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Hey, folks.

The Rodman & Renshaw conference this morning opened with a dialogue between Dan Rather and Alan Greenspan. Some interesting things were discussed. Here's a quick rundown of what was said:

Greenspan's Intro
It was a historic year. The Lehman collapse triggered an integrated series of financial catastrophes because the world has become so intertwined. Fortunately, we're now in the midst of a coordinated and integrated recovery. If there are any surprises for the remainder of the year, it will be on the upside.

Longer-term, recent gains in productivity (cost-cutting has led to significantly increased output per person) may mean higher unemployment unless we continue to use capital productively (more coming on that).

Prospects for Inflation?
In the near term, Greenspan thinks deflation is more likely, but inflation is inevitable longer-term because of our "horrendous" deficits. This is a critical transition period. We need an exit strategy to mop up what was an admittedly useful "explosion of money."
Unfortunately, there is no exit strategy ready to go. Treasury is aware of the problem, but politics may prevent them from doing the rational thing. The recent rise in the price of gold shows that the market has a real understanding of this risk.

What does China's development mean for the world?
First, on the dollar issue, Greenspan noted that if China wants to liquidate its dollars, it has to figure out somewhere to put the proceeds. The only currency with the liquidity to soak up China's dollars is the euro, and he thinks China prefers the dollar to the euro. That said, he does look for China to move dollar assets over time into physical assets, which, while less liquid, will either hold their value better or help China achieve strategic goals.

China is the "900lb gorilla" in world energy markets, and that will affect US energy security.

China's goal right now is to maintain a stable work force, which goes counter some of their longer-term goals. He does not believe the country is doing enough to promote consumerism.

The future of "too big to fail"
Greenspan gave his most animated answer to this issue. He said that the purpose of finance is direct capital towards its most productive uses. This is how the US economy has continued to grow despite its size and what gives us our quality of life. He worries that recent government intervention in the private markets is forcing capital into less productive investments (like US car companies), which will ultimately suffocate our growth and stop upward mobility.

What does increased output mean for unemployment?
The natural rate may end up being a number that is higher than what we're used to. But note that the unemployment rate is a lagging indicator. The US economy will grow substantially before we see that growth reflected in the country's jobs numbers.

What does China's growth mean for the agricultural sector?
China's growing food demand and protein demand mean long-term food inflation, which will be a reality for a long time.

What should the government do about bank regulation?
Government should only regulate the things it can regulate, like capital requirements. It should not try to predict and prevent a crisis. The government is very bad at predicting things, and we should not give it the responsibility of making forecasts.

What are the prospects for a worldwide consumer recovery?
Consumers don't differentiate between earned income and capital gains. Thus, when the stock market goes up, they feel rich and spend (see late 1990s). Conversely, when the stock market goes down, they retrench even if they have job stability. Thus, if the stock market continues to go up, we should see a sharp rebound in consumer activity as early as this year. If the stock market goes down again, we will likely see a few years of low growth.

Last words of wisdom
The secret to America's success has been strong protection of property rights. This is the most important aspect of our constitution and the thing that separates us from other world economies. We need to make sure that we don't compromise our commitment to property rights even as we respond to an econmic crisis. Further, he asserted that this was a once in a century event, and that we should recognize it as such. But if we make policy to constantly try to prevent a once in a century event, then we will end up with bad, overly conservative policy.

So live with it and get through it, but don't overreact to it.

Hope you guys find some of those notes helpful. Not everything has implications for international investing, but I thought it was an interesting and thought-provoking conversation.

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