Greenspan Is Fighting the Last (But Two) War

The United States in in the third of three nineteenth century type trade cycles. Yet our policy makers are still using a very different model of the cycle to guide their way through policy choices. Cyclical rules of thumb are dominated by the first eight post-World War II recessions. These were predominately short inventory cycles.

This puts policymakers in a position very much like the general fighting the last war who makes decisions that were winning one then but disastrous in the current war. The Spanish Armada was the best and most powerful naval force of its time. But it operated under the same model of naval warfare that prevailed at Lepanto, the great Christian victory over the Turks in 1571. At Lepanto, the fleets fought each other as collections of floating castles. The tactics consisted of ramming ships and soldiers fighting soldiers through boarding. Unfortunately for the flower of Spanish chivalry, the British demonstrated the superiority of an entirely new way of fighting naval warfare based on gunnery and maneuverability. Of the forty eight thousand soldiers and sailors who left Spain, barely fifteen hundred returned and the sun set on the greatest empire ever built.

When it comes to economic policy, few generals are as respected as Alan Greenspan. CNBC reported "Greenspan said on Thursday (7/31) that a slowing global economy may push the United States into recession, though it is not yet in one." [He is at least six, if not twelve, months off on that one.]

Greenspan said in an interview on CNBC television: "I think the data at this stage in the United States are not ... suggesting recession," but added, "We're right on the brink and I would be more surprised if we didn't (have a recession) than if we did, given the financial state."

What data was Greenspan looking at? Inventories: "Greenspan said companies were controlling inventories effectively and that 'at this stage, I think they are the major reason why in the very short term we're fending off inflationary pressures.'"