Rodney

Man, that's a hard one. Partly because he's discussing the bond market, and bond trading is kinda counterintuitive. I can get it straight for about five minutes, and then it slips away.

Basically, Greenspan is saying that he expects the economy to start growing at a good clip in the second half of the year as all the tax cuts kick in. He knows he's been wrong about a turnaround before (like for the last couple of years) but he REEELY REELY means it this time, so all is well. And a recovery means that there'll be more economic activity, more inflation, more demand for money, and so interest rates will go back up.

This is a good thing, because a lot of people have taken money out of stocks and putting it into the bond market as a safe harbor. If the interest rates rise, the yield on existing bonds will drop and so will the market price of those bonds; so people will be encouraged to pull their $$$ out of bonds and put it into the stock market or somewhere else where it will stimulate the economy.

Greenspan and the Fed have been trying hard to convince investors that this scenario will happen, and in fact there was a selloff in the bond market today after his announcement from people who think they'd better get out before economic growth pushes interest rates up.

What the Fed is really afraid of is deflation -- falling prices, and the expectation of more falling prices in the future, which will encourage people to wait and buy things later, instead of now. Greenspan said, as he has been, is that deflation is really absolutely probably not going to happen here, and if it does there's plenty the Fed can do but it probably won't have to because.... That's one of the reasons he's not whining about the growing federal deficits, short term -- he wants more money in the economy, because he wants to trigger inflation to fight deflation.

Got that? Good. There'll be a test.