Greenspan in the Hot Seat

Alan "Easy Money" Greenspan recently spoke in front of the Joint Economic Committee, answering some questions about the state of the economy. Of course, the Mogambo did not deem his answers acceptable, and our masked economist has a few things he would like to ask himself…

I tried listening to Alan Greenspan flap his lips in front of the Joint Economic Committee, but it was just more of the same. I was actually handling it pretty well. There was some straining against my restraints a few times, and making some pithy remarks, mostly about how they are all liars and idiots and I hate all of them. And some spitting.

So it was just boring until some ignorant putz who was kissing Greenspan’s gigantic butt asked, and I am quoting from memory here, "Do you think, in retrospect, that it was a good idea to slash interest rates after the dotcom bust in 2000?" This is where I lost it completely! I wish I could remember who that fat moron was that asked that question, so that I could actually tell you his name and where he was from, so that you would know what state elected this worthless boob.

Questions for Alan Greenspan: The Question He Should Have Been Asked

The question should be, and if I was on the panel this is what I would have asked, instead of his idiotic waste of time, "Do you think, in retrospect, that is was a good idea to produce all that money and credit, especially since 1997, in a stupefying deluge of egregious monetary irresponsibility, which produced the stock market bubble, which then busted in 2000, and caused a lot of misery? Huh? Is that what you think, you little twerp? A lot of people’s lives were destroyed, and then the economy was on the verge of being destroyed, and then you had to mercilessly slash interest rates – and the incomes of savers! – ever since to save our stupid butts from destruction! Do you really, really, really think we should thank you for impoverishing tens of millions of small-saver Americans, who save their pitiful little bit of money in Certificates of Deposit and their little savings accounts, by slashing their incomes to almost zero? And your ridiculous economic theories and your preposterous economic models so ruined everything that you had to do it, month after month, and year after year, for five long stinking years! Is some kind of damned thing to be proud about, you filthy stinking pig?" Then I would have jumped over the desk, seized Alan Greenspan by the damned throat and forced a confession out of him.

The only good part was when Greenspan allowed that the whole filthy Federal Reserve exists only at the whim of Congress, and that it can be eliminated at any time, which is an idea that I heartily endorse. I further say, since you were so kind to ask, that the gold that we are supposed to have stored be immediately used to turn the dollar back into gold, as required by the Constitution. Theoretically, gold will have to go to $5,000 an ounce, and so we let the gold bugs be the new millionaires, who will (and I think I speak for all of us) serve as a ready reference to anybody who thinks that real money CAN be anything but silver and/or gold.

But nobody asked The Big Freaking Mogambo Question (TBFMQ) that I would ask. It goes like this. "Mr. Greenspan, when you came to power in 1987 and took control of the Federal Reserve, the national debt was at $2.3 trillion, which is (and I am sure that my fellow Congresspersons will agree) a big, honking, pot load of money. But the interesting thing is that now, only 18 years later, the national debt is $7.8 trillion. You have allowed an almost tripling of the national debt! In 18 years! All by yourself!"

I can imagine the fear in his eyes as he realizes that I am on to his scam. As he licks his lips nervously, I continue. "Now, it is commonplace for all governments to want to spend money, lots of money. In the old days, when the Congress tried this silly crap, the amount of money left for everyone else to borrow to conduct ordinary business would have dried up. So the demand for money would increase, while the supply of money was decreasing. Since you think you are such a big shot economist egghead, then I am sure that you realize that the interest rate would have skyrocketed!"

I can see him sweating bullets, and I mercilessly press the attack by asking, "What would have happened then?" Waiting for his answer, I savor his squirming in his seat, his beady little eyes darting from side to side, trapped like the little rat that he is. Finally, he would start to stammer out something like "Well, umm, well, given that…" At that I would have jumped up onto the top of my desk and shouted, "Shut up! I will tell you what would happen! Everyone would get all mad and write rambling, disjointed and threatening letters to their elected government representative, such as, for example, ‘Dear deficit-spending Congressional nitwit, I’m voting against you in the next election! The Mogambo was right! You ARE all a bunch of buttheads! Signed, Angry Voter.’ "

Questions for Alan Greenspan: So Why Hasn’t Anyone Else Done This?

Leaning forward so that I can stare into his vacant eyes, I continue, "But now, you, Alan Greenspan, think that you have found a way around that, don’t you? You think that now that our money is just paper and electronic digits that you have found a marvelous, magical way to let the damn government spend and spend and spend! My question to you, Mr. Alan ‘Crazy Al’ Greenspan, is the famous Big Freaking Mogambo Question (BFMQ), which is: if this is such a hot idea, how come no other country ever thought of it before?"

Now, if I know Alan Greenspan, he will then turn into a bat and fly away, so you are not going to get an answer from him. So I will tell you the answer to the BFMQ. The answer is that they all DID try that crap, and it ruined every last one of them! Hahahaha! All governments always resort to this money-creation thing at the end, after their previous credit-fueled booms started petering out, and all the friends of the government starting calling up and wanting the government to "do something" to keep the stupid, bloated, misshapen, mal-invested and preposterous economy from collapsing and dying from the cancer that was eating it alive. And what they did was to create MORE money and credit!

And since nobody else in history has ever pulled off this trick, and in fact it destroyed their economies, I must assume that we half-witted American boobs won’t prove any more successful at it than any of them.

And it is not just me that is so angry that sparks are flying out of my eyes. For example, Bill Fleckenstein of the Contrarian Chronicles looked at an article by Greg Ip of the Wall Street Journal, who has "explained" the current Fed policy. "Faced with an asset bubble," writes Mr. Ip, "a central bank has two choices: Prick it early or wait for it to burst and try to contain the damage. The Fed in 1929 and the Bank of Japan in 1989 tried…raising interest rates in response to rapidly rising asset prices. The result in the U.S. in the 1930s was depression and deflation. In Japan it was stagnation and deflation that continues today."

So this time, it is explained to us, they decided NOT to try and stop the bubble and speculative excesses, but to let it expand until it burst, and then lower interest rates to try and clean up the big stinking mess! Instead of me getting apoplectic, I will try and sit here calmly, and let Mr. Fleckenstein explain why I am so angry.

"The article and the Fed argued from a false premise to a false conclusion," states Mr. Fleckenstein, "by blaming the American bust of the 1930s and the one in Tokyo in the 1990s on monetary tightening. That is completely untrue. The aftermaths of both were caused by the preceding asset bubbles, precipitated by reckless monetary policies. It is asset bubbles that create the damage, not the small amount of tightening that comes at the end. In fact, I would argue that the tightening didn’t end those bubbles. Exhaustion ended them, and the tightening was coincident with the exhaustion phase."

Need I say more?

Regards,

The Mogambo Guru

June 20, 2005

Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter, an avocational exercise to heap disrespect on those who desperately deserve it.

The Mogambo Guru is quoted frequently in Barron’s, The Daily Reckoning and other fine publications.

We’ve spent the last two weekends at weddings. Not that this has anything to do with our financial commentary. We just thought we’d mention it.

One wedding was in English. The other in French. But at both wedding parties, people wanted to talk about the same thing: the disintegration of Europe. More about that, below…

What was interesting last week was that for all the talk about Europe falling apart, both the euro and European stocks went up. The euro closed the week above $1.23. Stocks in Europe are cheaper than those in America, even after rising more than 50% from early 2003. They still seem to be going up – boosted by a lower euro. Unlike the United States, Europe still makes things and exports them. In fact, it’s the world’s leading exporter. The cheaper euro helps.

Two other things went up last week – gold and oil. You’ll recall, dear reader, that there are two major trends in the world economy: the globalization of the labor market, which is pulling down prices of manufactured goods and some services…and the rapid expansion of the supply of money and credit by the world’s central banks, which is pushing up prices for things on which cheap labor has little effect.

If something can be done or made by Asian workers, in other words, its price is probably falling (in real terms). If it can’t, its price is rising. That’s why houses are going up in the United States; they don’t make them in China. They don’t make gold or oil in China, either. In fact, they don’t make it anywhere. Both were made millions of years ago. Oil may have taken millions of years for nature to make, but it is being used up in just a few generations of human activity. Last week, oil went over $58. Gold is never used up; but neither is its supply easily increased. Thus, both oil and gold rise along with the tide of "liquidity" loosed upon the world by central bankers.

Buy timber, says Jeremy Grantham. Everything else is overvalued, he told the German business publication, Wirtshaftswoche. Stocks, bonds and real estate are all over-priced, he believes. The Chinese can’t produce timber – at least, not very soon.

More news, from our currency counselor:

————–

Chuck Butler, reporting from the EverBank trading desk in St. Louis…

"The U.S. Current Account Deficit came in much higher than forecast: $195 Billion, for the first quarter. That’s nearly $800 Billion per year! That cannot go on!"

————–

Bill Bonner, with more views:

*** Uh oh…first USAToday, and now The Economist. If it weren’t for our weak convictions we might begin to waver on our position with regards to the housing market. On Friday we pointed out that the lead story of the money pages in USAToday showed a few strategies should owners of high-priced real estate want to "cash out."

And now, The Economist wonders what happens "after the fall."

"A day of reckoning is close at hand…Two-fifths of all American jobs created since 2001 have been in housing-related sectors such as construction, real estate lending and broking. If house prices actually fall, this boost will turn into a substantial drag."

The Economist goes on to say the house party was fun while it lasted, "the whole world economy is at risk…the biggest increase in wealth in history was largely an illusion."

*** We receive proof that the real estate bubble is worldwide from Kevin Kerr…

"This is so frightening, and it’s not just here…

"In Estonia where the average income is around $500 a month (my mother-in-law is a doctor and makes $700 a month) People are getting loans for $200,000+ at 1.5% interest rates to buy real estate in Tallinn, the capital. Our home there has increased in value ten-fold in the last 18 months. It’s insane."

*** Whiskey and Gunpowder’s "intrepid correspondent," Byron King, sends over his two cents (and all of his loose change) from Pittsburg:

"The real Estate bubble is a world-wide phenomenon. This is the tech-bubble of the late 1990s, transferred to real estate. Post tech-crash, the folks who run the world did not want to take the well-deserved recession, rebalance the financial books & portfolios, and get the macro-financial house in order. Bad for politics. Couple that with the post-9/11 goosing of the money supply to keep people going to Disneyland and buying big SUVs, and this is the Titanic hitting the iceberg and backing up and moving forward again a couple of times, just for good measure. ("Where the hell is all this salt water coming from?" says the man….)

"From a macroeconomic perspective, it’s a worldwide form of real estate arbitrage, if not just plain old fashioned "kiting" except with real estate instead of bouncing checks between banks. Buy a house you cannot pay for, and sell it to someone else who cannot pay for it, but do it before the mass of people catch on to the con and prices stop rising. The cover of this week’s Economist is picture of a brick falling from the sky, representing the impending real estate bust, with extensive editorial and news writing about the falling and/or coming fall in real estate markets.

"This will, no doubt, be a major topic for discussion at the Agora Wealth Symposium – and if anyone needs a reason to go the conference, think of that great scene in the Broadway show ‘The Sound of Music.’ Max Dettweiler, the slick promoter, is talking with Captain von Trapp about the impending Anschluss of Germany towards Austria. Captain von Trapp says something about how concerned he is about what is about to happen to his edelweiss-like happy homeland. Max says, ‘Georgi, whatever is going to happen is going to happen. Just make sure it does not happen to you.’

"Yea, Max is kind of cynical, but he is also a realist. He knows that he cannot change the trends of history, and whatever is going to happen is going to happen. (Wait a minute, Max just said that.) So the reason to go to the Agora Wealth Symposium is to listen to some really smart people talk about those trends of history, and to do your own small part to ‘make sure it does not happen to you.’"

*** The papers are full of Europe-talk this morning. Over the weekend, Tony Blair squared off against Jacques Chirac. The details of the dispute are not worth rehearsing. But the effect of it was reported all over Europe. In Britain, Mr. Blair is a hero. He came back to London yesterday like the Duke of Wellington returning from the battle of Waterloo. (The summit meeting ended on the anniversary of the battle.) "Reform or Die," was his message to the European summit meeting over the weekend, according to Britain’s Daily Mail. In Paris, Mr. Blair’s performance got lukewarm or even hostile reviews. The French paper, Liberation, says he "KO-ed" Europe. Le Monde says he made the crisis worse; Le Monde also noted, in its headline, that Jacques Chirac denounced Britain’s "selfishness."

The fight is over money…and different notions about how Europe should be put together.

We’ve heard many opinions on the subject. But we’ve never actually heard one worth listening to for anything other than entertainment. Some people want a "strong, forward-moving" Europe because they think it is the way to "progress." They are dismayed to see the thing falling apart. Others want no part of further political integration. They are afraid the Poles might get a shot at French plumbing…or Turks might start driving Paris taxicabs.

Only French farmers seem to know which side of their bread has the jelly; they support the constitution because they want to continue receiving generous subsidies.

"They should never put things like this to a popular vote," said a French woman at this weekend’s wedding. "Look at that man standing in the doorway there [she pointed to a modest dwelling with a pensioner looking out]. You can’t let people like that decide the fate of Europe. He only cares about protecting his retirement benefits. Louis 14th didn’t put it to a vote before he built Versailles. Napoleon didn’t ask for referendum before attacking Russia."

"Maybe he should have…" we replied.

The silliest views, though, come from the American press. The homeland regards Europe itself as a potential political rival and is secretly happy to see it flailing about.

Here at The Daily Reckoning we take the side of the "no" voters but for different reasons. We like strong families, strong liquor and strong currencies…but we prefer weak governments.