What Hath Alan Wrought?
In this sneak peek into his latest book, Empire of Debt, Bill Bonner examines "the most famous bureaucrat since Pontius Pilate."
For years, we have been working on Greenspan’s obituary. As far as we know, the man is still in excellent health. We do not look forward to the event; we just don’t want to be caught off guard. Maybe we could even rush out a quickie biography, explaining to the masses the meaning of Mr. Greenspan’s life and work.
We see something in Alan Greenspan’s career – his comportment, his betrayal of his old ideas, his pact with the Devil in Washington, and his attempt to hold off nature’s revenge at least until he leaves the Fed – that is both entertaining and educational. It smacks of Greek tragedy without the boring monologues or bloody intrigues. Even the language used is Greek to most people. Though the Fed chairman speaks English, his words often need translation and historical annotation. Rarely does the maestro make a statement that is comprehensible to the ordinary mortal. So much the better, we guess. If the average fellow really knew what was being said, he would be alarmed. And we have no illusions. Whoever attempts to explain it to him will get no thanks; he might as well tell his teenage daughter what is in her hotdog.
Alan Greenspan is the most famous bureaucrat since Pontius Pilate. Like Pilate, he hesitated, but ultimately gave the mob what it wanted. Not blood, but bubbles. Greenspan’s role in the empire is more than that of a Consul or a Proconsul. He is the Prefect. He is the quartermaster who makes sure empire has the financial resources it needs to ruin itself.
Greenspan’s Bubble: An Error Worse Than Crime
We don’t know how heaven will judge him. According to the central bankers’ code, Greenspan has committed neither sin nor crime. He is seen as a paragon of virtue, not vice. Yet, as Talleyrand once remarked to Napoleon, "Sire, worse than a crime, you have committed an error."
When the winds of imperial debt-finance blew, Mr. Volcker planted his feet and stuck out his jaw. His successor, Mr. Greenspan, tumbled over. The Fed chairman’s error was to offer more credit on easier terms to people who already had too much. During Greenspan’s reign at the Fed, more new money and credit has been created than under all the rest of the Fed chiefs combined. Consumer debt rose to its highest level in history, the ratio of debt to income also rose higher than it has ever been. The effect was to inspire bubbles all over the world and to transform the United States from the world’s largest creditor to its biggest debtor.
What the Greenspan Fed had accomplished was to put off a natural, cyclical correction and transmogrify an entire economy into a monstrous economic bubble. A bubble in stock prices may do little real economic damage. Eventually, the bubble pops and the phony money people thought they had disappears like a puff of marijuana smoke. There are winners and losers. But in the end, the economy is about where it began – unharmed and unhelped. The households are still there and still spending money as they did before. Only those who leveraged themselves too highly in the bubble years are in any trouble.
But in Greenspan’s bubble economy, something awful happened. Householders were lured to take out the equity in their homes. They believed that the bubble in real estate priced created wealth that they could spend. Many did not hesitate. Mortgage debt ballooned in the early years of the twenty-first century – from about $6 trillion in 1999 to nearly $9 trillion at the end of 2004 increasing the average household’s debt by $30,000. Americans still lived in more or less the same houses. But they owed far more on them.
Greenspan’s Bubble: Telling the Truth (by Mistake)
We had given up all hope of ever getting an honest word out of the Fed chairman on this subject when, in early February 2005, the maestro slipped up. He gave the aforementioned speech in Scotland entitled "Current Account." Jet-lagged, his defenses down, the poor man seems to have committed truth.
"The growth of home mortgage debt has been the major contributor to the decline in the personal saving rate in the United States from almost six percent in 1993 to its current level of one percent," he admitted. Thus, did he bring up the subject. Then, he began a confession: The rapid growth in home mortgage debt over the past five years has been "driven largely by equity extraction," said the man most responsible for it. By this time, listeners were beginning to take notes. And pretty soon, even the dullest economist in the room was adding two plus two. Mr. Greenspan lowered lending rates far below where a free market in credit would have put them. With little to be gained by putting money in savings accounts and a lot to be gained by borrowing, households did what you would expect; they ceased saving and began borrowing. What did they borrow against? The rising value of their homes – "extracting equity," to use Mr. Greenspan’s jargon. The Fed chairman had misled them into believing that the increases in house prices were the same as new, disposable wealth.
But the world’s most famous and most revered economist didn’t stop there. He must have had the audience on the edge of its chairs. He confessed not only to having done the thing but also to having his wits about him when he did it. This was no accident. No negligence. This was intentional.
"Approximately half of equity extraction shows up in additional household expenditures, reducing savings commensurately and thereby presumably contributing to the current account deficit. . . . The fall in U.S. interest rates since the early 1980s has supported home price increases," continued America’s answer to Adam Smith.
"Lacking in job creation and real wage growth," explained Stephen Roach, "private sector real wage and salary disbursements have increased a mere 4 percent over the first 37 months of this recovery – fully ten percentage points short of the average gains of more than 14 percent that occurred over the five preceding cyclical upturns. Yet consumers didn’t flinch in the face of what in the past would have been a major impediment to spending. Spurred on by home equity extraction and Bush administration tax cuts, income-short households pushed the consumption share of U.S. GDP up to a record 71.1 percent in early 2003 (and still 70.7 percent in 4Q04) – an unprecedented breakout from the 67 percent norm that had prevailed over the 1975 to 2000 period . . ."
Greenspan’s Bubble: Central Planning
Since the fall of the Berlin Wall, nearly everyone seems to agree that central planning is bad for an economy. The central planners, as any Economics 101 student can tell you, do a poorer job of delivering the goods than the "invisible hand" of Mr. Market.
Joseph Schumpeter sharpened the point: "Our analysis leads us to believe that recovery is only sound if it does come from itself. For any revival which is merely due to artificial stimulus leaves part of the work of depression undone and adds, to an undigested remnant of maladjustments, new maladjustments of its own."
The U.S. economy faced a major recession in 2001 and had a minor one. The newborn slump was strangled in its crib by of the most central planners who ever lived. Alan Greenspan cut lending rates. George W. Bush boosted spending. The resultant shock of renewed, ersatz demand not only postponed the recession, it pushed consumers, investors, and businesspeople to make even more egregious errors. Investors bought stock with low earnings yields. Consumers went further into debt. Government liabilities rose. The trade deficit grew larger. On the other side of the globe, foreign businessmen worked overtime to meet the phony new demand; China has enjoyed a capital spending boom as excessive as any the world has ever seen.
Our own Fed chairman, guardian of the nation’s money, custodian of its economy, night watchman of its wealth: How could he do such a thing? He turned a financial bubble into an economic bubble. Not only were the prices of financial assets ballooned to excess, so were the prices of houses and the debts of the average household. And the economy itself was transformed. By 2005, the housing bubble was no longer an investment phenomenon, but an economic one affecting almost everybody. In some areas, half of all new jobs were related to housing. People built houses; people financed houses; people remodeled houses; people sold houses to each other; people put in so many granite countertops that whole mountains had been flattened to quarry the stuff.
The Daily Reckoning
November 23, 2005 — London, England
P.S. Addison and I recently sent the maestro himself – along with every member of Congress and the Senate – a copy of our new book, Empire of Debt. For convenience sake, we included both the Open Letter To Congress we sent along with the book and contact information for every Senator and Representative on the Daily Reckoning website. You’ll find phone, e-mail or physical address information… whichever method suits your style best.
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).
"Economy goes forward, but leaves many behind," says USA Today.
But it is a staged economy, not the real thing. The leading actors – Bernanke, Greenspan, et al. – are supported by a cast of thousands, including clowns, freaks, and financial jugglers. Almost all the lines are either fraudulent or facetious. "No child left behind!" "A glut of savings!" "Inflation is no problem." But who gets the jokes? Instead, most of the rubes in the audience sit on the edge of their seats, convinced that they are watching a heroic epic rather than a low farce.
The trouble is that the spectators are beginning to squirm in their seats. Real wages went down in 2004 by 2.3%. Estimates have them going down this year, too.
On stage, the comedians tell us that there is no inflation worth mentioning. But the crowd is not so sure. They’ve noticed that the things they must buy are getting more expensive. Gasoline is $2 a gallon. Health care is at least 10% higher than a year ago. And where in the nation can you buy a house for less than twice what you paid five years ago?
Many of the theatregoers have noticed something else, to good jobs are hard to find. G.M. is cutting 30,000 employees. Delphi is knocking 24,000 off the payroll. Ford is laying off workers, too – 3,000 of them.
On stage, we’re told not to worry about it. "America’s dynamic economy is the greatest job creation machine ever built," says one actor, impersonating an economist.
But if so many new jobs were being created, why are people earning less money?
Globalization is a great thing; we do not doubt it. But its virtue is a curse to most of America’s lumpen working stiffs. Here in London, we see how quickly labor rates adjust to opportunity. After weeks of neglect, our little maisonette needed a cleaning. So, we called Estella, recently of Columbia, now of Brixton. In Paris, the housekeeping is done by people from the East – from Poland or Bulgaria, working in a gray area of pan-European labor regulation. As near as we can tell, here in London, the floors are swept by a vast underground of men and women from Latin America, who are paid in cash, no questions asked.
This past Saturday, Estella labored for all of five hours and demanded 45 pounds in payment – about $85. Having come from Latin America recently, this seemed provocatively expensive; it was as much as she might earn in an entire week in her home country. But in London, we have yet to encounter a price for anything that seemed reasonable. A pity we couldn’t outsource the cleaning work.
As time and technology advance, however, the world is discovering more and more things that can be outsourced. Automobile manufacturing, for example…and call centers…and legal work (a friend is opening an office in Bangalore to do American legal firms’ back-office work)…and many, many other things that used to be done in America.
As more and more of this work finds lower-cost labor to its liking, what does that leave at home? We can clean each other’s houses! Or, we can sell each other things that are made in China!
Emblematic of the shift of the American economy from production to consumption is the ascension of Wal-Mart to the throne of national commerce. Wal-Mart now wears the crown that used to top G.M.’s head. Wal-Mart also now notices what Henry Ford noticed nearly a century ag the more money you pay your workers, the more they can buy from you. Ford hiked wages in his factories to the un-heard level of $5 a day. Now, Wal-Mart supports an increase in the minimum wage to well over $5 an hour. The increase would cost the company millions, but it would also force its competitors to pay more, too. The move would put more money in low-wage worker’s pockets (which they could empty, no doubt, at Wal-Mart).
But there is a big difference between raising wages in industry, and raising them in retail; there’s an even bigger difference between willingly increasing your own costs, and forcing everyone to do so (through minimum wage laws). It is the difference between creating wealth, and using it up. It is the difference between an economy on the way up, and one trying to dig in its heels on the way down. It is the difference between an honest man on a factory floor, and a windy mountebank on a gilded stage.
More news from our team at The Rude Awakening…
Bill Bonner and Addison Wiggin, reporting from opposite sides of the Atlantic:
"Quack economists at the Bureau of Labor Statistics do to numbers what guards at Guantanamo did to prisoners. They rough them up so badly, they are ready to say anything…"
Bill Bonner, back in London with more opinions…
*** Gold, Gold, Gold!
Again, the yellow metal rose yesterday. It is now so far above our $450 buying target that we can barely see it.
Our friend Steve Sjuggerud wrote yesterday to tell us what idiots we are. He begins by quoting us, "Right now, we rather regret it. Because gold has, so far, been unwilling to correct to our current buying target: $450. This leaves us to wonder whether we should buy at the market price – whatever it is – or continue waiting."
Then, he offers advice: Bill…stop wondering. Buy. Gold is cheap.
"Adjusted for inflation, gold today is at the same price it was 30 years ago.
Gold peaked at above $1,400 an ounce in 1980, adjusted for inflation. So we’re two-thirds below the price 25 years ago.
"Bill, you’re quibbling over 6% here. When gold’s at $500…or $600…you’ll wish you hadn’t.
"Look, there isn’t much value to be found around the world right now. Stocks aren’t particularly cheap, real estate is getting ridiculous in most places, and you sure won’t get rich in bonds. When things are like this, gold looks better and better as a safe store of wealth.
"We’re in a bull market in gold. It’s a secular bull market, which is just a fancy way of saying the general uptrend will stay in place for many years. And we’re only near the beginning."
*** Resource Trader Alert’s Kevin Kerr chimes in:
"The market for raw resources is raging. Because of China. Because of India. Because of surging oil demand and plunging energy supplies and the crushing effect of hurricanes on offshore U.S. oil.
"Huge events can create huge tension in commodity prices. Hurricane Katrina caused 17 different commodities to spike…and pushed the Commodities Research Bureau index to its highest level since November 1980.
"Oil prices shot up 70% just after the storm. Over 27% of America’s coffee beans got stuck in New Orleans ports. Over 750,000 bags of coffee were destroyed, sending coffee prices up 10%. Sugar cane crops were destroyed. Over 1 million feet of stored wood were destroyed, sending lumber prices up 7%. Nearly half the zinc stockpile for the London Metals Exchange was destroyed in New Orleans warehouses."
Jim Rogers, who made his own fortune in the resource market and who teamed up with George Soros to launch the hugely successful Quantum Fund even says, "People who have always ignored and scoffed at commodities can no longer afford to do so."