Last Man Standing

September 16, 2002

"Disgraceful."

We had asked Lord Rees-Mogg what he thought of Alan Greenspan's speech in Wyoming.

We hate to bring it up again, dear reader. You must be getting tired of hearing about it. But we can't resist. Here at the Daily Reckoning we are connoisseurs of absurdity. And here we have the man who - in an unusually lucid moment - described stock market investors as 'irrationally exuberant' in '96, claiming he could see nothing untoward 5 years later, even with the Dow 100% higher. He would not know a bubble if it blew up in his face, he seemed to say; he would have to wait and check in the mirror for bruise marks.

And even if he had been able to spot the bubble expanding, the Fed chairman continued, he would not have been able to find a pin or even to duck. The hundreds of economists at the Fed were powerless, "confronted with forces that none of us had personally experienced... aside from the recent experience of Japan, only history books and musty archives gave us clues to the appropriate stance for policy."

In today's letter, we revisit our Fed chief. We do so partly for the pure baroque mischief of it - like offering an immensely fat person a second helping of dessert - and partly because we have an investment insight that might be worth sharing.

You see, we have come to believe that Alan Greenspan is one of the last of the New Era heroes. As long as he still stands, we think, the delusion of greater wealth through greater borrowing stands too. Yesterday brought news that the current account deficit hit a new record in the second quarter - internationally, Americans continued to spend more than they earned - $130 billion more. And, as reported above, consumers stood in line to borrow even more money on their homes - even as mortgage delinquency rates hit new records.

But the last man standing - the only member of the 'committee to save the world' triumvirate still in office, the Caesar of central banking - cannot last much longer.

And now the pundits are edging his way, golden daggers in their hands. Paul Krugman in the New York Times... Abelson in Barron's...they're escalating their attacks, from criticism to open contempt.

When Greenspan's reputation gives way...we think...so will the dollar, and the consumer. Yesterday, the price of gold rose to $320. We're willing to bet that when the bubble in Greenspan's reputation finally bursts, many more people will want to trade 320 of the chairman's paper dollars for an ounce of gold. Then, it might be too late.

The photo in today's Daily Telegraph shows the titan of central banking looking a little tired. Even an hour soaking in his bubbles does not seem to be enough. Speaking before Congress must be a wearying job, of course. Neither Congresspersons nor their many apparatchiks are likely to understand what he is talking about. Of course, the chairman himself may not know what he is talking about - that was the implication of his testimony which, in the little bits reported in today's paper, made absolutely no sense...maybe he is becoming confused. But absurdity takes energy. The Fed chairman rested his chin against his arm, as if he was running low.

The minutes of past meetings of the Fed's Open Market committee reveal a surprisingly more confident and energetic chairman. In September '96, for example, Mr. Greenspan told his fellow central bankers: "I recognize there is a stock market bubble at this point." Then, referring to a suggestion that margin requirements be raised to dampen speculation: "I guarantee that if you want to get rid of the bubble, whatever it is, that will do it."

What became of these insights? What became of the Alan Greenspan of that era? He is no Volcker; the former fed chief was made of sturdier stuff and was willing to go against the mob. Greenspan bent.

The Fed chief already had re-invented himself to suit his ambitions. Had not the gold-buggish Ayn Rand devotee remade himself into a the greatest paper-money monger the world had ever seen...increasing the supply of dollars more than all the other Fed chiefs and U.S. treasury secretaries combined? Had not the man who once wrote that gold was the only honest money already betrayed his own beliefs as well as the nation's currency?

Now what can he say...now that the only thing still keeping the world economy growing is the willingness of the poor, hapless consumer to keep 'extracting equity' from his home - that is, going deeper and deeper into debt - in order to continue spending? Can Greenspan admit that he has done the nation a great disservice... allowing the debt bubble to expand, wafting the hot air of 'productivity miracles' into it...and turning up the gas with below-market interest rates? Or will he try to keep the consumers borrowing even more - as the Japanese did - with still lower rates and even more confident hokum?

"He'll end up as the most hated man since Herbert Hoover," continued Lord Rees-Mogg over dinner. "He gave America the 'Clinton Boom.' Clinton is gone. But Greenspan is still there. He'll be the one left holding the bag."

78 percent of the yearly gold supply--is made into jewelry.

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