Economic growth now depends crucially on the strength of wealth and profit creation. Mr. Greenspan and the bullish consensus economists claim that America is enjoying its highest rate of wealth creation in history - through rising asset prices.

Fed members are claiming that this is a perfectly normal transmission mechanism of monetary policy. This is an outright lie. Never before have inflating asset prices been a key driver of real economic activity.

To be sure, asset prices have always risen in the early stages of a cyclical economic recovery in response to monetary easing. But such increases do little or nothing to boost economic growth.

First of all, in past recoveries, price rises were generally very limited in size, particularly for housing; and secondly, there was no way to convert the asset inflation into cash, because the reckless lenders of today did not exist. Besides, Americans of the 1960 - 1970s would have been too proud to practice inflated-asset liquidation and too intelligent to mistake it for wealth creation. There is no precedent for such profligate behavior of private households.

Worst of all, asset-price inflation is not wealth at all. That is strikingly obvious from the macro perspective. The best way to realize this, we think, is a comparison against the true wealth creation that generations before us have experienced and that generations of economists have regarded as the one and only way to greater, lasting prosperity. It comes from investment spending on income-creating buildings, plant and equipment.

Investment spending creates demand, employment and incomes in the first instance through the production of the necessary capital goods. When finished and installed, the new capital goods go into production, creating further employment, incomes and demand. And most importantly, debts incurred in connection with this wealth creation are self-liquidating through the underlying income creation.

And what really happens to incomes and debts in the case of so-called wealth creation through appreciating asset prices? Nothing at all. Generations before us never thought of it as wealth creation. This new attitude arises principally from a general convention to consider total outstanding assets of a certain category as being worth the price of the last trade, however small that trade may have been. Clearly, small trades have tremendous capitalization effects. For good reasons, such so-called wealth creation is not practiced in most countries.

In Japan's case, the principal beneficiaries of the asset bubbles in the late 1980s were industrial and real estate businesses. In the U.S. case, it is the consumer. But in order to enjoy the wealth effects of rising stock and housing prices, the American consumer had to encumber himself with soaring debts in order to afford the price-driving asset purchases.

For Mr. Greenspan and the bullish consensus it is a virtuous circle, as the overall gains in capitalized asset prices have outpaced the rise in debt levels. Implicitly, the big net gain in asset values can be used as collateral for borrowing, which funds higher spending for consumption.

In their economic effects, these two patterns of wealth creation have nothing in common. The key feature of the capital investment model is correlated increases in current and future incomes. It boosts economic growth both in the short and long run. What's more, the associated initial rise in corporate debt amortizes itself through the following depreciations.

The striking key feature of so-called wealth creation through asset bubbles in favor of the consumer is, first of all, the associated record production of debt, set against the total absence of income creation. To maintain demand creation through this kind of wealth creation, ever more debt creation is needed - first, to keep the asset prices inflating; and second, to fund the spending on consumption.

Thinking it over, one realizes that "wealth creation" is really a grotesque misnomer for asset prices that are rising out of proportion to current income. The economic reality is not wealth creation, but impoverishment. We repeatedly hear from Americans that they are living in houses or apartments they cannot afford to buy with their present incomes. But many years ago, with incomes and prices as they were at the time, they could afford the houses. That says it all.

The writing has been on the wall for years. In 1996 the American consumer increased his spending on current goods and services by $281 billion, with debt growth of $345.7 billion. In 2000 he spent $456.9 and borrowed $566.9 billion. And in 2003 spending of $367.9 compared with debt growth of $879.9 billion.

But consumer borrowing was not alone in escalating to unprecedented extremes. Government borrowing also soared, in particular borrowing for boundless financial speculation.

In 1997, the U.S. economy grew by $487.4 billion in current dollars, with an overall credit expansion of $1,406.8 billion. That was already an unusually high borrowing ratio. In 2003, it took $2,717.5 billion of new credit to generate nominal GDP growth of $504.7 billion.

Credit excess - always due to artificially low interest rates - implicitly means spending excess. But the problem is that these spending excesses tend to distribute very unevenly across the economy. In the United States, for years, the spending excesses have been overwhelmingly directed towards the whole range of asset markets - stocks, bonds, housing - and in the economy towards consumption.

Given the enormity of these credit and spending excesses, it goes without saying that they have involved tremendous distortions in the economy's whole structure, being typically located in three areas: first, they misdirect output; second, they distort relative prices, costs and profits; and third, they strain balance sheets.

It used to be true among policymakers and economists that for an economy ailing from such structural distortions, a return to sustained growth is only possible after these have been significantly moderated, if not removed. Mr. Greenspan has plainly opted for the diametrically opposite strategy of fighting economic weakness, regardless of existing maladjustments, through more and more credit excess.

Pointing to the U.S. economy's rates of real GDP growth, Mr. Greenspan claims full success for his policy. Compared with the far higher rates of growth of past cyclical recoveries, his policy has grossly failed, even by that measure. But considering the horrible development of employment, it has been a policy disaster.

Regards,