The Poisoned Heritage of Alan Greenspan's
editor of Gurusonline.tv, January 2008
A conversation with Martin
Hutchinson, editor of Greatconservatives.com
and columnist of 'Bear's
Article at The Globalist: 'The
Fed's decade of deception'
Martin Hutchinson writes a weekly column, 'The Bear's
Lair' at PrudentBear.com, providing economic and market
commentary. He was also Business and Economics Editor
at United Press International, in Washington, D.C. from
2000 to 2004. Previously, he was an international merchant
banker for 25 years working in London, New York and
Zagreb. He is the author of Great Conservatives (Academica
Press, 2004), which examines
the British governments of 1783-1830. Hutchinson has
a first class Honors degree from Trinity College in
Cambridge and a Master of Business Administration from
Harvard Business School.
In the same week (January 2008) Anna Schwartz, the
High Priestess of US monetarism blames the FED for sub-prime crisis, in The Telegraph, London, columnist Martin Hutchinson talked with Gurusonline.tv
about the Heritage (a poisoned one) of Alan Greenspan,
the previous FED Chairman that governed the monetary
policy of the US since 1987 until 2006, working with
four Presidents (Reagan, Bush father, Clinton and Bush
son), and feeding two bubbles since 1997. Greenspan,
along the worldwide marketing of his recent book, try
to pass the idea that he has nothing to do with his
"babies", the bubbles of the dot-com era (1997-2000)
and the following one from 2001 until 2007 around the
"creative" financial tools like the sub-prime
and the rest that will burst soon.
· "After 2001, Greenspan and Bush didn't want the
recession that appeared inevitable after the bubble,
so they inflated the money supply further and cut taxes,
producing the housing bubble. Now the double downturn
in housing and eventually stocks will produce a very
· "As for Wall Street, I'd expect the industry itself
to suffer a drastic downsizing, and many of the current
top houses to disappear."
· "Once the bad debts and bad investments have been
liquidated, not just in the US but worldwide (think
of Spanish housing, for example) we'll go back to growth,
but I'd be surprised if that happened before 2011-2012."
· "Once capital becomes more again scarce, the West
will have relatively less of it, so they will have burned
off much of this comparative advantage."
Now it seems that FED's policy since end of the
1990s was focused in 'feeding' two successive bubbles.
First it was the dot-com; afterwards the "creative"
credit tools (subprime, derivatives, etc). Instead of
the so-called knowledge economy and increase of productivity,
we saw the emergence of a rent-seeking business model
in the United States in the last decade?
MARTIN: That's basically right. The standard economic
model assumes a constant value of money; nothing in
it claims to work well in a period in which money supply
is being inflated at 9-10% per annum. Normally, such
increases would cause rampant consumer price inflation
fairly rapidly, but in the late 1990s the forces of
globalization were powerful enough to overcome that
inflationary tendency. In fact, globalization should
have brought us price deflation, like when the railroads
came to the Plains states in the 1880s and caused world
agriculture prices to drop - the decline in prices for
e.g. clothes from China or software from India should
have overwhelmed the price rises domestically. However,
with rapid money supply growth we didn't get deflation,
we got asset bubbles instead. And, as appears to be
usual, bubble periods allowed crooks and charlatans
to flourish and suppressed long term growth projects.
Alan Greenspan, along his present marketing campaign
selling his book, speaks everyday day and night about
a growing recession risk in the US, and he talks as
he has nothing to do with this mess. It seems he wants
to kill his baby. For a foreign reader all this is very
confusing. Can you explain what's going on?
MARTIN: It was Greenspan's error in 1996, in spotting
"irrational exuberance" in a speech December
4, and then the following year discovering a productivity
"miracle" which allowed stock prices to be
exuberant, that set off the bubble in the first place.
The Fed in the mid 1990s was working off a theory that
rising asset prices had no effect on the real economy;
they now accept that every $1 rise in asset prices produces
3-4 cents in real output. After 2001, Greenspan and
Bush didn't want the recession that appeared inevitable
after the bubble, so they inflated the money supply
further and cut taxes, producing the housing bubble
(while business investment had a very weak recovery,
showing that 1999 did indeed produce over-investment.)
Now the double downturn in housing and eventually stocks
will produce a very unpleasant recession. Bernanke [Greenspan'
successor at FED) is attempting to postpone the recession
still further by cutting interest rates again, and Greenspan
is trying to distance himself from Bernanke's efforts.
Bernanke's new cuts will just cause inflation to accelerate;
the deflationary effect of globalization and the Internet
seems to have pretty well worked its way through the
system, so monetary expansion will now produce real
inflation, as was the case in the 1970s. You can see
the effects of Bernanke's new rate cuts and the ECB
injections of liquidity in oil and gold prices, both
up close to 40% in 5 months.
We heard recently in the news that the US is at
risk of losing its triple A credit rating for the first
time since was first assessed in 1917. What's your comment?
MARTIN: There's no God-given reason why the US should
be AAA; it depends on its fiscal policy and debt level.
At the moment, the fiscal policy has been over-expansionary
since 2001 (the Bush tax cuts were sensible, but they
didn't restrain spending as they should have) but the
debt level is reasonable. However the baby boomers,
born in 1946-64, began to retire this January 2008 -
that will cause a rapid increase in social security
and Medicare costs, which will produce much larger deficits
by 2017-2018. At that point, the US credit rating will
drop. It may indeed drop sooner; if as I expect we get
a deep recession, the federal budget could quickly be
running a deficit in the $750 billion - 1 trillion range,
6-8% of GDP, and that would cause the debt rating to
In the 1980's we saw the Japanese buying everything
it moves in America. Now it's time for Middle East prince
billionaires' holdings and sovereign wealth funds or
Chinese Banks to rescue American financial baby dolls.
Wall Street is approaching a sold out season?
MARTIN: Wall Street needs more sovereign wealth funds
to buy, because the current write-offs they have had,
of about $100 billion after Citigroup and Merrill Lynch
report this week (January 2008), are nowhere near the
end of the story. Essentially, buyers of US financial
service companies are speculating on a recovery before
the downturn has finished, always a way to lose money.
So in that case, like the Japanese in the late 1980s,
they are almost certainly making poor investments. However,
in some cases the recession will drop oil prices and
lower the Chinese surplus (China in any case has a $1
trillion bad debt problem) so the sovereign wealth funds
won't have huge amounts of money to invest. As for Wall
Street, I'd expect the industry itself to suffer a drastic
downsizing, and many of the current top houses to disappear.
Printing money and inflating the M3 money supply
seems the official medicine of Ben Bernanke (and also
the guys of European Central Bank). What can we expect
from this entire pumping money machine?
MARTIN: Reported inflation in the US will be close
to 10% by December 2008, I think. The ECB is essentially
exporting European inflation to the US, by means of
the US payments deficit. New money will cause more inflation
than it prevents recession. The only plus is that rapid
US inflation will cause US house prices to stop dropping,
as incomes, increased through inflationary pay rises,
rise to meet them. That will improve the US credit picture
somewhat but not much.
2008 Scenarios in the US are very pessimistic: Stagflation,
the risk of a new stock market crash and oil barrel
at 100-150 USD. Do you see a way out of this mess?
MARTIN: The only way out is through. As I said above,
the inflation will lessen the credit problem from housing.
Oil prices will drop back once recession has hit, particularly
as the Fed (probably following Bernanke's resignation)
will have to switch to fighting inflation, probably
late this year or in early 2009. Once the bad debts
and bad investments have been liquidated, not just in
the US but worldwide (think of Spanish housing, for
example) we'll go back to growth, but I'd be surprised
if that happened before 2011-2012.
What can be the geopolitical consequences of all
this Decade of Deception?
MARTIN: Almost certainly a weaker US, not just weaker
than in 1991 but weaker than we would have had if money
had been kept under control. One of the principal advantages
of rich countries over poor ones is a cheaper cost of
capital, so that new investments can be made more cheaply,
competing with poor countries' cheap labor. With excessively
cheap money and the US payments deficit, much of the
world's capital has flowed to the savings economies
of Asia and the Middle East. Once capital becomes more
again scarce, the West will have relatively less of
it, so they will have burned off much of this comparative
advantage. In general, Western wage rates and those
in India, China and other competently run countries
will tend to converge. Tata Motors and its Indian and
Chinese competitors will take over most of the world's
auto industry, for example.
© Gurusonline.tv, Jorge Nascimento