This past spring, Maestro Alan Greenspan issued official Federal Reserve statements that deflationary declines in the prices of goods and services people buy was the nation's top economic danger. Consequently, he said his Fed might make special purchases of Treasury bonds in order to pump new money into the economy and get bond rates lower to stimulate investment.

But last week, in congressional testimony, Maestro G changed his tune. Totally. Completely. Utterly. Suddenly, he said that next year's economy would be strong, and that this revival would begin in the second half of this year. Hence, his new thinking goes, deflation is apparently not a threat and there's no need to add liquidity through special bond purchases.

That's right. According to our Fed chairman, we've gone from deflation to reflation, lickety-split. If someone from the CIA -- after reading documents from Niger -- had pulled this 180, they'd be forced to take a lie-detector test.

But what about the bond traders who trusted Greenspan and stocked up on Treasuries for future sales to the Fed? Said traders got their brains beaten in. Blindsided by Greenspan's policy reversal, bond traders were forced to sell heavily. Now the 10-year Treasury is trading at 4.2 percent compared to 3.1 percent in mid-June, the worst bond-market price rout in nine years.

Fortunately, at mid-year 2003, the whole deflation shtick has turned out to be a mirage, though Greenspan was unable to fathom this since late last year. The dollar's value in relation to the prices of gold, commodities and foreign currencies has declined sufficiently to remove deflation as a real threat. There are no Japanese-style catastrophes looming out there.

And believe it or not, there is a silver lining to this Treasury travail. A stronger outlook for economic growth -- from prior Fed money-creating and the newly enacted Bush tax-cut plan -- has driven up the real-interest-rate component of the 10-year Treasury (not the inflation premium) by roughly a full percentage point. So, interest rates -- which had been heading down for three years -- are moving up.

This is meaningful. More normal interest-rate levels send a signal to consumers and investors that it is time to push the button on new purchases or new capital commitments. In fact, a lot of folks will be rushing to beat the next group of rate hikes.

Of course, Maestro G himself told Congress that it is unlikely the central bank will tighten in our lifetime. But can anybody believe this guy anymore? Continued...