Alan Greenspan’s Legacy

November 14, 2005 – Last week as I sat at my desk pounding away on my computer, a news ‘flash’ on CNBC caught my attention. But instead of some earth-shattering development, there was Alan Greenspan – looking quite smug and content – receiving the Presidential Medal of Freedom.

As I watched more closely, I noticed his wry smile. So I began to wonder what Greenspan was really thinking. Was he wondering how, years from now, people would view his Federal Reserve chairmanship?

With Alan Greenspan due to retire in January, much will be written about him in the weeks immediately ahead. Nearly all of it will no doubt be laudatory. Even worse, few will question his track record, much less examine the unconstitutional paper-money system the Federal Reserve operates. After all, that is the way the controlled media operates these days.

So-called ‘reporters’ obediently report what they are told. They are either oblivious to or blatantly ignore the prevailing ‘standard operating procedure’ these days that the government and its agencies only tell us what they want us to hear.

So it is a pleasant breath of fresh air when a media commentator actually provides some meaningful insight, which is the case in the current issue of Barron’s. Alan Abelson in his article “A Medal for Messups” delightfully skewers the Fed chairman, and in the process takes some well-aimed (and I might add, well-deserved) pot-shots at the politicians in Washington, D.C. Says Mr. Abelson:

“We know what they give losers — the Presidential Medal of Freedom.

Last Wednesday, by way of illustration, Alan Greenspan, the present and impending former chairman of the Federal Reserve, received one of these coveted metallic decorations. He thus joined two other prominent ex-civil servants, Paul Bremer and George Tenet, who were similarly honored last year…

For his part, Mr. Greenspan created two of the greatest speculative bubbles in all of history, one in stocks and one in housing…

It’s almost as if Mr. Bush — who is certainly not without his playful side — in awarding the medal to this trio was aiming for a trifecta of the messups. A kind of sly payback for the pain they’ve caused him, both at home and abroad. Or, it could be, a profoundly forgiving soul, he adheres to the dictum that no bad deed goes unrewarded

We want to be fair. Mr. Greenspan’s unrivaled bubble-blowing talent is by no means his only call on recognition. Equally noteworthy is his critical contribution to making this proud nation the world’s leading debtor and his key role in enabling Americans to become the world’s most remorseless borrowers, ravenous spenders and reluctant savers. Nor should we slight his essential participation in the magical transformation of lush budget surpluses into historic budget deficits.“

After all, I don’t call him ‘Bubbles’ Greenspan for nothing. It seems clear that ‘Bubbles’ will go down in history as one of the worst Fed chairman, but not only for his track record. History will rebuke him for the missed opportunity.

There is no doubt from his written record, his speeches and his testimony before Congress that ‘Bubbles’ understands both the inherent fragility of the current monetary system as well as the stability available through gold. ‘Bubbles’ has frequently referred to the remarkable price stability achieved during the two hundred years the classical gold standard reigned supreme. It was a monetary system that provided a set of rules that constrained governments from abusing its national currency, much as the federal government has abused the dollar during ‘Bubbles’ eighteen year chairmanship.

During this period, instead of price stability – which is supposed to be the Fed’s raison d’être – we have had everything but price stability. The result can be explained by the above chart, which presents the 12-month growth rates of M3 (a broad definition of the quantity of dollars in circulation) at each month-end. These widely varying growth rates cause widely varying rates of inflation, or deflation as was the case briefly in 1992 when M3 actually declined.

Instead of growing like the aboveground gold stock at a fairly consistent rate approximating 1.75% per annum, M3 growth rates are all over the place. What’s even worse, growth rates above 2% per annum cause inflation and bubbles.

So what does Greenspan do? Work hard trying to restore a sound dollar? No, he pretends he can manage money better than the free-market. So instead of working to re-establish a gold-based dollar, he presides over a command monetary system, relishing its perquisites and bogus medals that claim a job well done. But the 1990’s reflation noted on the above chart that created the stock and housing bubbles will be Greenspan’s legacy.

So good-bye ‘Bubbles’. You won’t be missed.

Now that I have berated our soon to be former Fed chairman, let me also berate the Fed for an unbelievable announcement made this past week.  Without explanation, the Fed disclosed: “On March 23, 2006, the Board of Governors of the Federal Reserve System will cease publication of the M3 monetary aggregate.”

Consider first the import of this statement.  The Fed exists to create money, and M3 captures all of it – all of the dollars in circulation in one form or another.  Not reporting M3 is the equivalent of General Motors not reporting how many cars it produces.  It is an absurd proposition that the Fed will no longer report the total quantity of dollars in circulation.

Now consider the implications of this announcement.  Why does the Fed no longer want to report the total quantity of dollars in circulation? 

They know what’s coming – massive amounts of dollar creation to fund the worsening trade and federal government budget deficits.  The Fed is just doing what other government agencies already do when they don’t like the result of their statistical calculations.  Like children, they play ‘make believe’.

For example, we know that the CPI calculation has been massaged to hide the true rate of inflation.  Further, the Core CPI concept (prices excluding food and energy) was created to mask just how worse off people really are by rising prices. 

I guess the Fed couldn’t figure out how to create a ‘core rate’ of money growth, so they decided to just shoot the messenger by getting rid of M3 reporting altogether.  In that way we won’t know how many dollars are being created.

Maybe the Fed thinks this action will save the dollar from its inevitable collapse, but the reality is that it will hasten its demise.  Look at it this way.  Would you buy General Motors’ stock if you didn’t know how many cars it produced?  No, you obviously would not. 

So why would anyone hold dollars if they are unable to see how many dollars are being created to fund the soaring trade deficit and the federal government budget deficit, both of which by the way just hit record levels?

Information is important to maintain confidence in a currency.  Without information, the only thing left is rhetoric, and who this day believes anything that comes out of governments and their agencies? 

By eliminating its reporting of M3, the Fed is shooting itself in the foot.  This misstep will only hasten the rush out of dollars into the safety and security of gold.