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Nick Goodwin can''t figure out why IMF would sell gold in name of helping poor
9:50p ET Friday, February 11, 2005
Dear Friend of GATA and Gold:
Bill Bonner's new essay, "Greenspan's Whopper,"
appended here, provides much explanation of why
the U.S. government might have wanted to
suppress the gold price in recent years.
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
* * *
By Bill Bonner
DailyReckoning.com
Friday, February 11, 2005
"You are wasting your life and your talents writing about Alan
Greenspan every day," said an old friend.
For years, we have been working on Greenspan's obituary. As far as we
know, the man is still in excellent health. But we do not 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.
Perhaps our friend is right. But then again, we weren't doing
anything special before we started keeping up with the Fed chairman.
Besides, 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 of it is Greek to most people. Though
the Fed chairman speaks English, of course, 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 he was
talking about, 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.
We persevere anyway, more in mischief than in earnest.
The background: The U.S. economy faced a major recession in 2001 and
had a minor one. The necessary slump he held off by a dramatic resort
to central planning. The "invisible hand" is fine for lumber and
poultry prices. But at the short end of the market in debt, Alan
Greenspan's paw presses down, like a butcher's thumb on the meat
scale. The Fed quickly cut rates to head off the recession. Indeed,
never before had rates been cut so much, so fast. George W. Bush,
meanwhile, boosted spending. The resultant shock of renewed, ersatz
demand not only postponed the recession; it misled consumers,
investors and businessmen 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. Even on the other side of the globe, foreign businessmen
geared up to meet the phony new demand; China enjoyed a capital
spending boom as excessive as any the world has ever seen.
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...and the
companies still in business. Only those that leveraged themselves too
highly in the bubble years are in any trouble - and they probably
deserve to go out of business.
Even a property bubble may come and go with little effect on the
overall economy. House prices have been running up in France, for
example, at nearly the same rates as in America. But in France there
is very little mortgage refinancing...or "taking out" of equity. The
European Central Bank was repeatedly urged to lower rates in line
with those in America. It refused to budge. Without falling rates,
there was no "refi boom." Nor were European banks offering "home
equity lines of credit." Property could run up...and run down...and
the only people who cared would be the actual buyers or sellers, who
either cursed themselves or felt like geniuses, depending on their
luck.
But in Greenspan's bubble economy something remarkably 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 21st century - from
about $6 trillion in 1999 to nearly $9 trillion at the end of 2004.
Three trillion dollars may not seem like much to you, dear reader.
But it increased 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.
We had given up all hope of ever getting an honest word out of the
Fed chairman on this subject when, in early February, in the year of
our Lord 2005, the maestro slipped up. His speech was
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 6 percent in 1993 to its current level of 1 percent," he
admitted. Thus, he did bring the 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
put Mr. Greenspan at the scene of the crime. And pretty soon, even
the dullest economist in the room was adding 2 and 2. 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 own jargon. The Fed chairman had
misled them into believing that house prices increases 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," continues America's answer to Adam Smith.
People take money out of their homes. With this source of spending
power available to them, they see no reason to save. Instead, they
spend - often on foreign-made goods. With no savings available
domestically, America must look overseas for credit.
"The obvious and most important point is that rapid growth of U.S.
mortgage debt did not come out of thin air," comments Stephen
Roach. "It was, of course, a direct outgrowth of the Fed's hyper-
accommodation of the post-bubble era - namely, short-term interest
rates that have been negative in real terms for longer than at any
point since the 1970s."
.
The crime of which Mr. Greenspan is guilty is fraud. Putting interest
rates at an artificially low level, the Fed chairman intentionally
misled Americans. Were it not for the Fed's low rates and easy
lending policies, Americans wouldn't have thought themselves so rich.
Their houses wouldn't have gone up so much; they wouldn't have taken
out so much equity, because they wouldn't have had any equity to take
out. They would have had to spend less, which would have reduced the
U.S. current account deficit and diminished household indebtnedness.
"Lacking in job creation and real wage growth," explains
Roach, "private sector real wage and salary disbursements have
increased a mere 4% over the first 37 months of this recovery - fully
ten percentage points short of the average gains of more than 14%
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 US GDP up to a record 71.1% in early 2003 (and
still 70.7% in 4Q04) - an unprecedented breakout from the 67% norm
that had prevailed over the 1975 to 2000 period...At long last,
Chairman Greenspan owns up to the central role he and his colleagues
at the Federal Reserve have played in fostering these developments."
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? And yet he has done it. 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 so were the debts of the average household.
Where does it lead? The force of a correction is equal to the
deception that preceded it. Mr. Greenspan's whopper must be followed
by a whopper of a slump.
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