems he would rather choke than mention blatant manipulation of its price in print. Makes no sense. Nor is there any consistency. Not when GATA has presented six years of evidence which proves our case.

Chuck checks in from Mexico:

Bill:
One more day in glorious Puerto Vallarta, and then back to the city. Even though it is very difficult to trace the technical considerations here because of the quirks of the Internet, I can follow enough of them to conclude that the next move in gold and its shares is nearly upon us. In the past month and a half we have seen a historic drop in sentiment on many fronts. They include the Hulbert survey, the Rydex PM assets, the put-call ratio in the gold futures, the persisten weakness in the gold shares on the close on almost a daily basis, the selling through the bids on most of the juniors, the TFC sentiment, the gold-silver ratio. Once the stock market stocks its real descent again, we should see money fleeing the bourses into precious metals and perhaps some dramatic shots in the smaller less liquid shares. As I have written on many occasions, most of those reading your material have never witnessed a bull market in gold and a bear one in stocks. They are now about to see what a real one is like. We are in a great multi-year bull market in gold and a great multi-bear market in stocks and soon to be joined in real estate. Our patience has been tried. To those who have withstood the squeezing, it will be rewarded.
Talk to you from NYC. Chuck

The gold shares are finally starting to "act" well. The XAU went up .76 to 94.15, while the HUI gained 2.32 to 204.75:

HUI
http://bigcharts.marketwatch.c…&o_symb=hui&freq=1&time=8

This fake picture of the tsunami in Phuket is breathtaking. The enormity of it all becomes apparent when you see the wave is almost as high as the tallest building right off the beach. Hard not to look at the picture over and over. Awesome. (Note: while the picture gets the point across, it may have been partially doctored. As our webmaster Mike Cunningham brings to our attention, if the wave is as tall as that building, it would be closer to a 200 foot wave.)

[Blockierte Grafik: http://www.lemetropolecafe.com/img2005/tsunami.jpg]

Irrespective how high the wave actually was in Phuket, the comparison to a potential financial market tsunami in the US is both valid and obvious (whatever the real size, over 150,000 people died in a flash). There have been warnings of a potential one coming our way for some time now. Morgan Stanley’s Stephen Roach articulates some rationale for that case below in the Appendix. The poor souls in South Asia were not prepared for what hit them. Few in that part of the world took warnings very seriously. Only now are they talking about building a warning system. Course, it is too late.

There is no excuse for investors not to prepare for what seems so likely as far as the US financial markets are concerned – 1987 might only have been a warm up tremor? How many will do so? For the moral of the story, and the lesson to be learned from this horrific disaster in South Asia, it is far better to be one to two years too early than 10 seconds too late!

GATA BE IN IT TO WIN IT!

MIDAS

Dan Ackman's summary of Stephen Roach's most recent (and possibly most controversial) article on Alan Greenspan. That summary can be read here in http://www.Forbes.com (with the full text below):

World On Brink Of Ruin
Dan Ackman, 01.07.05, 9:20 AM ET

http://www.forbes.com/2005/01/…da_0107topnews_print.html

To put this latest on Greenspan in perspective as to motive, I thought it might be of interest to go back exactly six years in time (to the day) and review some related MIDAS commentary:

January 7, 1999 - Spot Gold $291.40 up $3.90 - Spot Silver $5.23 up 8 cents

Yesterday, I had a wonderful conversation with internationally renowned and London based, Teddy Butler Henderson. "Teddy", one of England's respected elder statesmen, has a very highly regarded investment service and is very well plugged in with the investment community in Europe.

You will get a kick out of this story. I sure did. "Teddy" had lunch in London with Alan Greenspan in 1971. Greenspan had his own consulting firm at the time. Both "Teddy" and Greenspan" were believers in the Kondratieff wave (cycle) theory. Greenspan told Henderson that his ambition was to become the top man at the Federal Reserve.

Knowing the Kondratieff cycle would be predicting a crash or depression of sorts about the time he would become head of the Federal Reserve, Greenspan told Henderson he could stave it off by various means (injecting money into the system, supporting the dollar, etc) and he intended to do just that if his career ambition came true. And you wonder if the gold market has been controlled!!!!!

Teddy (TBH) has been a believer that the dollar is in deep doo doo and, that while it has been weak recently, it has more downside to go - about 5% more against the Euro. Guess who wants it that way? Contrary to what you might think, it is Alan Greenspan, according to TBH. Teddy says that Greenspan knows that he had to take certain steps to keep the bubble going (a la the conversation he had with him 28 years ago).

Greenspan knows that our trade deficit is a problem and that our manufacturing sector and real world export sector of our economy needed help. Thus, he made the decision some time ago to work on getting the dollar down. To keep our bubble going, he needed to have this sector of our economy become more competitive. Solution - lower dollar.

Now, this does not make the euro crowd very happy according to TBH. Their reserves are in dollars and with the new start in EMU, they do not want economic problems for themselves. Today, for example, there were reports of a French, German clash over farm policies. A lower dollar can only exacerbate that clash.

At the same time, the EMU wants a strong euro in general. But they want it that way because of a strong economy, not a weak one. In that light, TBH feels that they will up the gold backing of the euro as a reserve at some point in the future. Interestingly, we reported talk of this to you some time ago and today's ECB comments are very encouraging. Teddy feels that the ECB will break ranks from Greenspan in his efforts to keep the price of gold down, referring to Greenspan's comment last July to a congressional committee, " Nor can private counter parties restrict supplies of gold, another commodity whose derivatives are often traded over the counter where central banks stand ready to lease gold in increasing quantities should the price rise". It is this breaking of the ranks that will spur the price of gold to much higher levels according to TBH.

TBH has been a big fan of the US stock market and has his followers heavily invested here (while hedging the currency risk). His reasoning is the strong U.S. economy and he knew what Greenspan was up to. He invested in the US equity market with conviction ( and with the help of his 28 year old information ) knowing that Greenspan would lower interest rates sharply in a pinch. For the future, he sees inflation in the US as workers demand much greater compensation for their efforts, especially as they see this incredible stock market rally. TBH thinks Greenspan will be very slow to hike interest rates in response to this inflationary threat, citing previous false alarms of inflation.

However, that growing U.S. inflation is the other reason TBH is bullish on gold. His long term U.S. equity outlook is not a rosy one, however. TBH sees the Greenspan induced bubble blowing up by August. Sometime before then, he plans to advise his clients to bid sayonara to Uncle Sam and our stock market.

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Stephen Roach

"Game Over?"

U.S. Federal Reserve Board Chairman Alan Greenspan is credited with simultaneously achieving record-low inflation, spawning the largest economic boom in U.S. history, and saving the world from financial collapse. But, when Greenspan steps down next year, he will leave behind a record foreign deficit and a generation of Americans with little savings and mountains of debt. Has the world's most revered central banker unwittingly set up the global economy for disaster?

"Greenspan Is Responsible for the U.S. Economic Boom of the 1990s"

Only in part. The United States experienced an extraordinary period of prosperity in the 1990s. Between 1993 and 2000, 21 million new jobs were created in the United States, and in 2000 the country's unemployment rate briefly dipped below 4 percent for the first time in 30 years. During this boom, the U.S. economy grew at nearly 4 percent a year, adding more than $2 trillion to real U.S. gross domestic product (GDP)--more than the annual output of France.

But many stars aligned to produce that outcome, not just good monetary policy on the part of Greenspan's Fed. For starters, a judicious focus on fiscal discipline by former President Bill Clinton's administration brought the budget deficit under control. The Clinton administration managed to lower the deficit every year between 1993 and 1997. By 1998, there was a surplus that lasted until 2001. The 1990s also saw a powerful wave of corporate restructuring and technological change. Together, these two forces set the stage for sustained low inflation and a powerful acceleration of productivity and employment growth.

Greenspan's leadership in monetary policy undoubtedly played an important role in fostering the conditions that allowed the U.S. economy to surge in the 1990s. The chairman helped achieve the economy's high-performance potential during that time period. But no one should believe that the economic boom of the 1990s was the work of just one man or just one monetary policy.

"Greenspan Defeated Inflation in the United States"

No. Credit for breaking the back of double-digit inflation goes to Paul Volcker, Greenspan's tough and courageous predecessor. In the summer of 1979, when Volcker assumed the reins at the Federal Reserve, inflation was raging at 12 percent a year. Eight years later, when Alan Greenspan took over, the inflation rate stood at around 4 percent. During Greenspan's 17-year era, inflation slowed further to 2.5 percent per year. But 80 percent of the drop in inflation occurred under Volcker's stewardship at the Fed.

True, Volcker put the United States through its worst recession in modern times. It was the only way to unwind the destructive interplay between wages and prices that drove U.S. inflation. Greenspan's major challenge was to finish the job Volcker started. That was no easy task, and Greenspan's successes should not be minimized. In only one of Greenspan's 17 years at the Fed (1990) did inflation move above 5 percent; in 11 of those years, inflation was 3 percent or lower.

But there were serious complications along the way, not least of all a dangerous flirtation with outright deflation, or an overall decline in the price level, in early 2003. This problem resulted from Greenspan's biggest gamble--a willingness to push U.S. interest rates to extremely low levels during a period of rapid economic growth. The move gave rise to the destabilizing stock market bubble of the late 1990s, a speculative excess unseen in the United States since the roaring 1920s. The bursting of that bubble in early 2000 transformed an orderly disinflation (i.e., when inflation merely decelerates) into a close call with actual deflation.

"Greenspan Rescued the United State from a Stock Market Meltdown"

Maybe, but at what cost? In early 2004, Greenspan gave a speech to the American Economic Association, arguing that the Fed should feel vindicated in its efforts to contain the 2000 stock market shakeout. By slashing the federal funds rate--the interest rate at which the Fed lends money to other banks--by 5.5 percentage points between January 2001 and June 2003, the Fed limited the severity of the recession that followed the burst of the bubble.

That cure may cause bigger problems down the road. Bubbles have developed in other asset markets (especially corporate bonds, mortgage-backed securities, and emerging-market debt). And Greenspan's rock-bottom interest rates have led to the biggest bubble of all: residential property. Annual inflation in U.S. home prices is now running at a 25-year high of 8.8 percent, with 15 states experiencing double-digit increases in residential property values between mid2003 and mid-2004.

At the same time, the home-buying and consumption binge has put individual Americans deeply in debt. Greenspan takes comfort that rising home values compensate for increased borrowing, but that rationalization assumes a permanence to rising property prices that belies the long history of volatile asset markets. So far, the Fed and debt-addicted U.S. homebuyers have bucked the odds. Over the last four years, debt accumulated by U.S. families was 60 percent larger than overall U.S. economic growth. Many households in the United States now spend near record-high portions of their monthly incomes on interest expenses, leaving consumers in a precarious position should either interest rates increase or the growth in incomes slow.

History shows that central banks aren't always able to cope when bubbles burst. That was the case with the Bank of Japan in the 1990s, after the Japanese stock and property markets collapsed, and it could still be the case in the United States today. The United States dodged a bullet when the stock market tanked in early 2000. There are no guarantees that highly indebted Americans will be as lucky the second time around.

"Greenspan Saved the World from the 1997-98 Asian Financial Crisis"

False. Time magazine devoted its February 1999 cover to the "Committee to Save the World." Featured were then U.S. Treasury Secretary Robert Rubin, then Deputy Secretary Lawrence Summers, and Greenspan, all celebrating the end of the worst global financial crisis in more than 60 years. In truth, the world weathered the Asian financial storm only to chart increasingly dangerous waters in the years that followed.

Global economic imbalances have intensified dramatically since 1999. The United States' gaping current account deficit says it all--$665 billion in mid-2004, equal to a record 5.7 percent of U.S. GDP. Never in history has the world financed such a massive deficit. The United States is sucking up more than 80 percent of the world's surplus savings, requiring capital inflows that average $2.6 billion per business day. And the U.S. deficit is bound to get worse before it gets better.

This huge balance-of-payments gap reflects major disparities between global savings and consumption. A savings-starved U.S. economy is living beyond its means, while Asia and, to a lesser extent, Europe, are plagued by low consumption and high savings. Consequently, the United States is now the world's consumer of last resort. Asian economies, by contrast, are more prone to save and rely on export-led growth strategies, and they are unwilling or unable to stimulate domestic private consumption.

The result is an enormous buildup of U.S. dollars held by Asian nations (more than $2.2 trillion in mid-2004, or twice Asia's holdings in early 2000). These countries then recycle this cash back into the United States by buying U.S. Treasuries. This process effectively subsidizes U.S. interest rates, thus propping up U.S. asset markets and enticing American consumers into even more debt. Awash in newfound purchasing power, Americans then turn around and buy everything from Chinese-made DVD players to Japanese cars.

This is no way to run the global economy. Asia and Europe are increasingly dependent on overly indebted U.S. consumers, while those consumers are increasingly dependent on Asia's interest-rate subsidy. The longer these imbalances persist, the greater the likelihood of a sharp adjustment. A safer world? Not on your life.

"Greenspan Was Alone in Foreseeing the Productivity Revolution"

Yes. In the early 1990s, when the United States was mired in a productivity slump, Greenspan was largely alone in believing that an important shift was at hand. He was right. Worker productivity in the United States grew 3 percent a year between 1996 and 2003, double the anemic 1.5 percent annual increase of the preceding 20 years.

The productivity breakthrough had a profound impact on the performance of the U.S. economy, as well as on Greenspan's command of monetary policy. High-productivity economies can withstand rapid growth without an increase in inflation. So, as U.S. productivity climbed in the late 1990s, Greenspan boldly let the economy fly without raising interest rates. Investors, of course, were thrilled with Greenspan for not standing in the way of rapid economic growth. The stock market bubble of the late 1990s (which he initially warned of, but later ignored) reflected this exuberance. As Greenspan said in early 2000, "When we look back at the 1990s....[w]e may conceivably conclude...[that] the American economy was experiencing a once-in-a-century acceleration of innovation, which propelled forward productivity, output, corporate profits, and stock prices at a pace not seen in generations, if ever."

Within two months of that statement, the stock market collapsed, but the productivity miracle did not. Whether it will endure, though, remains an open question. Most U.S. businesses have an advanced IT infrastructure. The lack of new corporate hiring and the sharp falloff in business expansion point to ever more hollow American corporations. Moreover, the pendulum is now swinging back toward greater government regulation, further constraining corporate risk-taking. The drivers of the productivity miracle of the past eight years may not be sustainable, after all.