The Age of Turbulence: Adventures in a New World
By Alan Greenspan
$35.00, 505 pages
Since his days as a student of future Fed Chairman Arthur Burns at Columbia University in 1950, Greenspan has been deeply convinced of the intertwined evils of inflation and deficit spending, and those lifelong beliefs come through loud and clear throughout the book. His gnawing fear is that high inflation, and with it high interest rates, could come back to bedevil the economy.
There’s much more to Greenspan’s eclectic and readable book than his bleak outlook on inflation, though. The book includes a look at his career, containing entertaining glimpses into the economic history he helped make since the mid-1970s. Included are commentaries on the presidents and key players he has known, and insights into the way key decisions were made. Central to that history was the Greenspan Fed’s effort to achieve and maintain price stability — primarily by leaning against upward wage-price pressures but also, in the early 2000s, by resisting what he and his colleagues regarded at the time as an excessive cooling of inflation. Greenspan, more than anyone, has inculcated the belief, now nearly universal in central banking circles, that low inflation is the key to maximum, sustainable economic growth. But his efforts have not won universal praise.
The former Fed chief has been most controversial, he would say most misunderstood, in recent years for his role in the propagation of the housing boom/bust, the aftershocks of which his successor Ben Bernanke is grappling with. He uses the book to explain (or explain away, some would say) why he and his colleagues held interest rates so low through mid-2004 to combat the low but potentially very costly risk of Japanese-style deflation.
The book has its lighter moments. As he recollects his many years on the policy scene, the longtime economic forecaster often displays the dry wit that he largely hid during his years on the public stage behind a facade of scholarly obfuscation. For instance, recalling, when he was chairman of President Ford’s Council of Economic Advisors, how forecasting had come into such disrepute that a poll showed economists on a par with astrologers, he writes, “This made me wonder what astrologers had done wrong.”
Many passages of his book will look familiar, but it’s more than a rehash of speeches and testimonies, and it is much more than a memoir. After devoting the first half of the book to history, Greenspan offers insights on a range of issues confronting the world: from America’s fiscal mess, to the challenges facing China, Russia and other nations, to protectionism, productivity and the shortcomings of U.S. education.
But from a Fed watcher’s standpoint, Greenspan’s premonitions about inflation and long-term interest rates are the most intriguing and the most ominous. A hallmark of Greenspan’s reign, for which he has justly gotten a lot of credit from many observers, was taming inflation, preserving and building upon the gains made by predecessor Paul Volcker and bequeathing them to Bernanke. And so it’s a little surprising that he writes so self-effacingly about that signal accomplishment. He ascribes the reduction of core inflation not to the Fed’s determined efforts in the main, but to the fortuitous forces of global disinflation, chiefly the integration of millions of low-wage workers into world markets following the collapse of Communism.
Perhaps, there is a certain purpose behind his refusal to take much credit for the marked reduction in inflation and the resulting decline in bond yields in his book.
Greenspan’s unpleasant conclusion logically follows: If the decline in inflation has been due not primarily to the hard-headed perseverance of the Fed but to essentially transitory though tectonic shifts, then inflation can and will reaccelerate, and with them interest rates. As China and other countries continue to modernize, Greenspan predicts they will cease to be a source of cheap imports and labor. He also anticipates that Chinese export prices, which rose earlier this year, will rise further. The result will be “a pickup of price inflation and wage growth in the United States,” writes Greenspan. To combat wage-price pressures, he says the Fed will have to vigorously raise interest rates.
Globalization aside, fiscal forces, namely deficit spending under the demographic pressure of a bulging population of retirees, will add to pressure on inflation, interest rates and Fed independence, Greenspan warns. He also envisions a time when foreign investors’ appetite for dollar-denominated debt will become satiated, precipitating a depreciation of the greenback. Unless the United States’ spending is arrested, “the process of adjusting the current account deficit could be quite painful for the United States and our trading partners.”
Good bedtime reading, but only if you enjoy nightmares.
Steve Beckner is senior correspondent for Market News International and is regularly heard on National Public Radio. He is the author of Back from the Brink: The Greenspan Years (Wiley).