The Globalization Fairy will ‘intellectualize’ inflation away.... and you can simply THINK your stomach full, without having to buy any of that increasingly expensive wheat with which to make your bread--as implied in the Q&A after Greenspan’s testimony yesterday.
TOOMEY: Thank you, Mr. Chairman. And, Chairman Greenspan, thank you for your testimony today. My question is on a topic we really haven’t dealt with too much thus far today. And I want to just preface it by observing that we certainly seem to have had a remarkable period of achieving virtual price stability. And the inflation in recent years has been remarkably innocuous, and at this point seems to continue to be so. But I can’t but observing that we’ve had in recent years an extremely accommodative monetary policy.
We’ve got commodity prices very broadly, if not across the board, significantly higher in recent months and quarters. Gold is over $400 an ounce. The dollar has had a very significant decline in recent months. And when I look at that combination of events, it strikes me that historically this kind of combination of events would suggest that inflation, if it’s not with us now, is not terribly far away.
And so my question is, one, how have we managed to have these kind of events occur without yet seeing an inflationary problem? You know, is it productivity, is it more of the huge increase in global productive capacity, the increase in the global labor force, as a practical matter integrated into the economy? You know, is there something systemic that means that these kinds of historical indicators are no longer as useful or, in fact, is it just that we’ve got a little bit more time before this does, in fact catch up to us?
GREENSPAN: I think it’s basically what you suggest. It’s productivity, it’s the extraordinary rise in competition coming from globalization. And there are structural changes, but it does not mean that inflation is permanently subdued, just merely means that the tradeoff pattern is different from what it was. But remember that most of the items which you’ve discussed ... many of the commodity prices ... they’re far less of ... or far smaller in today’s economy than they were 20, 30 years ago. In fact, an ever-increasing part of our economy is becoming conceptual, rather than physical. And all of the items which are in the standard commodity indexes ... including gold ... are essentially physical, rather than intellectual.
That’s not to say they are not important. They do tell you various important things about how this economy is behaving. But what we observe is that this extraordinary degree of globalization and increased competition, a monetary policy which has generally been constrained in the early period of inflation, so what we were doing was continuously leaning against the inflation to assist it coming down, but with productivity where it is, it overwhelms any inflationary forces that are coming from a number of the issues that you raised.
Having said that, we watch this whole process exceptionally closely. And as I’ve said in recent speeches, the central bank’s formal fundamental mandate is price stability, because it’s that which we believe which will induce maximum sustainable economic growth. So it’s been a remarkably important decline in the rate of inflation. We expect it to continue this way for a while. But we are not in any means convinced that inflation has somehow disappeared from the scene. We are certain it has not.
