PrintJune 24, 2010
Greenspan's Call of Despair
If misery loves company, Alan Greenspan should be providing me solace anytime now. You see, last month I wrote a piece titled Greece: A Preview of Things to Come. It included this sentence:
What we are seeing now in Greece is a preview of what is eventually bound to transpire in the United States.
To some, this claim seemed crazy. A few snickered. They could not imagine that things in America would ever get so bad.
Last week, Alan Greenspan, the former Chairman of the U.S. Federal Reserve, wrote a piece for the Wall Street Journal titled U.S. Debt and the Greece Analogy.
I urge you to read it. Alan Greenspan clearly thinks things will get bad. This should not surprise, for the figures are depressing indeed.
Notes Greenspan: "Federal debt to the public rose to 59% of GDP by mid-June 2010 from 38% in September 2008." This, by the way, does not represent the full extent of America's national debt, as it does not include the $4.5 trillion owed to federal trust funds. And we have not even mentioned yet a hundred trillion-plus in unfunded liabilities.
After bemoaning our lack of fiscal restraint, Alan Greenspan makes a statement that should send a shudder down the spine of every American:
The federal government is currently saddled with commitments for the next three decades that it will be unable to meet in real terms.
We have said this repeatedly here, and now you can hear it from the wizard of finance himself: The U.S. government has taken on more financial obligations that it can possibly make good on. In practical terms, this means currency debasement. Why? Because the government will try to meet its payment schedules by creating new money.
This is one truth that no politician or government official ever mentions publicly. The coyness is understandable, since we are speaking about a form of theft -- the government ripping off its creditors and citizens alike. Being now out of government, Alan Greenspan dares to utter the unutterable. For this he should be commended, as his statement is certain to attract the ire of the governing elite to which he once belonged. This is how he puts it:
The U.S. government can create dollars at will to meet any obligation, and it will doubtless continue to do so. U.S. Treasurys are thus free of credit risk.
Yes, they are, indeed. Regardless of how excessive its obligations, the U.S. government will never have to openly default, because it can simply produce dollars at will. But the ability to discharge one's debts in this manner is neither satisfactory nor honorable. Quite to the contrary, it leaves creditors and citizens stuck with increasingly worthless money.
Greenspan's admission also puts to lie the myth that there are measures in place that prevent the federal government from wantonly printing new money. The mantra is that the Federal Reserve is independent of the executive branch in its oversight of monetary policy. But this is only in theory.
As many people know, the Fed Chairman and the Board of Governors are nominated by the president. They can also be removed at any time by the president "for cause." As such, they are prone to pressures from the White House.
This is something Alan Greenspan surely knows something about. He was pressured by both Bill Clinton and George W. Bush to keep interest rates low during politically sensitive periods. Greenspan's low interest rate policy produced two great bubbles: the dot com bubble in the late nineties and the real estate bubble in the middle of the decade that followed. They both burst, with spectacular effect and painful consequences, when Greenspan was forced to jack up interest rates due to rising inflation.
To recover from the latter, the government undertook additional levels of borrowing, which only further exacerbated its already chronic debt habit. As a result, we now face indebtedness of unprecedented proportions which threatens to bring down the whole economy. The situation has become so critical that only a complete change in the government's attitude toward spending could bring us back from the brink. According to Greenspan,
[t]he United States, and most of the rest of the developed world, is in need of a tectonic shift in fiscal policy. Incremental change will not be adequate.
This is surely a vain plea, for Greenspan must know that the tectonic shift he is calling for is politically unfeasible. There will be no cuts, much less deep cuts. There is simply no political will to implement them. Despite the obvious gravity of our situation, all we are getting is more spending, and that on an unprecedented scale. Health care reform, global warming bills, and endless bailouts keep rolling out of Washington even as we are drowning in a tsunami of debt.
There is an unmistakable note of despair that pervades Greenspan's piece. It is a note sounded by someone who sees the fiscal trouble we are in while sensing that there is no will to do anything about it. Spending with maddening abandon, our political class has thrown all sense of responsibility and restraint to the wind. In this respect, we are very much like Greece.
The only question is who will bail out the United States when the debt mess hits the fan.
