Best of DOUG NOLAND

BEST OF DOUG NOLAND

September 12, 2005

For the Wall Street Finance Juggernaut to remain viable, Greenspan had to guarantee liquid and "continuous" (no panics!) markets. For this, he has to ensure an ever-expanding financial sector. For this, he had to peg financing costs, manipulate financial returns and do so transparently. Because of this, he essentially invited massive leveraged speculation that then had to be accommodated. Because of this, he and Dr. Bernanke had to erect an edifice of marketplace assurances that the Fed would never tolerate system deleveraging and/or Credit contraction – all in the name of fighting the scourge of deflation. These assurances – the "Greenspan Levee" – have worked to this point swimmingly. But the dilemma for the Greenspan Levee is that it has emboldened the Wall Street Inflationary Liquidity Machine, along with energized Credit systems around the globe, that cannot today be reined in. A breech and a "flood" are anything but low probability events.

Watching the markets’ response to Katrina – higher stock and bond prices at home and abroad – I will err on the side of expecting continued economic "resiliency." There will surely be wide-ranging financial ramifications and some economic dislocation. But, for the economy as a whole, I expect activity to continue to be dictated by interest-rates, mortgage rates in particular. And while some point to economic weakness prior to the storm, I will stick with the analysis of a U.S. and global economy demonstrating inflationary boom characteristics. If the inflationary bias is as prevalent as I suspect it is, then expect the major impact of Katrina to be higher prices for things ranging from gasoline and other fuels, to chicken, shrimp and oysters, to lumber and other building supplies. If some of these reside in "core CPI," then we can simply adjust the core, again. To be sure, this catastrophe will ensure that an unsound and unbalanced economy becomes more so.