Robert McTeer, chairman and CEO of the U.S. Federal Reserve Bank of Dallas, resigned Nov. 5 to become chancellor of the Texas A&M University system. His departure presages the beginning of a severe shift in U.S. monetary policy, which most likely will result in sharply slower economic growth globally. The U.S. Federal Reserve is charged with keeping employment, growth and inflation in some sort of balance, with interest rates being the biggest tool in the box. Lower rates reduce the costs of borrowing — for a house, a credit card or Wal-Mart's or ExxonMobil's next major construction project — which directly or indirectly leads to hiring. The net result is more economic activity, higher growth and higher employment. The downside is that all the demand for resources, labor and even the credit itself increases the cost of doing business: inflation. Conversely, the Fed must on occasion raise rates to put the breaks on the economy, damping inflation at the cost of growth. Just as politicians differ on everything under the sun, economists differ on how much growth is good, where employment should be to keep inflation tame, and what specific actions would release an inflationary beast. McTeer tended to support high-growth policies. In the slang of the industry, he usually was perceived as an inflation dove. Taking a shot at what the Fed is going to do from meeting to meeting — much less years ahead of time — is always risky business. Not only do members come and go, but also the Federal Open Market Committee, which makes decisions on interest rates, is not a locked membership body. In addition to its seven standing members from the Board of Governors, there is the president of the Federal Reserve Bank of New York, and 11 regional branch managers (of which McTeer is one). Voting rights rotate among these 11 managers, and only four hold voting power at any given time. But of this menagerie of bankers, McTeer is unique in that he is the one who first — at the level of the Fed leadership at least — postulated that the United States economy had entered a new epoch in the 1990s. McTeer saw the wholesale development, operationalization and application of information technology as radically altering — if not outright destroying — the guidelines that the Fed had used for decades to keep growth strong, employment high and inflation low. McTeer's key assertion was that IT advances not only increased the productivity of the average American worker, but would continue to do so quarter-by-quarter and year-by-year. Higher worker productivity has two primary consequences. First, employers can squeeze more out of each hour of employee work than before, which in turn keeps labor inflation under control. Since labor inflation is the single largest component of U.S. inflation, higher productivity allows the Fed to keep interest rates lower — and by extension gross domestic product (GDP) growth higher — than it would otherwise. Second, the continual spawning of new technologies guarantees a continual spawning of products fundamentally different from their precursors. Such rapid product evolution not only continually encourages the development of even more technologies and products, but also keeps inventories extremely lean. That reduces costs for most industries as well as preventing any damning glut of goods from building up, removing a leading cause of deflation. In McTeer's view, which turned out to be quite correct, the dawn of the IT age meant that the United States had entered into a permanent period of lower inflation so long as technology continues to advance. While McTeer's word has not exactly become gospel in the Fed, it certainly has converted the most important player in the Federal Reserve system: Chairman Alan Greenspan. Greenspan has chaired the Fed since 1987, and has done a fine job, if we do say so. He has presided over the longest economic expansion in U.S. history and the two recessions on his watch have been the shortest and shallowest on record. He is also not particularly shy about speaking out about what he sees as the greatest strengths and weaknesses of the U.S. economic system, political niceties be damned. There are two massive icebergs on the United States' mid-term horizon that have in particular attracted Greenspan's attention. The first problem is the imminent retirement of the baby boom generation. As the baby boomers begin to retire, they will cease to pour money into their 401Ks and other assorted savings plans. Typically, retirees move their investments from more volatile stocks — among the most efficient forms of investment capital — to safer forms such as cash and long-term government bonds. Otherwise the retirees risk market crashes, which would eviscerate their holdings. Retirees also, of course, live off of their retirement accounts. So not only will the flow of investment capital soon dry up, it will reverse. The savings of the baby boomers has been the United States' primary source of investment capital for the past twenty years. As the money is spent it will ultimately flow back into the economy — the retiring boomers are not about to stuff it under their mattresses — but that flow will be unpredictable. Never before has the United States faced the retirement of such a large population bulge. The best way policymakers can help the economy to weather the years ahead would be to ensure a large amount of liquidity in the system to sooth any shocks; to keep interest rates low. Unfortunately, that will be precluded by the second problem Greenspan sees. The U.S. budget deficit has grown to a near record in terms of percent of GDP in the post-WWII era. Higher budget deficits mean the government is sucking capital out of the system in order to fund spending that it could not otherwise afford. The net result in the long term is a ratcheting up of interest rates due to the higher demand for capital. Addressing this requires massive spending cuts. If the Bush administration's deficit-reduction plan is carried out to the letter, the U.S. budget deficit will be halved in four years. Of course, the Bush administration presided over the U.S. budget as it went from a record surplus to a near-record deficit during his first term in office. Once the impending bankruptcy of U.S. Social Security — another of Greenspan's favorite topics — is figured in, the future turns even bleaker. The picture shaping up is one in which capital markets find themselves being squeezed like the proverbial turnip for every drop of money by a deficit-laden government and a private sector denied the baby-boomer nest egg. And so long as the United States serves as Asia and Europe's market of first and last resort, less money for the American economy means slower growth on a global scale. Dealing with these issues will take a great deal of creative leadership, particularly on the fiscal side, which falls completely under the purview of Congress and the White House. All the Fed can do on the monetary side is keep growth moving ahead as rapidly as possible (within the bounds of inflation of course) so that the country has as much wiggle room as possible when the crunch begins. That means keeping interest rates low. Historically low. Perhaps, by some measures, even artificially low. McTeer, for his own reasons, has been a strong voice for that very policy. Once some allowances are made for subtlety and nuance, so has Greenspan. McTeer is gone, and Greenspan plans to resign from the Fed for good in January 2006.