Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
The Connection Between Stocks and the Economy is not What Most Investors Think - 19th Sep 20
A Virus So Deadly, The Government Has to Test You to See If You Have It - 19th Sep 20
Will Lagarde and Mnuchin Push Gold Higher? - 19th Sep 20
RTX 3080 Mania, Ebay Scalpers Crazy Prices £62,000 Trollers Insane Bids for a £649 GPU! - 19th Sep 20
A Greater Economic Depression For The 21st Century - 19th Sep 20
The United Floor in Stocks - 19th Sep 20
Mobile Gaming Market Trends And The Expected Future Developments - 19th Sep 20
The S&P 500 appears ready to correct, and that is a good thing - 18th Sep 20
It’s Go Time for Gold Price! Next Stop $2,250 - 18th Sep 20
Forget AMD RDNA2 and Buy Nvidia RTX 3080 FE GPU's NOW Before Price - 18th Sep 20
Best Back to School / University Black Face Masks Quick and Easy from Amazon - 18th Sep 20
3 Types of Loans to Buy an Existing Business - 18th Sep 20
How to tell Budgie Gender, Male or Female Sex for Young and Mature Parakeets - 18th Sep 20
Fasten Your Seatbelts Stock Market Make Or Break – Big Trends Ahead - 17th Sep 20
Peak Financialism And Post-Capitalist Economics - 17th Sep 20
Challenges of Working from Home - 17th Sep 20
Sheffield Heading for Coronavirus Lockdown as Covid Deaths Pass 432 - 17th Sep 20
What Does this Valuable Gold Miners Indicator Say Now? - 16th Sep 20
President Trump and Crimes Against Humanity - 16th Sep 20
Slow Economic Recovery from CoronaVirus Unlikely to Impede Strong Demand for Metals - 16th Sep 20
Why the Knives Are Out for Trump’s Fed Critic Judy Shelton - 16th Sep 20
Operation Moonshot: Get Ready for Millions of New COVAIDS Positives in the UK! - 16th Sep 20
Stock Market Approaching Correction Objective - 15th Sep 20
Look at This Big Reminder of Dot.com Stock Market Mania - 15th Sep 20
Three Key Principles for Successful Disruption Investors - 15th Sep 20
Billionaire Hedge Fund Manager Warns of 10% Inflation - 15th Sep 20
Gold Price Reaches $2,000 Amid Dollar Depreciation - 15th Sep 20
GLD, IAU Big Gold ETF Buying MIA - 14th Sep 20
Why Bill Gates Is Betting Millions on Synthetic Biology - 14th Sep 20
Stock Market SPY Expectations For The Rest Of September - 14th Sep 20
Gold Price Gann Angle Update - 14th Sep 20
Stock Market Recovery from the Sharp Correction Goes On - 14th Sep 20
Is this the End of Capitalism? - 13th Sep 20
The Silver Big Prize - 13th Sep 20
U.S. Shares Plunged. Is Gold Next? - 13th Sep 20
Why Are 7,500 Oil Barrels Floating on this London Lake? - 13th Sep 20
Sheffield 432 Covid-19 Deaths, Last City Centre Shop Before Next Lockdown - 13th Sep 20
Biden or Trump Will Keep The Money Spigots Open - 13th Sep 20
Gold And Silver Up, Down, Sideways, Up - 13th Sep 20
Does the Stock Market Really "See" the Future? - 12th Sept 20
Basel III and Gold, Silver and Platinum - 12th Sept 20
Tech Stocks FANG Index Nearing Critical Support – Could Breakout At Any Moment - 12th Sept 20
The Tech Stocks Quantum AI EXPLOSION is Coming! - 12th Sept 20
AMD Zen 3 Ryzen 4000 Questions Answered on Cores, Prices, Benchmarks and Threadripper Launch - 12th Sept 20
The Inflation Mega-trend is Going Hyper! - 11th Sep 20
Gold / Silver Ratio: Slowly I Toined… - 11th Sep 20
Stock Market Correction or Reversal? The Jury Isn't Out! - 11th Sep 20
Crude Oil – The Bearish Outlook Remains - 11th Sep 20
Crude Oil Breaks Lower – Sparking Fears Of Another Sub $30 Price Collapse - 11th Sep 20
Inflation by Fiat - 10th Sep 20
Unemployment Rate Drops. Will It Drag Gold Down? - 10th Sep 20
How Does The Global Economy Recover After This Global Pandemic? - 10th Sep 20
The Best Mobile Casino - 10th Sep 20
QE4EVER! - 9th Sep 20
AMD Ryzen Zen 3 4800x 10 Core 5ghz CPU, Cinebench Benchmark Scores (Est.) - 9th Sep 20
Stock Traders’ Dreams Come True – Big Technical Price Swings Pending on SP500 - 9th Sep 20
Should You Be Concerned About The Stock Market Big Downside Rotation? - 9th Sep 20
Options Traders Keep "Opting" for Even Higher Stock Market Prices - 8th Sep 20
Gold Stocks in Correction Mode - 8th Sep 20
The law of long-term time preference and Gold ownership - 8th Sep 20
Gold Bull Markets: History and Prospects Ahead - 8th Sep 20
Sheffield City Centre Coronavirus Shopping Opera Ahead of Second Covid-19 Peak - 8th Sep 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession

Politics / Central Banks Apr 20, 2013 - 07:49 PM GMT

By: Fred_Sheehan

Politics

I thank Fan Zhiqiang for his decision to translate Panderer to Power. His great attention to detail in asking me to explain dozens of phrases and terms for a Chinese audience reminded me of how the book concentrates on the United States. The influence of Federal Reserve Chairman Alan Greenspan's actions spread around the world. It would have been a much longer book, though, if I wrote of how United States' policy influenced China (for example), other than writing of it in reference to the United States.


That being said, Panderer to Power was written with foreign readers in mind. There are universal tendencies in how the United States changed from 1950 to the present. Lessons might be applied in other countries.

Alan Greenspan embarked on his career at the mid-century mark. His story is thus intertwined with that of the United States from its post-World War II peak. In 1950, four million automobiles were built in the U.S. while the rest of the world produced about one-half million cars. Most ambitious young men went to work at manufacturing companies such as General Motors. Alan Greenspan followed a different route. He became an economist. This was either far-sighted or lucky, or both. The field produces non-tangible products, unlike the automobiles made in Detroit.

A few economic numbers give a sense of how much the country has changed. By 1956, a majority of the U.S. population was not engaged in production. This was the first time, in any country, when more people worked in administration than in agriculture or industrial production. In 1950, 59% of U.S. corporate profits were in manufacturing, 9% were from financial activities. During the period from 2000 to 2008, 18 percent of profits were from manufacturing and 34 percent were from finance.

The 34 percent underestimates how the larger distribution of profits has changed the habits of Americans. In the 1950s, most Americans' investments were simple. They saved for their retirement. The money was deposited in a local bank where it collected interest year-after-year. The annual interest never exceeded the mid-single digits, but, consumer price inflation never exceeded 2 percent a year and was generally well below that.

In the mid-1960s, the United States government and the economists advising the government started to live in a world of make-believe. This fit the times. Walt Disney and other fantasies were becoming more popular, not only with children but with adults. President Lyndon Johnson decided to fight an expensive war in Vietnam at the same time Congress passed his "War on Poverty." This included greatly expanded programs of food and medical care provided by the government.

Johnson surrounded himself with advisers who were more inclined to write scripts fit for Walt Disney than for reality. Despite what they told him, the U.S. could not fight a large war in Vietnam and a big war against poverty at the same time the country was de-industrializing. The latter was noted by Alan Greenspan in his autobiography. The steelworkers went on strike in the late 1950s. Compared to industrial workers anywhere else in the world they lived like princes. In addition to owning their houses, the workers often owned large boats and winter vacation houses in Florida or Arizona. In his autobiography, Greenspan wrote that American companies that were forced to import steel during the strike often found it was both of higher quality and less expensive than domestic steel. Many never turned back from their Japanese and German suppliers. This pattern repeated itself thousands of times over the next half century until industrial production had been hollowed out.

The United States' economy veered more and more out of balance. It could no longer balance its fiscal budget. It was running greater trade deficits with foreign countries. The median family income reached a peak around 1971 and it has been a struggle to attain that standard of living ever since.

The United States was bound by the Bretton Woods Agreement of 1944. A foreign government (central bank) could convert $35 U.S. dollars into an ounce of gold with the U.S. Treasury. On August 15, 1971, President Richard Nixon announced the U.S. had closed the gold window. The importance of this goes beyond the mechanics of monetary arrangements. In The Fate of the Dollar Martin Mayer wrote about the weekend meeting at Camp David 1971 when the decision to sever the gold link was reached. Quoting Mayer: "The fact that this procedure would violate American treaty obligations does not seem to have been mentioned by anyone..."

That nobody even mentioned the United States was acting dishonorably, unilaterally walking away from obligations to foreign countries, was a sign of the times - and, of the times ahead. For instance, until the early 1970s, bonds sold by corporations to the public were issued to finance large construction projects or to invest in power generation. These were bonds backed by a constant flow of revenues to the issuer. There was no law or rule against selling bonds backed by automobile loans or mortgages, but the Bretton Woods agreement itself restricted behavior.

After August 15, 1971, currencies issued by countries were no longer bound by a physical restriction. In time, and never more than in 2013, governments, and their central banks, print unlimited amounts of currency. This has unleashed an avalanche of debt a thousand times greater than in 1971 and an unstable financial structure that has forced the savers of the 1950s into a whirlpool of fast-buck investing that confuses the best minds. In 1978, Federal Reserve Governor Henry Wallich told an audience these distortions were a means "by which the strong can more effectively exploit the weak. The strategically positioned and well-organized can gain at the expense of the unorganized and aged."

"The strong," Wallich explained, "are smart enough to understand [distortion] introduces an element of deceit into our economic dealings." Contracts are no longer made to "be kept in terms of constant values."

To achieve the public's acquiescence when most Americans were falling behind, economists have turned all of what we have learned since antiquity on its head. It was always understood that investment is the bedrock of an economy. Consumption follows. It was always understood that imbalances - of budgets, in trade - must revert and balance again. It was always understood that a currency, the medium of exchange for trade, must be issued in limited quantities, a gold or silver standard often acting as a brake on issuance. A forgotten American essayist Alfred Jay Nock (Americans are expert at burying essayists critical of themselves) said: "It is an economic axiom as old as the hills that goods and services can only be paid for in goods and services."

The economists who run the world today have turned all such knowledge inside out and upside down. Their every decree defies common sense.

This is where Alan Greenspan came along at exactly the right time. He provided economic advice to companies from the early 1950s. He has been wrong at every turning point of the economy through his entire Wall Street and government career. Not once has he foreseen a change in the economy (for instance, when a recession or recovery was ahead). But: he was known on Wall Street as willing to provide whatever service a client wanted. As finance became more abstract and misleading after 1971, his advisory role to duplicitous firms and banks flourished. He also spent a large amount of his time courting the media. He deserves credit for anticipating that plastering one's face on television would come to define one's importance.

He served first in government as Chairman of the Council of Economic Advisers to President Gerald Ford in the 1970s. He served as Chairman of the Federal Reserve Board from 1987 to 2006.

The man who was willing to provide Wall Street with any service it wanted was more than willing to tell the U.S. Senate that it did not matter if the U.S. produced nothing (in 2003). He was more than willing to exhort Americans to buy adjustable-rate mortgages when the rates were at one percent (February 2004). Four months later, he was the man who started increasing rates.

Panderer to Power is the story of a bad economist with a shady reputation who reached the most powerful position in the United States. That the chairman of the Federal Reserve became more powerful than the President of the United States is part of that tale. I think it also important in understanding how power operates in our media-saturated time, to note the dynamic of how the entire, non-stop noise ensemble (newspapers, television, books), almost every economic department in every university in the country, and most of Wall Street, worshiped whatever Greenspan stated. It is little wonder then, that the American people, to their financial regret and destruction, bought (literally) what Greenspan told them to buy. That is the story you will read in this book.

We, the people in every country, are suffering from the spell of the same dynamic under Federal Reserve Chairman Ben S. Bernanke. This former head of the Princeton University economics department makes Greenspan look like a genius. He has led the world (forced the world, if you like) into the maddest and most destructive money printing scheme that has ever been attempted across every country on every continent.

As this is written on April 18, 2013, most Wall Street analysts and economists gleefully support central bank policies. Just listen to them: our celebrity central bankers can double the supply of currency, yet price inflation is dead. As long as consumers spend, we need not concern ourselves with mounting debt. The United States has consistently lost production jobs since 2000, but that does not matter. The only areas that have produced new jobs during that time are in education and health; where job growth has been produced by much higher government spending. The United States is only collecting 60 cents in tax revenues for every one dollar it spends. Somehow, this will continue. So, they tell us. They haven't been right in decades.

Panderer to Power was written to help the reader understand this incredible inversion of common sense. May it provide a means to anticipate and act before the reversion to a sustainable future.

By Frederick Sheehan

See his blog at www.aucontrarian.com

Frederick Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, November 2009).

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Frederick Sheehan Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules