-Caveat Lector- from: http://www.aci.net/kalliste/ <A HREF="http://www.aci.net/kalliste/">The Home Page of J. Orlin Grabbe</A> ----- Dollars R Us Behind Closed Doors, Greenspan Rethinks the Fed Statistics are no good. Coin flips maybe? Behind the unblinking facade of the US Federal Reserve's headquarters in Washington they are cleaning house. From top to bottom of the venerable institution, shelf-loads of tools and measures of monetary policy are being dusted down, reconditioned or even cast aside. The Nairu, a faithful appliance that has monitored monetary policy since the 1970s, is being consigned to storage. The Expectations-Augmented Phillips Curve, an attractive, if baroque, piece of economic furniture, is deemed no longer safe for policymakers' use. Even that family jewel, the Taylor Rule, is getting some long, hard looks from the repairers. This is because some of these tools indicate that the US economy - after a prolonged expansion - should be dangerously close to overheating. They suggest that Alan Greenspan, chairman of the Fed, should be tightening monetary policy to avoid an outbreak of inflation. Inflation remains firmly under control even as the economy expands. And the men and women of the Fed responsible for monitoring it and keeping it on a sustainable track are acknowledging that their traditional methods may no longer work. The search is now on for analytical tools that might work better. So far, officials have not abandoned tried-and-tested formulas for interpreting the economy's signals. But a far-reaching intellectual inquiry is under way into the basis of monetary policy decision-making. "I don't think we really have a lot of clues," Alice Rivlin, the vice-chair of the US central bank, said in an interview last week. "The macro-statistics may not be all that much help. People who want to understand this may need to pay a lot more attention to what is really going on in businesses and labour markets." In its unprecedented growth spurt over the past three years, the US economy has broken several rules: first, history says sustained growth above the economy's long-term trend will inevitably end in higher inflation. For three years, the US has grown at an annual rate of just under 4 per cent - 1.5 percentage points above the long-term trend. Yet the main measure of overall inflation, the gross domestic product price deflator, has fallen steadily - to an annual rate of 0.8 per cent in the last three months of 1998, its lowest in more than 20 years. Second, theory suggests that a fall in unemployment below a certain level will lead to a spiral of accelerating wage and price inflation as demand for workers forces employers to pay higher wages, without a corresponding increase in output. In the past few months, the unemployment rate has fallen to 4.2 per cent, its lowest level in 30 years and well below what even the most sceptical economists regard as the lowest rate consistent with stable inflation. Yet average annual earnings growth has been little changed in the past year and is now just 3.6 per cent; consumer price inflation is 1.7 per cent per year, half what it was three years ago. Third, experience indicates that low unemployment leads also to declining productivity, or output per hour. As employers hunt for workers in increasingly tight labour markets, the quality of the people they are able to hire diminishes. But even as unemployment has declined, the rate of productivity growth has doubled in the past two years, from its sluggish rate in the early 1990s, to over 2 per cent now. Outside the Fed, some analysts have used these events as evidence that the US economy has entered a "new paradigm" - a fundamental positive shift in conditions in the past few years that will enable it permanently to grow faster than its historical trend. Not even the most optimistic of the policymakers on the Fed's Open Market committee, which sets short-term interest rates - admit to being converts to the new paradigm. Nor is anyone quite ready to cast aside completely the traditional policy tools. This may be partly because even policymakers who sympathise with the notion that something fundamental has changed would not dare say it in public. The Fed's pronouncements are so closely scrutinised that any admission would be seized upon by the markets, with unpredictable results. But officials also appear to be genuinely undecided about what is happening. Even some of the more sceptical policymakers confess to bafflement at the apparent breakdown in traditional rules. They admit to waning confidence in the view that the strong performance is all down to a number of "lucky breaks" - such as falling global commodity prices or declining healthcare costs. As a result, the Fed has resisted pulling the interest-rate trigger for most of the past two years, even as inflation warning lights have been flashing. Officials are at least prepared to allow the possibility that something radical might have changed. "This will perhaps be remembered as Greenspan's greatest strength", says Richard Medley, of Medley Global Advisers, a policy consulting company, who studies the Fed closely. "Here he is, a 72-year-old man who remains completely open to re-thinking the way the world works." One reason for this re-thinking is an unusual divergence between conditions in labour and product markets. Labour markets have grown tighter in the past few years, reducing excess capacity in the form of workers looking for jobs. Yet productive capacity use has actually fallen. Industrial capacity utilisation - at around 80 per cent - is now down to near recession levels. In other words, while employers will have difficulty in drawing down much further from the remaining pool of unemployed labour, it is equally clear that they could in principle expand output without experiencing potentially inflationary production bottlenecks. The critical aspect of this phenomenon is that it goes some way towards explaining why productivity might have improved significantly in the past few years. Big investments - especially in information technology-related equipment - have raised the output per hour produced by each worker. This improvement is a key factor in the benign inflationary environment. Higher productivity enables companies - and the economy as a whole - to produce more without raising prices. In addition to this phenomenon, some economists argue that US companies have changed their behaviour in response to the intensification of global competition in recent years. Because of fierce pressure at home and abroad, companies are increasingly unable to raise prices for fear of losing market share. Instead, they have had to find different ways of dealing with the cost pressures they face. Ms Rivlin last week offered one possible explanation that links these two phenomena. She argued that increased global competition to hold down prices may have induced a radical change in companies' behaviour. Instead of pushing up wage inflation, tight labour markets may actually have reduced it by encouraging companies to invest more in plant and technology and in the training of their workers. That may have raised productivity, and held inflationary pressures in check. Ms Rivlin emphasised that this was merely a possibility, not a confirmed fact, and some other Fed insiders are sceptical. But there does seem to be a growing belief among policymakers that something quite important - the potential of the US economy for achieving sustained productivity growth - has changed. As Robert Parry, the head of the San Francisco branch of the Fed said last week, the evidence is more persuasive than ever that an upward shift in output per hour has occurred in the past three years. Many economists doubted the reliability of the productivity figures, but the improvement now seems to be so marked that attempts to explain away the change now seem less convincing. You do not have to be a believer in some dramatic "paradigm shift", say some senior Fed officials, to believe this change could be important. It may be that productivity improvements have raised overall growth potential by some relatively small amount - say by half a percentage point per year. If that is what is happening, then it suggests a possible alternative to the new paradigm. The new paradigm implies that the US is moving from the old world of hard choices and policy tradeoffs to an nirvana of inflation-free growth. Under the alternative view, the old rules may not work for now. But this nirvana will prove simply to be a transition, and the US economy will eventually face settle down at a new period in which it will again face trade-offs between price stability and growth. In other words, the economy will not go on for ever, functioning as benignly as it has done in the past three years. At some point the old rules will reassert themselves, but simply at a slightly higher rate of growth. That implies that Fed officials should not throw away all the old analytical appliances just yet. They may need to be tweaked and adjusted to reflect the way the world has changed. But eventually, their day will come again. The Financial Times, April 15, 1999 India vs. Pakistan Pakistan Matches India's Missile Test "We'll both sign the test-ban treaty as soon as we're done testing." PAKISTAN test fired a missile yesterday in retaliation for a similar trial by India on Sunday, raising the spectre of a new arms race in South Asia. The tests are part of both countries' efforts to perfect delivery systems for their nuclear weapons, and will increase tensions between them. These had been eased a few weeks ago when the two prime ministers held talks in Lahore. Pakistan's test yesterday was of its medium-range Ghauri 2 missile, which is capable of carrying both conventional and nuclear warheads. The 13-ton Ghauri, which has a range of 1,250 miles can reach all population centres in Northern India. Minister Nawaz Sharif said that the missile was launched from the Tilla Jogian test site in Punjab province, and fell on target 12 minutes later near Jiwani, in Baluchistan on the Arabian Sea. Last year Pakistan tested the Ghauri 1 missile, which has a range of 930 miles. American intelligence says the Ghauris were acquired from North Korea, although Pakistan says its missile programme is entirely indigenous. On Sunday India tested its upgraded medium-range Agni 2 missile, which has a range of 1,370 miles and can also carry nuclear warheads. Pressure on Mr Sharif to conduct a retaliatory test mounted all week from the military and politicians. The decision to test was taken after a meeting between Mr Sharif and army generals on Tuesday. Both countries warned each other of their impending tests, according to an agreement signed in February when India's Prime Minister, Atal Bihari Vajpayee, met Sharif in Lahore. Western diplomats had hoped that the summit would lead to improved relations between the rivals. Washington has been trying to persuade both countries to sign the Comprehensive Test Ban Treaty by September, when the deadline for signing the treaty expires. Both have said they will do so but are expected to refine their nuclear programme and sign at the last moment. Neither country has agreed to contain its missile development programme and both are working to develop longer range missiles and miniaturised nuclear weapons so that they can be carried by missiles. India said yesterday that the test firing would not trigger an arms race in the region and that peace talks between the two nuclear-capable neighbours - who have fought three wars since independence - would continue. Jaswant Singh, the foreign minister, said yesterday: "There is no arms race, there is no danger." India had been expecting a riposte to its own Agni 2 test firing on Sunday. Indian defence officials said that good relations with Pakistan were underpinned by the realisation on both sides that each had viable nuclear missiles and now had the potential to destroy the other nation. The London Telegraph, April 15, 1999 Der Fuhrer Invades Yugoslavia Serb Spies Penetrate NATO You mean they spy back? That's not fair. SPIES have penetrated Nato and are channelling vital information back to President Slobodan Milosevic, senior officials in Washington said yesterday. Evidence of espionage within the 19-nation alliance had been mounting since the air war began last month, and well-placed sources in Washington said that Belgrade was almost certainly scoring some intelligence successes. An official said: "The Federal Republic of Yugoslavia, as a former Communist country, has a robust intelligence capability and they have directed all their efforts toward collecting information through various sources on what Nato is planning. They are probably acquiring a good deal of information by directing their efforts at Nato." Fear that the Serbs were getting inside information broke open last week when The Telegraph reported that France was being cut out of top-secret meetings because Washington feared Paris would betray the alliance's military plans. Concern had grown amid evidence that the Yugoslav authorities sometimes knew when and where the air strikes would come. The Serbs had evacuated people from buildings sometimes just minutes before Nato missiles or bombs destroyed them. On repeated occasions, Milosevic appeared to have received advance warning of imminent attacks. A factory where workers were staging a sit-down protest was cleared just five minutes before Nato air power incinerated the plant. Serb commanders evacuated a barracks following an urgent radio message ordering everyone out, again minutes before the missiles and laser-guided bombs found their mark. Two Interior Ministry buildings in the middle of Belgrade were empty on the night Nato cruise missiles turned them both into fireballs. But they had been full of people with the lights on in the windows just 24 hours earlier, again suggesting that the enemy knew the attack was coming and when it was scheduled. Several news reports mentioned days before the Belgrade attacks that the Interior and Defence ministries' buildings were high on the alliance's target list, so it was possible that the timely evacuation involved nothing more than the Serbs monitoring foreign news bulletins and being lucky with the timing. It was not known whether the series of apparent tip-offs had anything to do with earlier American and British suspicion of the French. There were no hints or guesses as to the identity of the suspected spy or spies giving information about targets and timing. Nato yesterday declined to comment, saying it had no information about any spying. On Tuesday, however, Gen Wesley Clark, the Supreme Commander, said: "Nato remains very vigilant in terms of protecting the security of its operations, and we are taking all appropriate measures in that regard." It was not known whether procedures had been tightened up since the evidence of spying began to accumulate. "I really cannot comment as I know nothing about it," said James Shea, the Nato spokesman. Officials were less circumspect in the American capital. One government source said the Serbs were probably eavesdropping and intercepting electronic communications, many of which were being carried on open rather than secure lines. But the source also suggested that weaknesses were not only technical but human. Operation Allied Force was so big that there could be weak links in the long security chain extending from the battle zone at one end to 19 national governments at the other. The Washington source said: "Operations security is always an issue. There are ways we have to conduct business that make us vulnerable when we are facing the very robust intelligence capability that Yugoslavia has." When war was waged by committee, as with Nato in Yugoslavia, information useful to the enemy was always more likely to leak. The London Telegraph, April 15, 1999 ----- Aloha, He'Ping, Om, Shalom, Salaam. Em Hotep, Peace Be, Omnia Bona Bonis, All My Relations. Adieu, Adios, Aloha. Amen. Roads End Kris DECLARATION & DISCLAIMER ========== CTRL is a discussion and informational exchange list. Proselyzting propagandic screeds are not allowed. Substance—not soapboxing! These are sordid matters and 'conspiracy theory', with its many half-truths, misdirections and outright frauds is used politically by different groups with major and minor effects spread throughout the spectrum of time and thought. That being said, CTRL gives no endorsement to the validity of posts, and always suggests to readers; be wary of what you read. 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