Postcards from Old Europe – Thank God for Alan Greenspan

The week which is ending today hasn’t brought us much in the way of hard economic news. Alan Greenspan’s testimony before the House Budget Committee was probably the only thing that kept people at their desks.

The Federal Reserve chief managed to be upbeat and cautionary at the same time – his remarks continued to reverberate through the bond markets even yesterday as traders tried to figure out what he actually meant. Greenspan reiterated his standpoint on the economy (“recovery on track”) and on inflation (“subdued”). The only problem with the testimony was that it looked as if the Fed head wasn’t all that convinced about what he was saying.

The way I see it is that the Fed will continue to slowly hike rates. A rate increase is virtually certain to occur later this month. After that we might see one more hike this year – but only if June’s “soft patch” doesn’t return in the fourth quarter.

Most regular readers will know that I’m not all that sanguine about the economy’s prospects. Quite a few companies from the world of consumer goods reported in the past weeks and we saw numbers that were mostly – well- underwhelming. Wal-Mart and Coke are just two examples. There are of course firms in the consumer space that are doing well – Neiman Marcus springs to mind here. But then their clients are probably not all that affected by higher gas prices and stalling incomes than the people who shop at Wal-Mart are.

This is the underlying danger I see. A renewed soft patch just be the consequence of the lack of gains in consumer’s real income. Any further slowdown in the pace of job creation would be potentially disastrous. The real challenge that will face the next US administration will be to sustain the financial health of the middle class whilst still making an effort to balance the budget before the first baby boomers start to retire in 2008.

I’d like to let Alan Greenspan have the last word on this and I’ve reproduced one of the closing bits from his testimony below. Before I go I’d just like to thank you for reading and invite you to visit CurryBlog where I post mostly on market-related subjects. Take it away Alan…

Re-establishing an effective procedural framework for budgetary decisionmaking should be a high priority. But it is only a start. As we prepare for the retirement of the baby-boom generation and confront the implications of soaring expenditures for medical care, a major effort by policymakers to set priorities for tax and spending programs and to start making tradeoffs is long overdue.

PS As someone who is neither a US citizen or resident I don’t really feel as if I should weigh in on the style of “political” debate in the US. But it does strike me as odd that 30-year old events take up more newspaper real estate than the really important things – of which the quote referenced above is one of the most pressing.