Greenspan's Follies

Mogambo on Monday! This week our hero is rudely interrupted while trying desperately to mind his own business…

Last week, we were graced with the sight of Sir Alan Greenspan himself on TV testifying before Congress, which mainly consisted of Congresspersons demonstrating that they are either clueless, or that they couldn’t care less, since they are there at the testimony apparently only as a welcome respite from their regular duties of spending us into the poorhouse, and passing more and laws that make living in America more and more unpalatable and uneconomic.

Now, to tell you truth, I did not hear much of the testimony, as I usually get so angry at the vapidity of the questions or the glib evasiveness of Greenspan’s answers, or the outright lying, or his saying that he does not want to discuss this in public and how the questioner ought to drop by his office so they can close the door and that Greenspan can tell him how things really work, or maybe he would prefer to have some of Ashcroft’s Patriot Act armed-and-armored agents drop by the Congressperson’s house, late one night, so that THEY could explain it to him, if you catch his drift, and so I usually just stop watching the damn show, and missed most of the testimony. Almost all. I hate it.

Alan Greenspan: "Unfazed by the Soaring Debt Levels of the US"

But Mr. Eavis says he watched the testimony, and Mr. Eavis is the Senior Columnist for, and he wrote a nice piece about Greenspan’s testimony, which he entitled "Probing Greenspan’s Easy-Money Madness." With a title like that you know he is probably as dyspeptic as I am about the whole thing. He writes, "But one line in Greenspan’s testimony Wednesday shows that he is unfazed by the soaring debt levels of the U.S. He said: ‘All told, our accommodative monetary policy stance to date does not seem to have generated excessive volumes of liquidity or credit.’"

If Mr. Eavis says that this is what Greenspan said, then I have no reason to doubt him. So I’m going to believe him, especially since Greenspan has already proved that he is unreliable, and will lie to me just for the sake of lying, as far as I can tell, like when I finally get through to him on the phone, and as soon as he hears my voice he says "This is a no Mr. Greeniespan. Him gone. Me clean office plenty fine, chop chop" and then he hangs up, but I know it was him. He isn’t fooling anybody.

But I can see how he figures that he IS fooling me, since he does it every six months in front of Congress, who are supposed to be so bright and trustworthy and educated and upholding the Constitution.

Anyway, I’ll tell you what was spooky. One day last week, I am just minding my own business, going through the motions of the normal routine, when suddenly the meaning of when Greenspan said becomes clear to me in all its glaring treachery…and the next thing I know, I’m running down the street screaming in fear, and banging on the doors of neighbors, and when they make the mistake of opening the door in response to my repeated knocking, and ringing of the doorbell, and kicking the side of their house, and peering in the windows and yelling "Hello? Hello? I can see you in there! Why won’t you answer the door?" then when they do finally open the door, then I’m grabbing them by their necks and screaming in their faces, yelling that "Alan Greenspan has just testified that he sees no evidence of excess liquidity! Do you know what this means? Do you?"

By this time my voice has risen an octave and gradually working to higher and higher decibels, and in my unfathomable rage I’m spraying their faces with flying specks of spittle. "Do you understand me?" I’m screeching. "Do you have any idea of the profound and horrific consequences of a chairman of the central bank to say that he sees no evidence of excess liquidity?"

Alan Greenspan: Vanishing into Nothingness

Never mind that Greenspan’s denial gives Mr. Ben Bernanke, he of the printing press, a green light to print up even more money out of thin air that will find its way into all sorts of nasty speculative bubbles. Never mind that it means that even more bad credit will be given over to debtors who will never pay it back, like the government. Never mind that the future value of the Greenback – which wasn’t looking all that rosy to start with, especially sharing the first syllable of its nickname with the most profligate U.S. Fed Chairman in history, as it does – now appears to be vanishing into nothingness.

No…this sort of deceit is all too close to another of Greenspan’s favorite lies, and let me give you the scoop on that idiocy, namely that inflation is low. But it is too easy to attack Mr. Greenspan on these counts, as they can be successfully dismissed by anybody in the whole freaking country who has spent money, as the prices of everything are up, and many of them spectacularly so. So we have proved that he is a clueless weasel about liquidity and inflation.

But there is another one of Greenspan’s follies that just won’t go away, and it has as much credence as Greenspan’s ridiculous insistence that inflation is low, and that is the whole productivity thing.

So let’s attack him about this productivity thing. But we are again stopped at the front door of the Fed by some tough-looking security guards, so we turn around and decide that we will confine ourselves to attacking him verbally, and by that I mean in writing, so you can see how confused I am in my anger. But even in my current bewildered state, I obviously have a lot more on the ball than this Greenspan fella.

Anyway, suppose you, as a successful capitalist swine, hire a hundred guys to make a hundred widgets, and sell the widgets for a dollar apiece, and thus GDP is $100. So far, so good. Then a few days pass, and we wake up with a blinding headache in a strange, seedy little hotel on the outskirts of town with a one-eyed woman who says her name is Darla, and when we frantically call in to the office, we find that you raised the price to two dollars, and you also figured out a way to make widgets with only fifty employees! The hike in price, unfortunately, reduces widget sales by 25%. But GDP jumps to $150! And because you fired half the employees, labor costs plummeted, and the next thing you know Alan Greenspan jumps on an airplane and flies down to visit your factory and give you an award as Proud Poobah of Productivity, which you deserve because productivity has soared. In the old days, it took a hundred guys to make a hundred widgets. Now it takes only fifty guys to make seventy-five widgets, and you doubled the price to more than make up for it. You’re a genius!

But unemployment is up by 50%, total sales volume is down, and inflation has soared to 100%. Only a Fed chairman as clueless as Alan Greenspan could possibly only see the upside in this.

And so we have successfully debunked Greenspan’s insistence that productivity is a miraculous tonic for the economy, that inflation is "low," and that the volumes of liquidity and credit in the U.S. system are "not excessive."

Is there any lie Sir Alan has left untold?


The Mogambo Guru
for The Daily Reckoning
February 23, 2004

P.S. I went to the Treasury website for the public debt,, and saw that the debt is $7.025 trillion, a new all-time record. Just for laughs I scroll down to the bottom, and the list ends 9/30/87, when the debt was $2.350 trillion. That is, oddly enough, approximately the date that Greenspan took over the Federal Reserve.

So, under this guy Greenspan, we have gone into debt to the tune of another $4.675 trillion. One lousy Fed chairman has tripled our debt in seventeen lousy years. I am appalled and disgusted. Ugh.

Editor’s note: Richard Daughty is general partner and C.O.O. for Smith Consultant Group, serving the financial and medical communities, and the editor of the Mogambo Guru economic newsletter, an avocational exercise the better to heap disrespect on those who desperately deserve it.

We often opine that the world is full of fraud. Today we begin with proof.

Or rather, a few egregious examples – the first brought to you by the Bureau of Labor Statistics, explicated by the New York Post’s John Crudele, courtesy of the great Mogambo Guru:

"By now my readers should have a PHD (pretty high disdain) for Capitol Hill math," writes Crudele. "This one, though, is a cake taker. I’ll translate: Included in the 112,000 new jobs in January were 76,000 jobs that supposedly exist because people who weren’t hired in December couldn’t be fired in January. Got that? They didn’t get hired in December, or fired in January, so they showed up as new employees in January as a statistical fluke. So, really there were only an abysmally small 36,000 new jobs in January."

In other words, the 76,000 jobs are a fraud. "Weak holiday hiring," wrote the Labor Department in its release, "…meant that there were fewer workers to lay off in January, resulting in seasonally adjusted employment gains for the month." The key words here are ‘seasonally adjusted’ – meaning that although holiday hiring was weak, government quants went ahead and added imaginary seasonal jobs to the total figures anyway.

Yet…on Friday, the governors of the Federal Reserve, like so many comic book heroes, professed en masse their belief that real "job creation" is on the way. "It’s just a matter of time," Fred ‘let’s-all-join-hands-and-buy-an-SUV’ McTeer assuaged the huddled crowd of attendees at an economic education conference in Texas.

"In all likelihood," Alan Greenspan (ranking former member of Time Magazine’s Committee to Save the World) soothed a Chamber of Commerce group in Nebraska, "employment will begin to increase more quickly before long as output continues to expand." Ben ‘Printing Press’ Bernanke messaged reporters in Washington by "expressing" the view that "hiring will strengthen significantly this year…"

Speaking in St. Louis, William Poole suggested that if the U.S. economy expands by 4 to 5 percent in 2004, as the preponderance of the world’s talking heads seem to agree it will, then there will be "significant increases" in employment.

Their post-huddle story in a nutshell: If U.S. GDP grows at the expected rate…jobs will appear. Will they, we wonder? Probably. In the U.S.? Not likely. India and China? That would be our guess. But leaving aside the politically juicy issue of "off-shoring" of jobs, let’s consider the pedestal on which the faith of the Fed’s super-heroes is resting: the growth in GDP figures themselves.

Rather than relying on annualized GDP growth rates, "a more precise measure [of the strength of the recovery]," writes Richard Freeman in the Executive Intelligence Review (also by way of our friend the Guru), "would be to compare debt to the productive portion of GDP."

The "productive portion" of the economy – manufacturing, agriculture, construction, mining, public utilities, and transportation sectors – produces the "actual wealth" from which debt, both personal and national – both being racked up at staggering rates – gets paid off. Yet according to U.S. Commerce Department data, the productive portion of GDP is now less than 30% of total GDP.

Perhaps the real reason new-hires are failing to show ‘in the numbers’ as quickly as our friends at the Fed would like is masked by using a flawed (or at least easily manipulated) measure of ‘U.S. growth.’ Recent GDP reports, after all, measure countless paper transactions following an historic burst of government stimulus – rather than real economic activity.

Hmmmn. Just a thought.

To make the case a little more poignant, Freeman sheds light on another little ‘adjustment’ the government likes to make use of: "The Commerce Department reports the ‘manufacturing sector of GDP’ in dollar terms, not output terms; and it adjusts it by the notorious ‘Quality Adjustment Factor,’ which artificially overstates production." Thus, even the officially stated 30% of GDP that is supposed to be the ‘productive portion’ is just a statistical fluke.

"There it is in one compact sentence," excoriates the Mogambo, "proof that the government is a pack of lying weasels!" Mogambo unpacks his outburst…below.

In the meantime, here’s Eric with the market news…


Eric Fry from New York City…

– The bull market marches steadily onwards. Year after year, prices soar…but no one’s happy about it. Your Manhattan-based editor is referring, of course, to the local bull market in private kindergarten tuition.

– "New York kindergarten tuition fees top $26,000 a year," Bloomberg News reports, "almost as much as the cost of attending Yale or Princeton universities…Demand for about 2,300 kindergarten spots at such schools as Dalton and Horace Mann is stronger than ever, with some getting 15 applications for every seat. Behind the surge in demand is a growing belief among parents that the schools put their children on track to make it to Harvard, Yale or other top universities."

– Evidently, the boom times are back on Wall Street…or maybe they never really left.

– "It’s supply and demand," Ms. Nina Bauer tells Bloomberg News. Ms. Bauer is a counselor at Ivy Wise Kids, a service that charges $5,000 to coach parents how to prepare their four-year-olds for admittance tests and interviews. "Wall Street got big bonuses this year," she notes. "No one has ever once asked me about tuition."

– Down on Wall Street, stock buyers aren’t terribly price-sensitive either. Demand is inelastic. So desperately do stock buyers wish to gain admittance to the capital gains fast track, they rarely consider the price. Unfortunately, investors often discover that indiscriminate stock buying gains them admittance only to the School of Hard Knocks.

– Last week, the nation’s stock buyers exhibited slightly less enthusiasm for stocks than normal. Indeed, many former stock buyers became enthusiastic stock sellers, perhaps to raise a little scratch for next year’s kindergarten tuition.

– For the week, the Nasdaq Composite slipped 0.8% to 2,037, dragged down by the semiconductor sector. As Barron’s observes, "The failure of the semiconductor stocks to capture any strength from then gaudy results of Broadcom and Applied Materials was notable mainly as part of a broader theme of technology stocks under-performing the market in recent weeks.
Lagging technology shares – the SOX is down more than 8% over the past month in a flat overall market – have been the talk of the Street, giving rise to concerns that this once-leading sector represents a troubling signal for the continuing flow of risk capital into stocks."

– The non-techy blue chips fared slightly better, as the Dow dipped a mere eight points to 10,619, while the S&P 500 slipped just one point to 1144. A rallying stock market – like all of life’s other earthly pleasures – is a fleeting delight. Sometimes we investors forget that bull markets are as mortal as man himself. But alas, the delight of a rallying stock market does not last forever.

– Nor, it seems, does a rallying gold market endure from everlasting to everlasting. Last week, the ancient monetary metal plummeted $12.70 to $397.55 an ounce. The ignominious plunge dragged the gold price to its lowest weekly closing price since late November – ending the yellow metal’s eleven-week foray above $400 an ounce. Gold stocks also suffered mightily, as Amex Gold Bugs Index tumbled 6%.

– Gold’s collapse coincided with a ferocious dollar rally that started mid-week. Wednesday morning, the dollar fell to $1.293 per euro. But then, following a report that foreign buyers of U.S. Treasuries increased in January, the dollar sharply reversed course and rocketed more than 3% against the euro. Boosted again by terror threats in Japan, the revitalized greenback closed higher on Friday, gaining nearly 2% to $1.2537 per euro.

– Is the gold rally over? Is a new dollar bull market now underway? Most Big Picture trends would argue against that conclusion. In the other hand, there is no denying that bearish bets on the dollar and bullish bets on gold had become very "crowded trades."

– As one salty investment professional told your New York editor late last week, "Selling short the dollar has become one of the most crowded trades I’ve ever seen during my long career. From a contrarian standpoint, this trade has to reverse for a while. In fact, I think the whole ‘reflation trade’ will reverse for a while. Of course, longer term, I wouldn’t mind seeing the dollar rally and gold fall for a while. If gold falls, I’ll be buying more."

– So will we.


Addison Wiggin, back in Paris…

*** Bill called early in the morning from Nicaragua to say he was boarding a boat for a sail up the coast. But, he says, it’s still warm and sunny February weather…don’t worry about him; he’ll be just fine.

*** Stephen Roach, Morgan Stanley’s increasingly lonely global recovery skeptic, wrote on Friday: "In the second half of 2003, the U.S. grew at a 6% annual rate, Japan surged by 4.75%, and the Chinese economy turned in a 9.7% annualized gain. Collectively, these countries – which account for 41% of world GDP on a purchasing-power-parity basis – grew at an estimated 6.9% annual rate in the second half of 2003.

"As impressive as this burst of global growth has been, I maintain the rather lonely view that the jury is still out on the key question of sustainability. My reservations go back to the same two growth sparks – the American consumer and the Chinese producer. For a jobless and income-short recovery, the recent performance of the American consumer is even more astonishing.

"With the internal dynamics of the U.S. business cycle failing to deliver fundamental support to household purchasing power, the consumer has instead drawn support from more ‘toxic’ sources of growth – namely, open-ended government deficit spending, ever-rising debt, reduced saving, and the ongoing extraction of incremental purchasing power from overvalued assets such as homes. If job creation and income generation continue to lag – a distinct possibility, in my view – the sustainability of consumption will require increasing support from these same toxic sources of growth. And the outcome in that case will lead to ever-mounting imbalances – not just higher debt and lower saving but the ever-increasing twin deficits of the government and the balance of payments.

"This, in my view, is not a recipe for sustainable vigor in the U.S. recovery."

*** "One way to describe the willingness of Asian countries to buy U.S. bonds and keep their currencies weak," writes the Strategic Insider, Dan Denning, "is to call it what it is: vendor financing. Loaning money to your customers so they can afford to buy your products is a risky proposition, however. So is keeping your currency cheap in order to make your exports competitive, so Americans can buy them on debt.

"Sooner or later," Mr. Denning continues, "you either lend more money to your cash-strapped customer, or he stops buying because he doesn’t have the resources himself. As a vendor, the sooner you realize this, the sooner you’ll stop lending. It looks like the Japanese are beginning to realize that selling to Americans on credit has its own kind of economic blowback. Bankruptcy for the customer, non-performing loans for the vendor. Wasted capital for everyone."

The Daily Reckoning