Beiträge von Schwabenpfeil

Café member Jesse has sent The Café superb input over the years. His latest:

Forecast 2005: The Humpty Dumpty Economy
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GATA consultant James Turk has co-authored a new book along with this friend John Rubino. "The Coming Collapse of the Dollar" has been published by Doubleday and is now available for your perusal. For more information on how to obtain a copy, go to: http://www.dollarcollapse.com. It is available from Amazon as well as at local bookstores.

The ramifications revealed in this important article out yesterday can give substantial impetus to gold buying by central banks this year:

Central banks count the cost of weak dollar

1/10 FRANKFURT (AFP) - The weak dollar appears to be tearing holes in the annual accounts of central banks both in Europe and elsewhere around the world, with many banks considering reducing their official holdings in the US greenback

The German business daily Handelsblatt reported that the European Central Bank, which booked a 2003 loss of 477 million euros (625 million dollars), saw its net loss widen to at least one billion euros last year as a result of the weak dollar.

The newspaper did not reveal its sources and said that the guardian of the euro had refused to comment on the information.

But already last week, the Bundesbank had conceded that press reports were "more or less accurate" when they claimed that the German central bank's annual profit had been whittled down to next to nothing as a result of the sharp fall in the value of the dollar.

Already in 2003, the Bundesbank saw its profit fall to just 248 million euros in 2003, its lowest level in 17 years as a result of the weak dollar.

And because the Bundesbank holds vast reserves of dollars, it was compelled to make heavy writedowns against its holdings of the greenback again in 2004, the reports said.

The ECB faces the same problem. The Handelsblatt said in its Monday edition that the world's second most powerful central bank, after the US Federal Reserve (news - web sites), was compelled to make 1.6 billion euros in writedowns against its dollar holdings.

Last year, the euro rose by 16 percent against the dollar, representing an increase of more than 60 percent compared with the historic lows it posted in autumn of 2000.

In addition, the ECB's earnings have dwindled because of the low level of interest rates around the world.

Central banks earn income from interest rates as well as from its activities in gold, foreign currency and securities trading.

Handelsblatt said the low level of interest rates alone knocked around 700 million euros off the ECB's net interest income.

If the Handelsblatt figures are correct, it will be the third annual loss posted by the ECB in the first few years of its existence.

In addition to the loss in 2003, it also booked a shortfall of 247.3 million euros in 1999.

According to data compiled by the International Monetary Fund (news - web sites), the dollar accounted for nearly 64 percent of central banks' foreign currency reserves worldwide at the end of 2003.

But the euro's role is strengthening -- it saw its share of the world's foreign currency reserves rise from 16.3 percent at the end of 2000 to 19.7 percent at the end of 2003.

And that trend looks set to continue.

Russian central bank president Sergey Ignatiev said last month that the Bank of Russia was considering changing the composition of its gold and foreign currency reserves to reduce its dollar holdings in favour of the euro.

Chinese authorities have embarked on a similar restructuring of their foreign currency reserves, but have not provided any concrete figures.

"The euro is under-represented" in international currency reserves, considering the "economic weight of the eurozone and the growing role of the euro in international commerce," said Exane-BNP Paribas economist Emmanuel Ferry.

Nevertheless, the dollar was still a long way from losing its supremacy as the world's main international reserve currency.

Central banks in Asia and South America were unlikely to perform a U-turn in policy just because of the current weakness of the dollar.

"They are not ordinary investors. They view things very long term. The euro is still too young a currency and there are still too many uncertainties about the functioning of European institutions and the future perimetre of the eurozone," Ferry argued.

The Gold Cartel has muted investment demand in the West by capping the price vis-à-vis foreign currencies and keeping upward price movements (one which might generate financial market press commentary and investor enthusiasm) to a minimum via its $6 Rule.

The logic behind their maneuvers is simple. The West buys price strength and excitement. The East buys price weakness and value. Here is anecdotal evidence which supports this analysis:

Hi Bill,
I have been toying with some data from the US Mint off and on for 3 years. At the Mint website, they have posted the number of Gold Eagles for all denominations weights in ounces per year and divided by 12. I thought others might like to see the average ounces sold by the Mint per month, listed by year. We so often get the price for an ounce of gold, but never any volume data. Well here are some volume numbers you can sink your teeth into.

Year - ounces of gold sold per month
1992 - 32,150
1993 - 42,833
1994 - 25,833
1995 - 24,813
1996 - 22,917
1997 - 64,271
1998 - 153,292
1999 - 171,292
2000 - 13,708
2001 - 27,083
2002 - 26,250
2003 - 40,375
2004 - 44,667

The data shows the definite increase in 1997, 1998, and 1999 leading up to Y2K, then a huge drop off in average sales per month in 2000. But what I found most interesting is that sales in 2001 and 2002 seemed to return to normal collector interest around 25,000 ounces per month. But 2003 and 2004 saw sales of 40,375 and 44,667 gold ounces month after month for two years. I would have to say it does look like a trend, that Americans buy more gold as the price rises.

I have a feeling this trend will continue for several more years.
Preston

Mr. CM Snow, which is it…strong dollar policy or free market forces? Talk about drivel! Why don’t they just get it out of the way and tell it like it is. The US strong dollar policy is all about controlling the price of gold as best they can.

Cause for alarm:

Report: U.S. Lost 1.5 Mln Jobs to China in 1989-2003

Jan 11, 3:08 AM (ET)
WASHINGTON (Reuters) - The United States lost nearly 1.5 million jobs between 1989 and 2003 because of increased trade with China, according to a report released on Tuesday by a government watchdog committee.

The report was prepared by the pro-labor Economic Policy Institute for the U.S.-China Economic and Security Review Commission, a congressionally-appointed panel that has pushed for a tough U.S. approach to China on trade.

The study estimates that imports from China displaced 1.659 million jobs between 1989 and 2003, while exports to that country generated only 199,000 additional U.S. jobs.

The job losses have accelerated and moved into unexpected new sectors as the trade deficit -- which reflects the gap between imports and exports -- with China skyrocketed to a record $124 billion in 2003, report author and EPI senior international trade economist Robert Scott said.

"The assumptions we built our trade relationship with China on have proved to be a house of cards. Everyone knew we would lose jobs in labor-intensive industries like textiles and apparel, but we thought we could hold our own in the capital-intensive, high-tech arena," Scott said in a statement….

***

Full story:

http://reuters.myway.com/article/20050111/2005-
01-11T080859Z_01_N10542739_RTRIDST_0_NEWS-TRADE-CHINA-USA-DC.html

-END-

Versus this morning:

Jan. 11 (Bloomberg) -- The dollar had the biggest decline in two weeks versus the euro in Asia after Treasury Secretary John Snow suggested the U.S. won't strengthen its currency.

Exchange rates are best left to ``market forces,'' Snow told Reuters in a television interview, three days after he said U.S. policy makers ``want to do things to sustain the strength'' of the dollar, which dropped for a third year in 2004. The comment last week helped the currency to its second-biggest weekly climb ever against the euro….

Any expectation the U.S. intended to halt the dollar's weakness has faded with Snow's statement,'' said Junya Tanase, a currency analyst in Tokyo at JPMorgan Chase & Co. …

``Just because I don't say something doesn't mean it's not part of our policy,'' Snow was quoted yesterday as saying in response to a question in an interview with Reuters Television. ``We believe in market forces and free capital flows.''…

``The repetition of `market forces' sounds likes nothing's changed'' in U.S. currency policy, said Robert Rennie, a currency strategist in Sydney at Westpac Banking Corp.

-END-

Instead, the market focuses on comments from Snow that wouldn’t satisfy the curiosity of a kid in grade school. Take late yesterday:

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-

Charlie McCarthy Snow has gone schizophrenic as far as public commentary on the dollar and US economy is concerned. Why markets continue to react to his comments is beyond me. What is worse is the press et al let him get away with making statements without pressing for any kind of backup details. For example:

*Mr. Snow, you reaffirm the US government’s strong dollar POLICY. What have you done over the years to implement this policy and what are you doing at the present as far as reaffirmation of the policy is concerned, BESIDES just talking about it?

*You have made a conscious effort to assuage foreign creditors’ concerns over US fiscal deficits by stating the US is going to seriously address this issue. Exactly what steps do you and the Administration have in mind for the US to reach this goal?

*In the past the rhetoric to fix US financial market problems has centered on the US growing out of chronically rising deficits of late. What is Plan B if it becomes apparent this is not coming to pass?

Those are pretty simplistic questions which should be addressed by someone in the mainstream financial world. Yet, no one in the mainstream media or on Wall Street is asking them, as far as I can tell anyway.

CARTEL CAPITULATION WATCH

The US stock market was weak for most of the day with all rallies failing, as has been the case since the start of the year. The DOW gave up 65 to 10,556, while the DOG shriveled 17 to 2079.

07:45 UBS chain store sales index (0.6%) in 1/8 week vs +0.2% in prior week
* * * * *

The John Brimelow Report

An unusual Bull (ctd.)

Tuesday, January 11, 2005

Indian ex-duty premiums: AM $8.21, PM $7.80, with world gold at $420.80 and $422.40. Very ample for legal imports. As usual nowadays, gold rallied during the purely Asian day (by some $4) but reversed as NY weighed in (only modestly, today).

Reuters carries a story from Singapore, saying that physical market buoyancy has spread to the Far East:

"SINGAPORE, Jan 11 (Reuters) - The recent fall in gold prices has ignited buying interest from jewellers and investors in Asia and pushed up premiums in key trading centres, dealers said on Tuesday…Premiums for gold bars widened to as much as 40 U.S. cents an ounce to London spot prices in Hong Kong, a key bullion trading centre in East Asia, compared with 20 U.S. cents last week…"The physical buying is not necessarily from China only. The Asian region is certainly buying gold," said Ronald Leung, director of Lee Cheong Gold Dealers in Hong Kong."

But the key areas appear to remain India and the Middle East – areas which tend to be overlooked in the conventional Wall Street world view.

Japan returning from a long weekend found world gold some $3 lower than on Friday’s close. Some report public buying; Mitsubishi speaks of Fund selling, but $US gold went out $2.75 above the NY close and the active contract settled down only 8 yen. Volume was equal to 35,903 Comex lots (+15% from Friday); open interest dropped the equivalent of 1,279 Comex contracts but the data offered by Mitsubishi implies the public bought a little. TOCOM so far is offering no leadership to gold. (NY yesterday traded 41,008 lots; open interest edged down another 884 lots.)

"The market is pretty steady now after three days of consistent selling. We had some good buying this morning"

Reuters from London reports a local trader this morning. While the chart damage has turned momentum players and all but the longest term chart analysts negative, those who think about volume data are becoming suspicious. Citigroup sensibly observes in a recent report:
"Speculator net-long positions in COMEX gold futures fell by 25,510 contracts to 73,243. This is well off the record net-long position of 173,241 contracts set December 7. Viewed in this light, gold prices have been remarkably resilient, likely reflecting the willingness of fabricators and Asian investors to accumulate on weakness."

While the $30 drop since Dec 7 is not small (or painless) perspective is supplied by remembering that it took 311 tonnes of liquidation – 60% of the entire net spec long – to achieve it. More important, as noted yesterday, since the counterparty is price-elastic and apparently insatiable in appetite, without similar liquidation this month prices should go straight back up.

JB

Related markets:

March copper is back to $140.05. It refuses to stay down. March WTI crude oil closed at $45.68 per barrel, up 35 cents. It took out $46 again at one point on this news:

PLATTS: Saudis ask majors to take less US-bound Mar-Apr crude: source

The CRB is working its way back up, finishing the day at 281.33, up 1.80.

March bonds rose 17/32 to 112 7/8. So much for the talk of more aggressive Fed tightening.

The dollar fell .29 to 83.17. The euro gained .23 to 131.21. The biggest winner of the day was the yen which rose to 103.35. The consensus is for the US trade deficit to shrink to $53 billion tomorrow, due to sharply lower oil prices.

Since the breakout above huge resistance at $330 gold has taken off, only to sell-off time after time as The Gold Cartel takes out the specs by managing the price vis-à-vis the dollar. What is medium-term constructive from our camp’s standpoint is each high is higher and each low on the setbacks is higher. Can’t see any reason for this pattern to change with the physical market so firm.

The gold open interest fell 884 contracts to 279,075.

Silver was a different animal today. It surpassed its London Fix by 8 cents and surged through key resistance twice during the day. The price action is gratifying, as these are the kinds of surges we need to see to confirm the MIDAS input regarding how tight the silver market really is.

Many of us in the bullish silver camp have been looking for silver to explode for quite some time. Perhaps the time is now, or at least it is FAST approaching. Word is coming my way from various sources which underscores the same input: silver is hard to buy in size and becoming more so by the month.

The silver open interest rose 603 contracts to 97,898.

Another example why silver is so confusing. While demand is roaring overseas, 571,413 ounces came into the Comex warehouses, bringing the total back up to 103,461,130.

Same nowhere story as far as gold is concerned. The AM Fix was $422.55. Yet, as always, gold sold off going into the Comex trading zone and could only rally back to $422 at one point in the day, never really threatening to take out the Fix high.

Year after year gold is taken through this same drill by The Gold Cartel. It is as tedious as can be, yet for those with patience it will yield ENORMOUS returns for those staying the course with the precious metals and the corresponding shares – as it did in 2002 and 2003. The basic gold and silver supply/demand fundamentals are superb and getting better by the month for each.

The Swiss refineries continue to go all out. Demand for gold is surging around the world. According to our STALKER’s London sources, these refineries could double their output and still sell it all. This will give you some idea of the amount of tonnage dumped on the market by The Gold Cartel to take the gold price down. Of course, even more selling was generated by the specs pitching their positions, which was the intent of the cabal’s orchestrated price takedown.

Putting the last month’s debacle in big-picture perspective:

Gold weekly
http://futures.tradingcharts.com/chart/GD/W

January 11 – Gold $421.50 up $2.90 – Silver $6.60 up 18 cents

Silver Surges / What The Big Bad Gold Cartel Wolf Has To Look Forward To:

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

Live as if you were living a second time, and as though you had acted wrongly the first time....Viktor Frankl, author, neurologist and psychiatrist, Holocaust survivor (1905-1997)

GO GATA!!!

"It Will Be Difficult to Replace Greenspan"

Hardly. Alan Greenspan's term as a member of the Federal Reserve Board of Governors expires on the last day of January in 2006, at which time he is required to step down. When he does, Greenspan will have served as chairman for more than 18 years under four different presidents, making him the second longest-serving chairman since the founding of the Fed in 1914.

There is understandable apprehension over the transition to new leadership at the Federal Reserve. Business leaders, politicians, and investors expressed similar concerns when the Volcker era came to an end in the summer of 1987. "There is concern in Washington," Paul Glastris reported in the Washington Monthly in 1988, "that Alan Greenspan sees himself as the new Paul Volcker and that he may seriously damage the economy." Yet, aside from a small flutter in the financial markets, the U.S. economy barely skipped a beat when Greenspan replaced Volcker. Shepherding the world's most dynamic economy is not a personal accomplishment. It has more to do with the interplay between markets, consumers, businesses, politicians, and policymakers than any cult of personality a Fed chairman may or may not have.

A key challenge for Greenspan's successor will be rebuilding private-sector savings. It's a critical step if the United States is to close its balance-of-payments deficit and an essential insurance policy for an aging population of baby boomers nearing retirement. Although prudent fiscal policy and budget deficit reduction by the U.S. Congress will be part of any fix, the Fed's monetary policy can also play an important role in fostering a long overdue improvement in national savings.

At the same time, the next Fed chair must be a true internationalist--facing the increasingly daunting challenges of globalization. The United States has enjoyed an unprecedented dominance of the global economy since the mid-1990s. But, like U.S. geopolitical hegemony, its economic dominance is unlikely to last. The next Fed chairman will have to walk a delicate line between domestic imperatives and the challenges posed by other players in the global economy.

History cautions against rendering a premature verdict on the accomplishments of any one economy, or any one central banker. When Alan Greenspan arrived at the Fed in the late 1980s, Japan and Germany dominated the world economy, and the United States was down and out. Over the last 20 years, the fickle pendulum of economic prosperity swung the other way, as the United States redefined the very concept of global economic leadership. Greenspan will be a tough act to follow. But his success was as much an outgrowth of history as it was a reflection of any one person.

By Stephen S. Roach
Stephen S. Roach is chief economist at Morgan Stanley.

For Stephen Roach junkies, his latest out this afternoon:

Global: The Sure-Thing Syndrome

"Greenspan Is Politically Independent"

Yes, but... Unfortunately, the Federal Reserve is located in Washington, D.C. That thrusts its chairman into the political arena and has led to some indelicate episodes for Greenspan over the years, including his endorsement of the Bush administration's 2001 tax cuts as the wisest way to spend the government's budget surplus--a surplus that has now disappeared into thin air.

Despite such momentary lapses, there is no evidence that Greenspan has politicized U.S. monetary policy. Although Greenspan is a Republican (he first entered public service as an advisor to President Gerald Ford in 1974), he had no compunction in raising interest rates on GOP administrations, including the current one, at inopportune times. Over the years, Greenspan has been critical of fiscal policies pursued by Democrats and Republicans alike.

But with Greenspan, the line between politicization and policy activism is blurred. There is no mistaking Greenspan's aggressive stance on several key issues driving financial debates and policy. In early 2000, Greenspan made a strong (and ultimately wrong) case for why there wasn't a stock market bubble. More recently, he minimized the immediacy of the United States' current account deficit problems and played down the risks of an oil shock. And, in October 2004, he dismissed concerns over the United States' excess household debt.

The sheer weight of Greenspan's point of view can bear critically on financial markets and the real economy. To the extent that his intellectual activism aligns with Fed policies, investors tend to take Greenspan's messages too far. This tendency compromises his position as an independent central banker. Moreover, his recent role as a cheerleader for policies as tax cuts compounds already serious imbalances such and imparts a pro-growth bias to his central banking philosophy that could make the endgame all the more treacherous. That was the case with stock buying in the late 1990s and could well be the case today in condoning the household debt binge, overvalued property markets, and Asian demand for U.S. Treasuries. Greenspan's stances may not be political--nor may they be prudent.

"Greenspan Leaves the U.S. Economy in Good Shape for the Future"

The jury is still out. By congressional mandate, the Fed's goals include price stability, full employment, and economic growth. Greenspan's Fed has made progress on all three.

However, some unintended consequences of Greenspan's efforts may jeopardize the United States' long-term economic future. Consider the profound shortfall in U.S. savings. The United States' net national saving rate--the combined saving of households, businesses, and government--fell to 0.4 percent of national income in early 2003, and it has since risen to just 2 percent. Lacking in domestic savings, the United States must import savings from abroad and run massive current account deficits to attract that capital.

Greenspan shares some blame for this problem. It all goes back to the asset economy, his often expressed belief that financial assets can play an important role in sustaining the U.S. economy. He made that argument in the late 1990s when stock prices went to new highs, and he reiterated it recently with regard to surging home prices.

The catch is, people interpret Greenspan's analysis as advice. So individuals view the appreciation of their home as a proxy for long-term saving and are therefore less inclined to save the old-fashioned way--by putting away cash from their paychecks. This scenario sets U.S. citizens apart from those in most other Western economies. Only in the United States are people aggressively tapping the savings in their homes (through mortgage refinancing) to finance current consumption.

Moreover, the rapid buildup of debt, both domestic and foreign, leaves a savings-short U.S. economy in precarious shape. The problem is compounded by the 77 million aging baby boomers, now approaching their retirement years, when they need savings more than ever. To the extent that Greenspan has condoned asset-based savings (homes) in lieu of income-based savings (cash in the bank), he has unwittingly compounded the United States' most serious long-term problem.

"Greenspan Spells a Strong Dollar"

Not necessarily. Until recently, the dollar has generally been stable during Greenspan's 17-year tenure, a noteworthy accomplishment for any central banker. An exception came in 1994 and early 1995, when the dollar weakened sharply, only to regain its strength in the latter half of the 1990s.

But the dollar's past may not be prologue. Global imbalances--underscored by America's record balance-of-payments gap--are best corrected through a cheaper dollar. A cheaper dollar means higher U.S. interest rates, which in turn will suppress U.S. spending and enable a long overdue rebuilding of national savings. Conversely, other currencies will strengthen, forcing the export-led economies of Asia and Europe to embrace long-overdue reforms, including lowering tariffs and making labor markets more flexible.

Today, even Greenspan acknowledges that the world needs a weaker dollar. That's the verdict from America's record (and rising) current account deficit and from Asia and Europe's excess dependence on exports. The hope, of course, is that the dollar experiences a "soft landing," a gentle descent over several years. But in light of the massive U.S. current account deficit, the risk of a hard landing is all too real. The more the current account deficit grows, the greater the odds of an abrupt adjustment. The dollar may be an accident waiting to happen, with a sharp decline in the greenback raising the possibility of collateral damage to stocks, bonds, and price stability. Given the central role the United States plays in driving the world economy, any shock "made in the U.S.A." could reverberate around the world.

"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.

"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 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.