Winter of Discontent

Former Federal Reserve Chairman Alan Greenspan resurfaced this week.  We couldn’t recall the last time we’d heard from him.  But, alas, the old fellow’s in desolate despair.


Alan-GreenspanUnexpectedly rising from the crypt: Alan Greenspan

Photo credit: AP


On Tuesday, for instance, he told Bloomberg he hasn’t been optimistic for “quite a while.”  Obviously, this is in contrast to the perennial Goldilocks attitude he had during the 1990s.  So what is it that has the Maestro playing a low dirge?

China, the dollar, Dodd-Frank, and associated unknowns are all part of his negative outlook.  But the long winter of his discontent is something else.  Greenspan said he “won’t be [optimistic] until we can resolve entitlement programs.”

Nobody wants to touch [entitlements].  But it is gradually crowding out capital investment and that is crowding out productivity and that is crowding out the standards of living,” said Greenspan.

Indeed, funding entitlement programs is becoming more burdensome by the year.  As a greater percentage of the economy’s GDP goes toward entitlement programs, a lesser percentage goes towards capital investment.  The effect of this negative feedback loop, as Greenspan infers, is quite simple.


ramirez-entitlement-cartoonAn enticing lure….

Cartoon by Michael Ramirez


Less capital investment leads to lower productivity.  Lower productivity leads to slower GDP growth.  Slower GDP growth leads to an economy that can’t keep pace with entitlement programs.  Thus, an even smaller percentage of GDP is, in turn, available for capital investment…to propel future growth.  And so on, and so forth.


1-SR-fed-spending-numbers-2012-p8-1-chart-8_HIGHRESA 2012 forecast of entitlement spending by the Heritage Foundation. This seems not exactly sustainable – click to enlarge.


What Drives Economic Growth?

Certainly, this is a basic insight.  But perhaps Greenspan is on to something much larger than just the issue of entitlement programs.  From what we can tell he’s getting at the question of economic growth.  Namely, what drives it?

Based on Greenspan’s example of entitlement programs, and their effect of crowding out capital investment, productivity, and standards of living, it seems he’s asserting that savings and production drive economic growth.

This, no doubt, is an important distinction.  For it goes contrary to the mainstream Keynesian economic thought of the day which asserts spending and consumption drive economic growth. Hence, the main purpose of today’s economic policies is to increase spending and consumption to the detriment of savings and production.


2-Production structureHow the economy grows. Lower left corner: an outline of the economy’s structure of production in the form of a “Hayekian triangle”; clockwise from the upper left corner: the process of widening and lengthening of the production structure and the growth in output it creates over time, as savings and investment increase (for a more detailed explanation of the concepts involved see our previous brief article “The Production Structure”) – click to enlarge.


To be clear, this was also the approach to monetary policy that Greenspan executed when he was Fed Chairman.  Between 1987 and 2006, while at the command of the nation’s monetary levers, Greenspan implemented these policies of promoting mass consumption.

Moreover, Greenspan’s dirty fingerprints are all over today’s global economic problems.  For it were Greenspan’s policies of mass consumption that accelerated globalization and a lopsided trade imbalance with China and others.  Practically all the malinvestments, bubbles and busts across the planet that are presently in various stages of reckoning can be traced back to the man.

We doubt Greenspan will ever take responsibility for the effects of his actions. But we do know that he has full knowledge of his errors.  For while Bernanke and Yellen are true believers in their craft, Greenspan knows central banking is filthy hogwash.  In particular, long before he became the Maestro, there was a time when Greenspan was openly opposed to state intervention.


maestroThe publication of this book was like the ringing of a bell. It heralded the end of the great boom and it was the last time Greenspan was put on a pedestal by a book author.


Alan Greenspan’s Pickled Economy

Greenspan, if you didn’t know, once stood firmly behind the gold standard.  He even wrote one of its better defenses.  In his essay Gold and Economic Freedom, published in 1966, Greenspan came to the following conclusion.


“In the absence of the gold standard, there is no way to protect savings from confiscation through 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.  If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods.  The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

“This is the shabby secret of the welfare statists’ tirades against gold.  Deficit spending is simply a scheme for the confiscation of wealth.  Gold stands in the way of this insidious process.  It stands as a protector of property rights.  If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.” 


gold-coinsGold: the money of the free market, and guarantor of economic freedom – and consequently hated by etatistes far and wide. Alan Greenspan was well aware of the importance of sound money.


Years later Greenspan put his vanity above his ideals.  During his 18-plus years as Fed chairman he went on to provide the elastic currency that allowed for the national debt to stretch from $2.3 trillion to $8.5 trillion.  That amounts to a 269 percent increase.  Such a dramatic increase would never have been possible under the gold standard.

Greenspan’s elastic currency also allowed for the nation’s ballooning entitlements, funded via deficits.  Maybe his present despair stems from the full knowledge and remorse of his dirty deeds now coming home to roost.  For in Greenspan’s words, “deficit spending is simply a scheme for the confiscation of wealth.”


3-Federal DebtTotal federal public debt: the next update will show a more than $1 trillion jump to a new high above $19 trillion. The current administration has finally succeeded in more than doubling the public debt in just eight years – unsurprisingly, with nothing to show for it – click to enlarge.


Just ask David Stockman.  Greenspan, bar none, perpetuated this wealth confiscation scheme with great proficiency.  Any remorse he now has is too little too late.  Like a pickled cucumber, his actions, and the actions of his predecessors, can never be undone.

Look around.  Today we’re all living with the exacting consequences of Alan Greenspan’s pickled economy.  Quite frankly, it bites.


Charts by Heritage Foundation, (adapted from Roger Garrison), St. Louis Federal Reserve Research


Chart and image captions by PT


M N. Gordon is the editor and publisher of the Economic Prism.



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One Response to “Alan Greenspan’s Pickled Economy”

  • therooster:

    Gold bullion is now elastic thanks to the floating trade value as measured in USD/oz. We now simplymake gold’s mass the unit of account. We can thank the severance of gold’s price pag back in 1971 for this new chapter in debt-free liquidity.

    Liquidity is directly proportional to the product of weight x trade value/unit weight = weight x USD/oz

    To raise liquidity, either element in that little equation can be raise. Gold’s liquidity is not simply peciated on its weight, but also on its purchasing power. Could this be why the price peg of $35/oz was really severed, regardless of the official story line ? More importantly , does it matter ?

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