Best of the Week
Most Popular
1.Putin’s World: Why Russia’s Showdown with the West Will Worsen - John_Mauldin
2. Stocks Bull Market Grinds Bears into Dust, Is Santa Rally Sustainable? - Nadeem_Walayat
3. Gold and Silver 2015 Trend Forecasts, Prices to Go BOOM - Austin_Galt
4.Gold Price Golden Bottom? - Toby_Connor
5.Gold Price and Miners Soar on Huge Volume - P_Radomski_CFA
6.Stock Market and the Jaws of Life or Death? - Rambus_Chartology
7.Gold Price 2015 - EWI
8.Manipulated Stock Market Short Squeezes to Another All Time High - The China Syndrome - Nadeem_Walayat
9.Gold, Silver, Crude and S&P Ending Wedge Patterns - DeviantInvestor
10.Is the Gold And Silver Golden Rule Broken? - Michael_Noonan
Last 5 days
Swiss Gold Referendum A Golden Opportunity for Switzerland - 25th Nov 14
Silver: What COT Analysis Tells Us - 25th Nov 14
Stock Market Big, Bold and Ugly - 25th Nov 14
U.S. Dollar Near Top? Gold and Silver Trading, Platinum Breakout Invalidation - 25th Nov 14
Buy Fear - Easily Pick Up Profits on Stock Market Dips - 25th Nov 14
The Islamic State Reshapes the Middle East - 25th Nov 14
Gold Price Forecast 2015 - 25th Nov 14
The Swiss Referendum On Gold: What’s Missing From The Debate - 25th Nov 14
Clash of Generations - Why Millennials Still Live at Home; Not Jobs, Student Debt, or Housing - 25th Nov 14
Stock Market Reminiscent of Pompeii - 25th Nov 14
Once Upon A Time There Were Philosopher Kings - 24th Nov 14
The 2014 Crude Oil Price Crash Explained - 24th Nov 14
China Stock Investing - Follow the Money! - 24th Nov 14
122 Tonnes of Gold Secretly Repatriated to Netherlands - 24th Nov 14
What Causes the U.S. Dollar to Move? - 24th Nov 14
Stock Market Indexes New Highs - Will Uptrend Extend Even Further? - 24th Nov 14
All Hail the King U.S. Dollar - Trend Forecast - 24th Nov 14
Where Is China Economy On The Map Exactly? - 24th Nov 14
Most of The World Economies Panic - Is The US Next? - 24th Nov 14
Stock Market Exhaustion Gap? - 24th Nov 14
Gold Golden Gains Come After The Pain - 24th Nov 14
Crude Oil and Stock Market Setting The Stage For The Next Recession - 23rd Nov 14
This Publicly-Owned Bank Is Outperforming Wall Street - 23rd Nov 14
Who’s Ready For $30 Crude Oil Price? - 23rd Nov 14
Strategic, Methodological and Developmental Importance of Knowledge Consumption - 23rd Nov 14
Manipulated Stock Market Short Squeezes to Another All Time High - The China Syndrome - 23rd Nov 14
Gold Price 2015 - 22nd Nov 14
Stock Market Medium Term Top? - 22nd Nov 14
Is the Gold And Silver Golden Rule Broken? - 22nd Nov 14
Malaysia's Subsidy and Budget Deficit Conundrum - 22nd Nov 14
Investors Hated Gold at Precisely the Wrong Time: What About Now? - 22nd Nov 14
Gold and GLD ETF Selloff - 22nd Nov 14
Currency Wars, the Ruble and Keynes - 21st Nov 14
Stock Market Investor Sentiment in The Balance - 21st Nov 14
Two Biotech Stocks Set to Double on One Powerful Catalyst - 21st Nov 14
Swiss Gold Poll Likely Tighter Than Polls Suggest - 21st Nov 14
Gold's Volatility and Other Things to Watch - 21st Nov 14
Australia Stock Market and AUD Dollar Analysis (ASX200 and AUDUSD) - 21st Nov 14
New Algae Research May Have Uncovered an “Energy Forest” Under the Sea - 21st Nov 14
The Cultural and Political Consequences of Fiat Money - 20th Nov 14
United States Social Crisis - No One Told You When to Run, You Missed the Starting Gun! - 20th Nov 14
Euro-Zone Tooth Fairy Economics, Spain Needs to leave the Euro - 20th Nov 14
Ebola Threat Remains a Risk - New Deaths in Nebraska and New York - 20th Nov 14
Stock Market and the Jaws of Life or Death? - 20th Nov 14
Putin’s World: Why Russia’s Showdown with the West Will Worsen - 20th Nov 14
Making Money While The World Burns - 20th Nov 14
Why This "Quiet Zone" Is Now Tech Stocks Biggest Profit Sector - 20th Nov 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Gold Report 2015

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

© 2005-2014 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

Free Report - Financial Markets 2014