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Twitchy investors dumped shares on the New York Stock Exchange Friday afternoon to close yet another week of economic mass-indecision on a major down-tick. The Dow Jones Industrial Average slumped 205 points, or nearly two percent, to end at 10,219 while the technology-heavy NASDAQ slid 137 points, or more than three percent, to end at 4,441, all largely on news from Federal Reserve Chairman Alan Greenspan that repeated interest-rate hikes are in the offing, lest the US economy overheat and succumb to price inflation. "The profoundly beneficial forces driving the American economy to competitive excellence are also engendering a set of imbalances that, unless contained, threaten our continuing prosperity," Greenspan said last week in Congressional testimony, employing his characteristically vague wording. What he means is that America's absurdly low rate of unemployment -- a seemingly positive by-product of her absurdly high rate of economic growth -- will inevitably yield upward pressure on wages as workers in all sectors negotiate in what has become very much a seller's market for labour. The result is sure to be inflation. In order to influence such variables, the Federal Reserve buys and sells Treasury securities on a vast scale, thereby manipulating the amount of money in circulation. Interest rates respond to monetary supply/demand differences in a predictable ratio. Less money in circulation means, quite simply, that the banks, where much of it is held, get away with charging more for it. The Fed manipulates these factors meticulously, and can effect changes in the prime lending rate of as little as one quarter of one percent. Conventional wisdom on the Street currently assumes that three hikes of one-quarter percent each will be needed by Summer to tweak US economic expansion back to a satisfactory rate. But this is only a best guess based on the Fed's past behaviour during similar conditions: Greenspan himself declined to predict exactly how far the rate needs to go, or precisely when and in what increments it needs to be bumped. All of this has long been expected, in spite of what appears to have been a shocked reaction to it on Friday. But The Register was quite surprised by Greenspan's decision not to cap margin buying (where the shares themselves serve as collateral for the loan with which they're bought), a move which several analysts with whom we stay in touch had anticipated. "The evidence suggests [that buying on margin] has very little impact," Greenspan said. "The fairly significant rise in margin debt, large as it is, is still a small part of market values." Fair enough; but, while it makes us uncomfortable to take issue with anything a financial demigod like Greenspan believes, we would be derelict in our duty to readers not to point out a possible error of judgment lurking somewhere within his analysis. We note that since July, the blue-chip rich Dow has fallen 6.8 percent while the dot-com heavy NASDAQ has surged a whopping 64 percent. This means that the dazzling performance of US markets is being fueled largely by companies whose assets are, for all practical purposes, imaginary. The NASDAQ is actually so far out in front of the Dow right now that the difference looks patently artificial to us. We are therefore concerned that a correction, combined with a bump in interest rates, will cut deeply into share values if a significant portion of the dabbling in technology issues is being done on margin. We hope that Greenspan's analysis takes into account not just the overall rate of margin investing, but the specific areas where it's being carried out. It may represent a small part of market values as Greenspan claims; but if it should represent a large part of technology market values, then we are all in line for a most unpleasant surprise when the NASDAQ corrects itself, which it will do, sooner or later. ®

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