Issue 413 • Thursday, September 17, 2009
Former Federal Reserve Chairman Alan Greenspan (pictured left) said he's worried that lawmakers will hamper U.S. central bank efforts to rein in its monetary stimulus, and that inflation might "swamp" the bond market. "It's the politics in the United States that worries me, whether the Congress will basically feel comfortable" with the Fed withdrawing its stimulus, Greenspan said in a broadcast to Tokyo clients of Deutsche Bank Securities Inc. today. He later said that "if inflation rears its head, it will swamp long-term markets," referring to bonds. With U.S. unemployment running at a quarter-century high, the Fed may face resistance from lawmakers as it tries to promote price stability by raising its benchmark interest rate from near zero. The jobless rate reached 9.7 percent last month and employers have cut almost 7 million jobs, the biggest drop in any recession since World War II. The former Fed chief, who counts Deutsche Bank among his clients, also warned that the U.S. must rein in its "very dangerous" level of debt, citing the threat of increased issuance of Treasuries undermining the dollar. - Bloomberg
Dominant Social Theme: The sage is concerned.
Free-Market Analysis: This is the point that we, along with many others in the hard-money community, have made strongly in the recent past - that the Fed will not be able to finesse the looming monetary disaster stemming from its pump priming. Pump priming in the trillions. Sums that stagger the mind.
But unlike Alan Greenspan, we don't believe that it is the politicians that will put a wrench in the works. Greenspan was always political, but he has reached a fever pitch of late. For a while it looked as if the current crop of Fed leaders had decided the best way to deflect blame was to point the finger at Greenspan, though we're not sure Greenspan was ever on board with this tactic. Now it looks as if Greenspan has been recruited to help the Fed blame Congress.
It is not Congress' fault, in the sense that the Fed is a flawed mechanism and its strategies are hapless. It has printed TRILLIONS in the past year or so, along with other central banks, and the idea that the Fed will be able to extract those funds from the banks and the market appropriately is questionable in the extreme. No, it is in actual reality for anyone with more than a rudimentary understanding of natural law an impossible task. Back in the 1970s, price inflation growled and Paul Volcker raised rates to 20 percent in America, basically murdering the economy in order to drain price inflation. But the problem is worse today by an unimaginable magnitude. The amount of paper and electronic money that has been printed is enough to swamp the West.
Central banks CANNOT time the removal of this money. If they do, it will be like winning the big lottery every day for a year or two. There are no reliable indicators that tell central bankers when to remove money. The market has been effectively removed, on purpose, and thus the bankers only have their "gut" when it comes to deciding how much to tighten and the amount of paper they wish to "sterilize."
Yes, of course they have fancy terms, but no central banker in the world has figured out how to create a forward-looking evaluation. They can only look backward, and past events are no guarantee of the future. It is like flying blind. They have printed all this money but if they remove it too soon, the West will lapse back into a recession or depression. Too late and price inflation turns Europe and America into a vast Zimbabwe. Here's some more from the article:
Greenspan, speaking via videoconference from Washington, indicated that successor Ben S. Bernanke and his fellow Fed policy makers have until next year before inflation will present a danger.
"We've got worldwide disinflation in train and it will continue for a short while," he said. "Our model says that by the early months of next year the rate of inflation will fall below 1 percent on an annual rate" before increasing. ...
Greenspan said one threat to Treasuries is the "very dangerous" level of U.S. national debt. "We've got to confront that issue immediately," he said. ...
Economists surveyed by Bloomberg News this month put the odds of a double-dip recession in the next 12 months at 25 percent, up from 20 percent in August. The economy will expand at a 2.9 percent annual rate in July through September, according to the median of 61 estimates in the survey taken Sept. 3 to Sept. 10. ...
Greenspan also weighed in on the debate over a regulator of risks across the financial system as Congress prepares the biggest overhaul of U.S. financial regulations since the 1930s, when the Fed was reorganized. The U.S. Treasury has proposed giving the Fed greater authority over the capital, liquidity, and risk-management standards of the largest financial firms.
Congressional leaders haven't supported that proposal and are considering giving broader authority to a council of regulators.
"I'm not in favor of a systemic-risk regulator because I don't think it's feasible," Greenspan said. "I think we have to recognize that there are limits to what we can do."
So Greenspan isn't in favor of a systemic risk regulator. Good on him. From our point of view he carries the Fed's water, however - by blaming Congress - and then makes a statement to confirm his own independence. Or maybe Greenspan is just being practical. The idea of the Fed gaining more power right now is fairly unfeasible. It is not in good odor, and in fact, it is likely that its reputation is on the verge of getting worse.
Why will it get worse? In the 1970s big Paul Volcker rode to America's rescue, or so it seemed if one went by media reports. But today the mainstream media has a good deal of trouble casting any Federal Reserve chairman as a rescuer. It is too well known that the Fed itself, along with other central banks, made the determinations that plunged the world into the current mess. It is the old switcheroo, but it is not working so well anymore. They continue to try. The playbook was written long ago, and bankers simply aren't that imaginative. Neither is the mainstream media. So one Fed chairman is praised for a miraculous economy. The next is praised for salvaging the economy from disaster.
Conclusion: Central banking is the biggest form of crony capitalism going on today. We've pointed out that the Iceland meltdown is systematically revealing the criminal dealings of one of the world's smallest central banks. Imagine what goes on in the largest. Greenspan can try to blame the upcoming monetary debacle on Congress but it won't wash in our opinion. Sure, Congress is responsible in some sense, since it could do away with the Federal Reserve. But in the larger sense, central banking itself is simply an unworkable concept. Only the market - a gold and silver based market-standard - can fully resuscitate the use and value of money in the West. Greenspan, who once wrote a good paper on the value of gold and money, has not gotten around to suggesting that yet.