- The Washington Times - Friday, January 14, 2000

The American economy is experiencing either a "once in a century" technology boom that justifies today's lofty stock prices or it is in a "euphoric, speculative bubble," Federal Reserve Chairman Alan Greenspan said Thursday night.

In a speech to the Economic Club of New York, Mr. Greenspan sought to explain why the expansion is close to a record in length without the usual "signs of geriatric strain," but rather is defying conventional wisdom with its unusually healthy rates of inflation, unemployment and growth.

In another 10 years, it may be clear "the American economy was experiencing a once-in-a-century acceleration of innovation, which propelled forward productivity, output, corporate profits and stock prices at a pace not seen in generations, if ever," he said.

Or, he said, "we might well conclude that a good deal of what we are currently experiencing was just one of the many euphoric, speculative bubbles that have dotted human history."

As he said in his famous "irrational exuberance" speech, which three years ago sent stock prices plummeting, Mr. Greenspan noted evidence of both speculative "imbalances" fed by the soaring stock market, as well as the unprecedented technological changes that might justify today's euphoria.

The Fed tries to take both possibilities into account in deciding whether to raise interest rates, he said, but it is moving toward higher rates because of evidence that the wealth generated by the stock market is driving consumer spending and the economy to unsustainable rates of growth.

The Fed's Open Market Committee will meet Feb. 2 to decide whether to raise interest rates.

Thursday, the Commerce Department reported that retail sales grew 8.9 percent last year, the fastest pace in 15 years. Consumers ended the year on a spending spree, buying cars, cruising the malls and the Internet, emptying grocery store shelves, topping off their gas tanks and eating out.

Even so, the Labor Department reported that prices producers paid last year rose a subdued 0.8 percent, when large increases in prices for food and a whopping 76.4 percent increase in gasoline prices are excluded.

Mr. Greenspan said the unusually low inflation amidst a spending binge is due to the "extraordinary" technological advances of the 1990s, particularly the computer, faxes, cellular phones and other information technologies that have enabled businesses to dramatically cut their costs and keep prices low.

A decade of intensive investment in these technologies has revolutionized the way businesses make, order and distribute nearly every good and service, while it has opened up new horizons for workers with the technological skills to participate in this "new economy," he said.

Still, the Fed chairman said he continues "to be bedeviled by concerns that the so-called new economy is spurring imbalances that at some point will abruptly adjust, bringing the economic expansion, its euphoria, and wealth creation to a debilitating halt."

In particular, the "wealth effect" after five years of double-digit gains in the stock market has created a major "imbalance" in the economy by spurring consumers to spend more than their incomes will support, he said.

And that has driven up growth on average by 25 percent to unsustainable levels around 4 percent, he said.

Unable to find enough goods at home, Americans have been voraciously consuming imports, he said, leading to a bloated trade deficit that also is unsustainable.

"If a trend cannot continue, it will stop," he said. "In the end, balance is achieved through higher borrowing rates" imposed by the central bank and credit markets.

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