Now, Even Greenspan Can't Stop This One

The stock market's negative reaction to the Federal Reserve's decision to lower interest rates by ½ percentage point is all one really needs to look at in order to determine that Alan Greenspan is destructively operating behind the curve. For quite some time now the markets have been literally begging for the Federal Reserve to inject liquidity directly into the financial system. Instead the Federal Reserve has attempted to "ease" monetary policy by lowering interest rates. As we clearly wrote in our "E-Letter to Dr. Irwin Kellner and CBS.Marketwatch.com Re: The Federal Funds Rate", this approach does not work and because Greenspan has waited this long and still refuses to adopt a different mechanism by which to inject liquidity, we now believe that there is noting that he can do to arrest this economic downturn…absolutely nothing.

Sure, we recognize that the money supply has increased recently and that many point to this as evidence that the Fed is increasing liquidity. But this opinion only considers the supply of money. It does not consider its demand. Therefore one who focuses on the supply of money alone, is ignorant of the velocity of money.

The best way to know the velocity of money, in today's economy, is by observing the intersection of demand and supply with the most monetary of commodities. That commodity being gold.

Because the supply of money has increased but the price of gold has not sustained an upward movement and gain in price, that is evidence that the Fed has not injected enough liquidity into the financial system.

The demand for money is still much greater than its supply. The Fed is not matching that demand with a sufficient supply of liquidity. That is what an excessively low gold price is telling us right now.

In a lucid opinion piece, "Show Us The Money" penned for the National Review online, Polyconomics' International Economist Michael Darda explained very clearly what Greenspan would have to do in order to supply the markets with the appropriate amount of liquidity.

I spoke with Mr. Darda yesterday for over a half-hour, prior to the Federal Reserve's decision, and the conversation almost immediately moved into the damage that Federal Reserve monetary policy combined with IMF austerity policies are causing around the globe.

Mr. Darda explained his deep concerns about Japan, Turkey and Argentina and I expressed to him my great concern about how the direct and ripple effects of bad Federal Reserve monetary policy in the US have affected Africa.

I explained to him how the depressed price of gold, for which the Federal Reserve is most responsible, has, on the margin, moved Congolese out of the gold mining business and into the business of digging for col-tan, a rare mineral with a multiplicity of utility for American and European industry. I relayed to Mr. Darda how this has further exacerbated the economic tensions that underlie the war in the Congo.

Mr. Darda now intimates to us his concerns about international debt default. He got our attention with that one. And as we consider the interconnectedness of Japan, Turkey and Argentina with South Africa, as an example, it becomes increasingly obvious to us that the entire globe is at risk of financial and economic collapse.

And those at the bottom of the economic pyramid, of course, have already suffered the most under Greenspan's reign as Fed chair and as we wrote in our "Open Letter To Federal Reserve Chairman Alan Greenspan Re: Monetary Policy and Black America" - it is Blacks in America and in Africa who are catching the worst of the worst as it is they who are most dependent upon labor and most in need of capital and a clearly defined unit of account which does not fluctuate in value.

Now, Greenspan has outdone himself. His refusal to inject liquidity into the financial system has now reached its apex with the stock market now realizing that the bad news of poor corporate earnings and layoffs will now having a greater negative effect on the minds of investors and consumers than anything of good that the Fed can produce.

And that is the real story of what a 50 basis point cut in interest rates means.

Yesterday, in a sense, was Greenspan's last chance to put a deciding weight behind monetary policy in its recent battle against poor corporate earnings reports and some worrisome economic indicators. It was earlier this month, when the Fed indicated that everyone would have to wait until yesterday for a rate cut, that the pendulum began to swing in favor of the bad economic news.

Now the defeat or Greenspan's forfeit of monetary policy is complete.

With Greenspan relying on government statistics which are lagging and with those individuals who have been laid off yet to hit the ranks of the officially unemployed, he is misinformed as to how bad things really are in the economy. However, he has always had available the daily price of gold, which has told him for some time now, that things are heading south.

Greenspan had an opportunity to head negative economic developments off at the pass and has, for some time now, decided to do next to nothing.

By not doing more yesterday to inject liquidity, Greenspan has given a final edge to pessimism and real economic deterioration. Although he will eventually try, there is no longer anything he can do, of himself, to save the US economy, and by default, the international economy.

Now, we guess, as it should be, the world economy will have to save itself.

Cedric Muhammad

Wednesday, March 21, 2001

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