THE OUTLOOK: Does Greenspan Deserve an Asterisk?
WESBURY, BRIAN
and two new breeds of venture investors had appeared on the scene. One was the angel investor. Typically, an angel is somebody who got rich starting a company or who earned a boatload of...
...Now our angel is working 40 hours a week, having a blast...
...If the Fed targets the strongest-growing sector of the economy, it squeezes the slower-growing sectors and eventually causes problems for the entire economy...
...eserve an Asterisk...
...K DOes Greenspan...
...A choir of ten thousand angels has joined in...
...For the next 30 years, an asterisk differentiated his record from Ruth's 60 home run total, denying Marls the satisfaction of his accomplishment...
...The extreme volatility in Fed rate moves this year is strange given that the economy is having nowhere near these kinds of problems...
...In today's terms these are an inflation premium and a real rate...
...After years of seeming in control, the Fed looks out of control...
...How many angels in America are there...
...Then in the early 1990s, as can be seen in the chart, the federal funds rate slipped below the average economic growth rate...
...The second breed of newbie VCs are corporate investors...
...But he's 42 years old now, not 24, and he wants back in the game without having to work 80-hour weeks...
...The one economic statistic that incorporates both a real rate of growth (a proxy for the entrepreneurial component) and an estimate of inflation is nominal GDP, i.e., GDP before being adjusted for inflation...
...Possibly the best measure was theorized by Ludwig von Mises...
...At various times Greenspan has focused on insecure workers, scrap steel prices, stock prices, consumer confidence, and GDP growth THE AMERICAN SPECTATOR 9 June 2001 65 rates...
...They have a free hand that your corporate employees may not have...
...After excluding high-tech spending, the GDP grew 6.4 percent over the past two years, while the non-high-tech GDP has increased by just 5.6 percent...
...THE ASTERISK This is where Greenspan went wrong...
...If we look at the average rate of growth in nominal GDP over the previous two years, we get a good estimate of the growth rate of the average business in the U.S...
...That's the role of the entrepreneur: to disrupt...
...Another set of statistics used to measure the Fed are measures of the money supply...
...Intel leads the pack, plowing back $1 billion a year into the hands of entrepreneurs...
...So an angel is what he decides to be...
...As a result, by increasing the federal funds rate to 6.5 percent, the Fed squeezed the Old Era sectors of the economy, but did not discourage investment in hightech goods...
...On the other hand, if the Fed held interest rates above the average rate of growth in the economy, then the economy and inflation would be squeezed...
...of the bounce of youth...
...In 2000, nominal GDP grew at a 7.1 percent annualized rate...
...Either they conduct poor research in the first place, or, infamously like Xerox in the 1970s, they invent the future but fail to commercialize it...
...If entrepreneurs could borrow at less than the average growth rate of business, then investment would increase until interest rates and growth balanced out...
...the "core" PPI is up 1.9 percent...
...The simplest measure of what the Fed is doing is the level of the federal funds rate...
...At first glance, this suggests that the Fed has been too easy for quite some time and that excess investment and inflation should be the result...
...So even the "neutral rate of interest" is a problematic device for targeting the federal funds rate...
...This is perfect...
...Lately, the M2 measure of money has explodedmgrowing by 13 percent at an annual rate in the first quarter...
...With few exceptions, only entrepreneurs can do this...
...The CPI has climbed 3.5 percent in the past year...
...While he and the rest of the Fed were focused on a rapidly growing New Economy, they ignored the pain of the Old Economy...
...As can be seen in the chart at right, the Fed held the funds rate below the growth rate of the economy during virtually all of the 1960s and 1970s.The result was much bad investment and inflation...
...This person quits his job, travels the world, buys a big house, maybe a fast airplane or boat, and then discovers he is...bored...
...By ignoring these indicators, Greenspan has risked earning an asterisk beside his name in the history of Fed chairmen...
...He has praised productivity and also Named it for our problems.There does not seem to be any standard monetary policy indicator...
...They get zero or negative return from it...
...Today, as Alan Greenspan winds down his career, his stellar record is threatened with an asterisk as well...
...However, the absolute level of the federal funds rate means very little...
...Call it the innovator's dilemma, a term popularized by another Harvard biz school professor, Clayton Christensen...
...Angel investing is a fairly new development, too, one made possible by the 1992-2000 bull economy...
...If the economy is experiencing a once-in-a-century boom in technology, should the Fed aim its interest rates at the technology sector or those sectors outside of high tech...
...To many, this suggests that inflation is right around the corner...
...and the "core" PCE Deflator is up just 1.7 percent...
...Europe and Asia are awakening to the potential of risk capital...
...However, high-tech spending grew 22.9 percent as the New Era Economy, fueled by Y2K spending, boomed...
...He wants back in the game...
...What corporate investing represents is not "big dumb money" chasing a late bull market, as the skeptics portray, but a big, important, secular development: the outsourcing of corporate R&D...
...This suggests that the Fed is managing the economy on the run, reacting to economic developments, not anticipating them...
...I don't believe it...
...Angels are showing divine courage in the hellish winds of 2001, even as some scared professionalVCs shake like puppies...
...Beginning in 1979 and continuing through the early 1990s, the federal funds rate was almost always held above the rate of nominal GDR and inflation fell dramatically...
...BY BRIAN WESBURY I n 1961, Roger Maris hit 61 home runs to break Babe Ruth's 1927 record...
...It's hard to tell, but the money from them continues to pour in and no one knows how to measure it...
...Rather than focus on the level of interest rates, the money supply, or economic growth rates, there are market indicators that tell the Fed when it is too fight and when it is not...
...It has spread from a few dozen VC firms in the 1970s to thousands today...
...This created a situation where spending slowed, but investment in New Era companies boomed...
...Greenspan's favorite measure, the PCE Deflator, is up 2.3 percent...
...Unless~aha!~you're an angel...
...Venture investing is fun, usually profitable, and infectious...
...Corporate VC investing is one way out of this innovator's dilemma...
...Typically, an angel is somebody who got rich starting a company or who earned a boatload of options as an early employee of Cisco or Sun...
...This is fun, so he writes another $250,000 check to a second company...
...He's worth more than $10 million and is mostly cashed out, but he's still full say corporate VC money, late in, will be the first to bail if the downturn persists...
...The money supply aggregates that the Fed controlsmbank reserves or the monetary base---are now contracting or barely growing...
...All of these indicators suggest that money supply was not keeping up with money demand and that the Fed was too tight...
...Our angel gets plugged back into the engineering world, finds the hottest fields, makes friends with some crazed-eyed 24year-oids, and writes them a check for $250,000...
...Of course, if the Fed were to hold interest rates artificially low, then it would create an environment that would encourage excess investment and inflation...
...However, money supply measures have been useless since banking deregulation in the early 1980s...
...However, this conclusion may not be correct...
...economy...
...The Fed did not need to make this mistake...
...Most of the Forbes 500 corporations have followed Intel's lead and now invest in startups, if on a smaller scale...
...Maybe 5,000...
...Unfortunately, it took him eight more games than Ruth...
...Invent your future, sure, but just to hedge your bets, why not give some of your R&D money, and maybe some intellectual property, too, to entrepreneurs on the outside...
...A better measure of what the Fed is doing is the real federal funds rate (fed funds minus inflation), but with this statistic the measure of inflation matters a great deal...
...economy has split into two parts in the past decade...
...Nearly every large corporation also participates...
...Something always seems to go wrong when companies set about to reinvent themselves...
...And that's the answer to the entire dilemma...
...He included in this interest rate a price premium and an entrepreneurial component...
...He spends 20 hours a week with the company, acting as chairman, a door opener, a rope shower, a gray eminence...
...The Fed has cut rates faster in 2001 than it has since 1982, when the economy was in the worst recession since the Great Depression and inflation was rising at double-digit rates...
...Skeptics In 1994, Michael Jensen of Harvard's graduate school of business published a study showing that most large American corporations routinely botch their R&D...
...This creates a major dilemma for policy makers...
...He gets himself plugged back into the engineering world, finds the hottest fields, makes friends with some crazed-eyed 24-year-olds out to change the world, and writes them a check for $250,000...
...That compromise is hard to find in Silicon Valley...
...In fact, M2 is now a better measure of money demand than money supply...
...After a recordbreaking recovery, high-tech stocks have crashed, the economy is closer to recession than it has been in over a decade, and many think that inflation is returning...
...Pick your poison and get very different forecasts...
...He suggested that there was a "neutral rate of interest" that would not either cause inflation or affect the growth rate...
...NEW VERSUS OLD The U.S...
...It is given money to invent the future, but not disrupt the present...
...Maybe 10,000...
...K 66 THE AMERICAN SPECTATOR 9 June 2001...
...Essentially the dilemma is that successful corporations find it structurally impossible to disrupt current profit streams on a future bet...
...Corporate R&D is therefore caught in a bind...
...Commodity prices were weak in 2000, gold prices were falling, the yield curve was inverted, and the value of the dollar was rising...
...After four 50-basis-point rate cuts over four months that dropped the federal funds rate from 6.5 percent to 4.5 percent, it is now at its lowest level since 1994...
...After all, Japan has 0.0 percent interest rates and they still aren't low enough...
...This, not 200 l's retraction, is the big picture...
Vol. 34 • June 2001 • No. 5
