The Daily Reckoning PRESENTS: Today marks the beginning of our ‘Farewell to Greenspan’ week, where we will explore everything Greenspan: his life, his policies, his infamous "Greenspan speak." But before we delve into that, we’ll allow him to say a few final words. Take it away, Maestro.
I, Alan Aurifericus Nefarious Greenspan, Chairman of the Federal Reserve Bank, holder of the Medal of Freedom, Knight of the British Empire, member of the French Legion of Honor, known to my peers as the "greatest central banker who ever lived," (I will not trouble you with all my titles. I will not mention, for example, that I was the winner of the prestigious Enron Prize for distinguished public service, awarded on November 1, 2001, just days after Enron began to collapse in a heap of corruption charges) am about to give you the strange history of my later years.
For I will dispense with childhood…even with young adulthood, and those dreary sessions with that terminally dreary woman, Ayn Rand, who couldn’t write a compelling sentence if her life depended on it. I’ll also dispense with my own dreary years at the Council of Economic Advisors, and pass directly to the time I spent as the most powerful man in the world. For here are my real titles:Emperor of the world’s most powerful money, despot of the world’s largest and most dynamic economy, and architect of the most audacious financial system this sorry globe has ever seen.
Yes, I, Alan Greenspan, ruled the financial world. But who ruled Alan Greenspan?Ah…I will come to that, and tell you how, while presiding over the biggest boom ever I became caught in what I may call the "golden predicament" from which I have never since become disentangled.
This is not by any means the first thing I have written. I have written much over the years. But it was all written for a purpose, which only a few were able to discern. Most readers foolishly saw the cluttered mind of a dithering economist or the clumsy, stuttering pen of a professional bureaucrat. Many listening to my wandering speeches and twisting sentences thought that English was not my first language. They thought they detected a faint accent, like that of Henry Kissinger or Michael Caine. They mocked me as "incomprehensible" or "indecipherable." They watched what they thought was an obsequious bureaucrat squirm. They had no idea what I was really up to and what I can only now reveal.
But they admired me, too. I knew it. Because they saw in me a kind of genius…a Bernoulli of banking…a Newton of numbers…a Leibnitz of lucre…a Copernicus of currency. My mind worked at such a high pitch, they believed, that my thoughts were inaudible to most humans. They counted on me to keep the great empire’s economy trundling forward. Little (actually nothing) did they know of my real thoughts and designs.
But now, all has changed. Now, I can write clearly and speak the truth. For now I am leaving my post. There is no further need for me to dissemble; no further need for me to pretend to kow-tow before Congressional committees; no further need to hide the real facts from my employers and the American people. Now, I swear by the gods, what I write comes from my own hand, and not from some overpaid, anonymous flack.
Some are born in crisis, some create crisis, and others have crisis thrust upon them.
Let me begin at the beginning. Scarcely had I settled into to the big chair at the Fed when a crisis was thrust upon me. And it is true, I responded in the conventional manner.There is no manual for central bankers, but there is a code of behavior. Faced with a financial crisis of any sort, a central banker’s first duty is to run to the monetary valves and open them. This I did in 1987. I was new to the job and probably didn’t open them enough.The U.S. economy lagged its rivals in Europe for several years. My old boss, George Bush, the elder, lost his bid for re-election in 1992 and blamed it on me. I resolved never to make that mistake again. Faced with a slew of challenges, shocks, uncertainties, crises and elections…ever thereafter, I made sure that every valve, throttle, level, switch and sluice gate was wide open.
But it was on December 5, 1996, that I had my first epiphany. That was the year that I made my celebrated remark about stock prices. I wondered aloud if they did not reflect a kind of "irrational exuberance." In truth, whether they did or did not, I do not know. But what I came to realize was this:1) People, especially my employers, actually wanted prices that were irrationally exuberant. And 2) they could become far more irrationally exuberant if we put our minds to it.
I was 70 years old at the time. I had weaseled (why not be honest about it?) my way to the top post by knowing the right people and by making myself generally agreeable, and helpful, and by not saying anything anyone could disagree with. That was the original reason for what the press called "Greenspan speak." My private thoughts remained mine alone. All the public and the politicians got was gobbledygook, but for good reason.
They would not have wanted to hear what I really thought. So, I did not tell them. For I knew well and good what generally happened when politicians and central bankers got their hands on soft money and a compliant central banker. I was not born yesterday. They use their control of the money to cheat people. It is as simple as that. (I explained this early on in my career; fortunately, no one bothered to read what I wrote. Otherwise, I never would have gotten the job.) If central banking were an honest métier, there would be no reason to have it at all.Private banks could do the job better.
But people are ready to believe anything. Somehow, they think that a collection of rich financiers and power-mad politicians got together to create and run a central bank for the benefit of the people! Well, I’ve got news: it doesn’t work that way. Money is only valuable when it is rare. It is like stock in a company. The shareholder is happy to hold a few shares. But imagine how he would feel if the company issued a few million more shares. His own ownership of the valuable thing is diluted. He would be cheated.
Likewise, an honest banker cannot dilute his depositors’ money. He cannot create real money "out of thin air," as if he were issuing new share certificates, without cheating his clients. But that is exactly what central bankers do. They issue a certain amount of currency. Then, they issue more and more of it. So, the people who got it and saved it lose a little bit of the value each year. In effect, the value is lost by the savers holders and captured by the people who control the currency. It is really a very simple swindle. Who but an octogenarian Fed chief, on his way out the door, would have the courage to say so?
People today act as if they had invented money themselves. But money, central banking, and currency debasing have been around a long time. In 64 A.D., Nero decreed that the number of aureus coins minted from a pound of gold would increase from 41 to 45 (each coin would be about 10% less valuable). The silver denarius, meanwhile, lost 99.98% in the five centuries before the sacking of Rome. Paper sheds value even faster. The dollar has lost 95% of its purchasing power since the Fed was set up to protect it in 1913.
A successful central banker, in the age of compliant paper money, is one who is able to control the rate of ruin so that the rubes don’t catch on. A little bit of inflation, they believe, is actually healthy. Haven’t the economists told them so? Issuing a little bit more money each year makes people feel richer…so they spend more; they hire more people; they build more houses. Everybody is happy. Everyone feels richer. What an elegant fraud! It’s almost a perfect crime, because no one objects as long as it is done right. (My replacement at the Fed, Ben Bernanke, specializes in controlling the rate at which central bankers can steal from dollar holders without getting caught. He says that if necessary, he’ll "drop money from helicopters" should the currency fail to lose value fast enough.I predict that there will be a lot of people who will want to drop him from a helicopter…for reasons I will explain here.)
I return to my narrative. After I made my remark about "irrational exuberance," I was called into Congress. The politicians who confronted me were the usual oafs and know-nothings. They made it clear that if I wanted to hold onto my job, I would have to stop worrying whether asset prices were too high; instead, I would need to do all I could to goose them up! It was on that very day, I recall it well, that what I had previously seen only in foggy theory came out into the clear, bright daylight of applied central banking.
No one wants honest money. No one. The politicians, bankers, investors, voters, and householders – anyone with a voice in the matter wants "easy" money. It is just too delicious to resist. (I wondered what kind of a central banker would stand against them; he would need a backbone of titanium like Paul Volcker, and a head as thick and hard as a vault.) Debtors want a little inflation to lighten their burdens and put a wind to their backs. Creditors want inflation to swell their asset values. Politicians want to be re-elected. Businessmen want customers with money to throw around. Is there anyone who doesn’t appreciate a little inflation?
And yet, of course, I always knew the answer. Easy money only works by defrauding people into thinking they have more money than they really do. Easy come; easy go.They get it; they spend it. Before you know it, you have a boom. But people soon adjust their expectations. Prices rise to catch up to new money. Debt levels increase, and with them come heavier debt service costs. The magic fades. What can a central banker do?He can do the right thing. He can "take the punch bowl away," as my predecessors used to say. But this is where the trouble begins. Take away the punch bowl, and they begin punching you! I recall they burned Paul Volcker in effigy on the Capital steps when he did it. They would have burned him alive if they could have gotten their hands on him.
Why should I, Greenspan, suffer such a fate? No, it was not for me. This was the "golden predicament" I faced. Yes, I knew well that the nation would be better off if the punch bowl were removed, but I knew that I would be removed too, if I did it. And I knew, also, that it would be just a matter of time until the pressure for easy money would overwhelm any resistance a Fed chairman could put up. No pure paper money system has ever lasted.People can never resist the temptation to make the money easier and easier…until it is so wobbly and woozy it falls on its face. It’s better that it falls sooner rather than later. It’s better that the lesson is taught now, rather than 10 years from now. It’s better that the lean times come on the next man’s watch, not on mine! That’s what I owe to old Ayn; she taught me who rules Greenspan – Greenspan! Ayn taught me the number one rule: Look out for Numero Uno.
I remember it so clearly.I was sitting in a House committee hearing room. My tormentors kept asking questions. I kept giving the kind of answers for which I later became famous…answers that didn’t say anything. And I thought to myself: if these lardheads want easy money, I’ll give them easy money. I’ll give them the easiest money the planet has ever seen! I’ll give it to them good and hard!
And so, I did.
Since I joined the Fed, outstanding home-mortgage debt has jumped from $1.8 trillion to $8.2 trillion. Total consumer debt went from $2.7 trillion to $11 trillion. Household debt has quadrupled.
And government debt, too, exploded. The feds owed less than $2 trillion in the second Reagan administration, a figure that had been almost constant for the previous 40 years.But under my direction, the red ink has overflowed like the Nile in flood – to over $7 trillion.
During the two terms of George W. Bush alone, the feds have borrowed more money from foreign governments and banks than all other American administrations put together, from 1776 to 2000. And more debt will be added in the eight Bush years than in the previous two hundred. The trade deficit, too, more than tripled since I’ve been at the Fed, from 150.7 to 756.8 billion, and will reach $830 billion in 2006. When I came to power, the United States was still a creditor. Now, it is a debtor, with more than $11 trillion worth of U.S. assets in foreign hands, a more than 500% increase since 1987.
Who can argue with such a record? Who can compete with it? Who would want to?
But that is the smooth, perverse pleasure a cynical old man takes in his achievements. I have practically ruined the nation, and I know it. If you distributed the cost of the federal government’s programs, promises, and pledges to the voters, along with the nation’s private debt, the typical household, and the nation itself, would be broke. And yet, almost everywhere I go, I am revered as a maestro…saluted as if I were a war hero. It is as if I had won World War II all by myself. The same numbskulls that wanted easy money 10 years ago, now praise me for causing what they call "The Great Moderation," as if there were anything moderate about America’s borrowing binge.
Others say that my real legacy is that I finally "made central banking work." Yes, I made it work…just like it’s supposed to work, giving the people enough rope so they could hang themselves. That’s what they’ve done. Now, they dangle from a long rope of mortgages, deficits and credit cards.
And I am delighted. Soon, people will be able to see how central banking really works.And poor Ben Bernanke will get the blame for it. He and his stupid helicopters…he almost deserves it.
The Daily Reckoning
January 20, 2006
Editor’s Note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of The Wall Street Journal best seller Financial Reckoning Day: Surviving the Soft Depression of the 21st Century (John Wiley & Sons).
In Bonner and Wiggin’s follow-up book, Empire of Debt: The Rise of an Epic Financial Crisis , they wield their sardonic brand of humor to expose the nation for what it really is – an empire built on delusions. Daily Reckoning readers can buy their copy of Empire of Debt at a discount.
England is ahead of us. Property prices rose first, faster and further. Now the boom seems to be over.
"Houses on the edge," is this week’s MoneyWeek cover story. Houses are about to fall off a cliff, the feature story tells us. Debt service costs have risen to their limit, nearly 22% of after-tax income, says James Ferguson. The last time that level was reached, in 1990, marked the beginning of a bust in the housing industry.
Few people seem aware of it. Instead, there is an air of calm, complacency, and self-assurance in London. No bust has come. Instead, the market merely loses air, like a slow leak in a bicycle tire, or a broken music box winding down.
It is like the beginning of World War II, says Ferguson:
"For the 8 months after the outbreak of WWII, from September 1939 to April 1940, during the so-called ‘phony war,’ so little happened that children [who had been] evacuated to the country were returned to London. Some probably argued at the time that it was all going to blow over without incident." But then, the Panzers raced across Belgium, and bombs started raining down on London.
"Just because the market has defied expectations for so long," adds Scheherazade Daneshkhu in the Financial Times, "does not necessarily mean that the danger is now past."
Over on the other side of the Atlantic, the market has defied no one’s expectations.People thought prices would go up; they went up. As near as we can tell, they are still going up in some areas…and going nowhere in others.
The typical house in Santa Clarita, California, rose to $600,000 in December, up 15% from a year ago. "We are just not making anymore land," said an especially clever real estate agent. They may not be making any more land, but they are making more houses at a near-record clip – almost as many new ones were slapped together in 2005 as were put up in the all-time record year, 1972.
But what’s this? "Fed sees a housing slowdown," reports the Associated Press. And in December, the rate of new-house starts went down more than expected. If the new rate holds, about 200,000 fewer new houses will blemish the landscape than the year before.
Builders seem to be picking up their tools and going home.
Our guess is that the typical buyer is under pressure, though he makes no more money, his energy bills are rising; his health care is more expensive (if he can still afford it at all); the credit card companies are putting up minimum payment levels; and worst of all, he already has too much debt.
More evidence that the lower- and middle-income levels are feeling pinched – from yesterday’s news:nationwide, the foreclosure rate is running 13% ahead of last year.
And, in an interesting little sign of the times: metal theft is rocketing. Copper and aluminum prices are the highest they’ve been in 17 years. We don’t know if the thieves are desperate for cash, or just looking for an opportunity for modern art at a discount.
Here in London, a huge bronze statue – supposedly an important work of art, worth millions – was hauled away by thieves. And in America, empty houses are being ransacked for aluminum siding, gutters and downspouts…as well as copper wires and pipes. "Everybody’s doing it," according to a policeman in Springfield, Ohio.
Americans, along with the British, seem to have reached a limit. It does not necessarily show up in the averages; if half the nation is getting richer and the other half getting poorer, the average will remain steady. Still, there is bound to be trouble sooner or later.More and more people are having a hard time keeping up.
For the moment, America and Britain enjoy a phony prosperity – a financial peace paid for with debt. But the danger is not past; it grows daily.
More news from The Rude Awakening…
Bill Bonner, back in London with more of other things…
*** Gold, gold, gold…Zut! Gold shot up $14.50 yesterday, ending the one-day correction we thought we saw. It goes up too far, too fast for us. We can’t get in.
*** Meanwhile, we saw an article in Le Monde in which the Bank of France was congratulating itself. "Our finances are better than they’ve been in a long time," say the bankers. Why? Because they have more money. Where did they get the money?They sold off gold in 2004 and 2005!
Oh, these poor dumbbells. France and Britain have been selling off their nation’s gold reserves – while the price of the metal rises. And for what? Paper money. They are going to feel like idiots. Or, at least they should.
The United States still has its gold, or claims to have it – 261.8 million ounces.Let’s see, at $500 an ounce, that’s worth…could this be right? …only $130 billion! Did we do the math right? If so, the entire gold reserves of the United States of America is less than about a third of its annual budget deficit…and less than a fifth of this year’s trade deficit. Or, to look at it another way, at the current rate, the United States is creating more new paper money every two months than all the gold it has in Ft. Knox.
[Ed. Note: Wanna get in on the gold rush, but aren’t exactly sure how?
You’re not alone, many newcomers feel daunted and confused by the task of diversifying their portfolio with the yellow metal. Luckily, our friends at EverBank have an easy and sensible way to do so – the 5-Year MarketSafe Gold Bullion CD – open to DR readers until January 24.
*** "Isn’t this amazing?" writes reader Frank Sobkowiak, from "a mountain top in beautiful corner of North Eastern Pennsylvania." He forwarded this e-mail to us in response to our renewed interest in dismantling the IRS.
"This is a list of the various ways in which citizens of the U S of A are taxed:
Accounts Receivable Tax
Building Permit Tax
Capital Gains Tax
CDL license Tax
Corporate Income Tax
Court Fines (indirect taxes)
Dog License Tax
Federal Income Tax
Federal Unemployment Tax (FUTA)
Fishing License Tax
Food License Tax
Fuel permit tax
Gasoline Tax (42 cents per gallon)
Hunting License Tax
Inheritance Tax Interest expense (tax on the money)
Inventory tax IRS Interest Charges (tax on top of tax)
IRS Penalties (tax on top of tax)
Local Income Tax
Marriage License Tax
Real Estate Tax
Septic Permit Tax
Service Charge Taxes
Social Security Tax
Road Usage Taxes (Truckers)
Recreational Vehicle Tax
Road Toll Booth Taxes
State Income Tax
State Unemployment Tax (SUTA)
Telephone federal excise tax
Telephone federal universal service fee tax
Telephone federal, state andlocal surcharge taxes
Telephone minimum usage surcharge tax
Telephone recurring and non-recurring charges tax
Telephone state and local tax
Telephone usage charge tax
Toll Bridge Taxes
Toll Tunnel Taxes
Traffic Fines (indirect taxation)
Trailer Registration Tax
Vehicle License Registration Tax
Vehicle Sales Tax
Watercraft Registration Tax
Well Permit Tax
Workers Compensation Tax
"COMMENTS:Not one of these taxes existed 100 years ago and our nation was the most prosperous in the world,had absolutely no national debt, had the largest middle class in the world andonly one parent had to work to support the family.
"What the hell happened?"
*** Warren Buffett, the Oracle of Omaha, spoke to a group in Reno.
"Right now, the rest of the world owns $3 trillion more of us than we own of them," Mr. Buffett told students at the University of Nevada, Reno. "In my view, it will create political turmoil at some point…Pretty soon, I think there will be a big adjustment."
The U.S. trade deficit for the first 11 months of 2005 totaled $661.8 billion, up from the annual record of $617.6 billion set in 2004. Include December figures and the total will top $700 billion.
"That’s $2 billion a day," said Buffett. "We are like a super rich family that owns a farm the size of Texas. You sell off a little bit of the farm and you don’t see it."
Fifteen years ago, the United States had no trade deficit with China, he said. "Now it’s $200 billion. If we don’t change the course, the rest of the world could own $15 trillion of us. That’s pretty substantial. That’s equal to the value of all American stock."
*** Around two million. This round number was given to us by a friend. We had heard that the old family farm in Maryland had been sold. That was the amount it brought.
It was in this farmhouse, on the banks of the Patuxent River, where our great-great grandfather had gone mad…and our grandmother had lived as a child, raised by the madman after her mother had died. The house had been built by an even more remote ancestor, in the 18th century, following the arrival of the family patriarch, in chains, from England.
Old Seamus MacKenzie had been on the wrong side at the Battle of Culloden. He was captured by the cruel English (they were no more cruel than the Scots, but that was how the family used to refer to them…we couldn’t refer to the English without the modifier ‘cruel,’ nor could we pronounce the word ‘Yankee’ without the adjective ‘damned’ in front of if) and sold into indentured servitude on Kent Island, in the colony of Maryland.
Later, the family built the house – probably with slave labor – out of bricks fired right there; it was a gentle and charming example of the architecture of the period, surrounded by tobacco and cornfields on the bottom land. The corn was used to feed animals and slaves. But the tobacco was packed into "hogsheads" and rolled down to the river, where it was loaded onto skiffs and then onto ships for passage back to England. There, it gave Old Seamus’s enemies lung cancer.
Families break down…and then revive. After our great-great grandfather went mad, the farm passed out of the family. Our own grandfather considered buying it back in 1927.But he thought the price asked at the time – $25,000 – a form of extortion. Besides, he went broke in the Great Depression and was unable to buy anything. And so the house went to others. Until recently, it was lived in by a former colonel in the U.S. marines, and his family, until that family, too, wanted to get rid of it. Now, it is in the hands of developers. Soon, the tobacco fields will be filled with houses, built of the latest synthetic materials, containing the latest conveniences, adorned with the latest granite countertops, and sold with nothing down, interest-only mortgages.
Oh, Lord…we thank thee for this progress you have bestowed upon us.