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Alan Greenspan is Against Inflation Again

Written by Geoffrey Pike
Posted June 3, 2016

Former Federal Reserve Chairman Alan Greenspan was against inflation before he was for it. Now that he is long retired, he seems to be against it again.

Greenspan headed up the Federal Reserve for over 18 years, from 1987 to early 2006. But Greenspan’s history goes a lot further back than the Reagan era.

In 1966, Greenspan wrote an essay called “Gold and Economic Freedom,” published in Ayn Rand’s book Capitalism: The Unknown Ideal. Greenspan laid out the case for economic freedom and linked it with the use of gold as money.

Greenspan wrote: “In the absence of the gold standard, there is no way to protect savings from confiscation though inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold.”

This is one of the best short essays I have seen on the subject. He understood that productivity and living standards are highly correlated with a stable and reliable form of money. Gold served as money, as chosen by the marketplace, for thousands of years. Central banking and fiat currencies are a recent invention when taken in the context of history.

There is no question that Greenspan is an intelligent man who understands the workings of a free market. He obviously also understands the monetary system well.

This is also the reason I despise Greenspan in so many ways. He is a complete sellout.

Greenspan the Inflationist

Greenspan, despite his previous affection for gold as money, went on to accept the position of Federal Reserve chair. If he had used his position as a platform to end the Federal Reserve and return the process of setting interest rates to the marketplace, then there wouldn’t be a problem.

Even if Greenspan had just used his time as Fed chair to implement a relatively stable money supply without heavy manipulation of the interest rates, then we might still be able to give him a pass.

The problem is that Greenspan got into office and was quickly confronted with Black Monday on October 19, 1987, which resulted in a drop of the Dow of more than 22%. Greenspan quickly sprung into action with monetary stimulus.

Greenspan never went crazy with monetary inflation, as was the case from 2008 to 2014 when the Fed quintupled the adjusted monetary base. But over this time period (mostly with Bernanke as Fed chair), much of the new money went into excess reserves at the banks, thus limiting actual price inflation.

Greenspan was subtler, but there was inflation nonetheless. The monetary base more than tripled on his watch, but this was over a period of 18 years. That’s still bad.

He helped blow up the tech bubble in the 1990s. After September 11, 2001, and a downturn in the economy, Greenspan quickly provided the stimulus to cover over the minor recession. Instead of letting the correction happen, he lowered interest rates via the federal funds rate and increased the money supply. This then led to the housing bubble.

The housing bubble did not implode on Greenspan’s watch, but it was the Fed policies during Greenspan’s time that helped blow up this bubble. There were certainly other factors with the government-sponsored enterprises and the government’s encouragement of loose lending, but the housing bubble never could have blown up the way it did without the easy money and low interest rates provided by the Fed.

So while Greenspan is very bright, this is the very reason he is so bad. He knew better, but he played the game of the insiders. He acted as a stooge for the left to claim that his free market policies just weren’t working, while his policies were not at all reflective of the free market.

Disaster Ahead

Greenspan is now 90 years old, but he is still making appearances. He was recently interviewed on Fox Business by Neil Cavuto.

Greenspan said, “What the markets are beginning to show us is an acceleration in money supply for the first time in a very long time.”

He must not be referring to the base money controlled by the Fed because the Fed has had a tight monetary policy since the end of 2014. Janet Yellen has surprisingly kept a tight stance, despite not raising interest rates as much or as fast as expected. Still, we should not doubt that Yellen would quickly revert to a loose monetary policy if “needed” by the economy.

Greenspan also said that we have a global problem of a shortage in productivity growth. He is correct on this point, but unfortunately he doesn’t point his finger to the main culprit, which is the previous loose policy of the Fed.

He also said we should be running federal surpluses right now and not deficits. Again, he is correct on this point, but it is the Fed that has enabled these deficits to a large degree. If the Fed were not a ready buyer of U.S. Treasuries, then there probably wouldn’t be so much confidence for investors to pile into Treasuries at low rates.  And it is the previous policies of the Fed that have enabled such a long period of ultra-low interest rates.

Greenspan also said that entitlements are the biggest issue facing the U.S. economy. And again, there isn’t a lot to disagree with here. But also again, it has been the Fed that has enabled the federal debt to be run up the way it has. You don’t see state and local governments run up these levels of debt as a percentage of spending. They can’t do it because they can’t create money out of thin air. If they get too far in debt, they face actual bankruptcy.

At the federal level, the politicians and bureaucrats spend money with few limits. They don’t have to worry about debts because the Fed can always just buy it up with newly created money.

In the interview, Greenspan said entitlement spending is crowding out savings and capital investment. He says that capital investment is the critical issue in productivity growth and that productivity growth is the critical issue for economic growth.

In other words, Greenspan likes to return to his free market roots every now and then with his talking points. Because again, he is absolutely right in what he is saying, which is why it is so frustrating.

Savings and capital investment are the main components for economic growth. But it is government spending and the Federal Reserve that discourage savings. What does Greenspan think the Fed was doing under his watch for 18 years? It is hard to call money pouring into tech stocks, and later housing, capital investment. For capital investment to increase living standards, it has to be investment into things that are sustainable and will meet consumer demand. With the Greenspan bubbles, these were cases of resources being misallocated, which stunt economic growth in the long run.

Heeding the Warnings

If Greenspan had put on a mask for the interview and called himself by another name, then somebody with an understanding of economics watching him would say he is making perfect sense. The problem is that Greenspan’s comments, when analyzed properly, are a complete repudiation of what he did for 18 years as Fed chair. He needs to take a look in the mirror.

It is not uncommon for politicians and government officials to speak in a different tone once they are out of office. Maybe Obama will start talking about what a mess our health insurance system is once he is out of office.

The major problem with Greenspan is that he generally advocates more free market policies, but he completely sold out when he was with the Fed.

Still, his warnings should not be taken lightly. He is right that there is a major train wreck ahead with regards to entitlements. The federal government is running massive deficits right now during a so-called recovery. How bad will the deficits be if we fall back into recession?

The Fed will continue to resort to digital money printing when it is called upon to do so. If gold were money, this would not be possible, as you can’t create gold on a printing press or a computer screen.

Greenspan was right over five decades ago when he linked gold with economic freedom. For the sake of your own economic freedom, it is a good idea to own some.

Until next time,

Geoffrey Pike for Wealth Daily

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