Greenspan’s Fine Mess

Adam Hamilton     November 9, 2001     4060 Words


“But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions?” – Federal Reserve Chairman Alan Greenspan, December 5, 1996 speaking before The American Enterprise Institute for Public Policy Research, Washington, DC


Watching Alan Greenspan’s Federal Reserve desperately thrash-about in wholesale panic mode all throughout 2001 has been one appalling yet morbidly fascinating spectacle, like a grim financial blood-sport.


After an unprecedented 10 interest rate cuts in slightly more than 10 months, three of which were panicked emergency inter-meeting moves, and 450 basis points of easing, the Greenspan Fed has single-handedly exacerbated and prolonged what may yet prove to be the worst economic slowdown in United States history.


2001 dawned with short-term interest rates of 6.5%, but by early November they had already been artificially slammed down to 2.0%, a four-decade low.  In absolute terms, in unmitigated terror of the monstrous bubbles it created, the Federal Reserve has already frantically slashed short-term rates by 69% this year (4.5% of cuts divided by the 6.5% starting point).


On November 6, the latest in this long chain of desperate market-manipulations of the price of money, the Fed hacked-down short-term interest rates by 20% alone (a 0.5% cut divided by the 2.5% starting point).  For about three seconds after the latest cut Wall Street rejoiced and gave thanks to their patron-saint Greenspan, and then like a bunch of doomed crack-addicts coming down off their last hit they began drooling over and demanding yet another Fed interest rate cut on December 11.


Observing “Maestro” Greenspan at work in recent years is like watching a drunk attempt to drive home on an icy winter road.  Greenspan has forgotten his responsibilities and can barely keep the Fed, let alone the US economy, between the ditches.


Five years ago, well before the great bubbles of the late 1990s had reached maturity, Greenspan in his usual obtuse way complained of “irrational exuberance” in stock prices.  The opening quote above is from that famous speech. 


Yet a few years later, as equity valuations totally detached from their underlying fundamental reality and grew far more absurd, Greenspan seemed to conveniently forget his earlier fears of a brewing bubble and proudly bought-into the so-called “productivity miracle”.  That particular gem from the pantheon of popular New Era Mythology has already been proven false by ex-post-facto downward productivity revisions by the statistical wizards at the Bureau of Labor Statistics.


With all the precision of a drunk-driver fishtailing on an icy road, Greenspan seemed to have no courage for his earlier convictions and bent-over and grabbed his ankles with his ultra-easy inflationary policies for the politicians and Wall Street.  He showed no fear of the dire consequences of his inflation, as he boldly testified before the US Congress that central banks around the world would actively manipulate the price of gold whenever it started to rise.  As Greenspan boldly proclaimed that the ages-old inflation barometer of gold would be silenced, hardly anyone even blinked an eye.


As the Russian debt crisis hit US shores with the force of a hurricane in 1998 and equities swooned, Greenspan threw prudence to the winds and allowed the Federal Reserve to organize an extensive bailout of a private hedge fund, Long Term Capital Management.  After that horribly-misguided action, speculators around the world suddenly knew that the Fed was underwriting speculative bets for entities deemed too-big-to-fail and that Greenspan would always come to the rescue and assure that the Wall Street Big Boys didn’t lose any money on their silly speculations.  Moral hazard be damned!


Out of the vile seeds of the Fed’s 1998 interventions in the supposedly free markets, the monstrous equity bubbles of 1999 and early 2000 were spawned.  Since Greenspan had proven to Wall Street that the Federal Reserve would actually backstop its trades and Wall Street had no more real risk to worry about, the greatest speculative bubbles in history grew and festered.


As the bubbles ballooned, Greenspan, once a man who had publicly warned of irrational exuberance, finally realized that he had single-handedly created an immense Frankenstein’s-monster by deluging the US economy with new Fed fiat funny money (that is “stimulus” or “liquidity” in the pernicious Orwellian Doublespeak so common today).  Like a drunk-driver on an icy road, he perceived the danger and hit the brakes far too late and fishtailed the other way as the Fed began to raise interest rates slowly in a too-little-too-late feeble attempt to dampen the cancerous speculative mania that it had spawned.


As the mighty bubbles started to burst, led by the Great American Casino commonly known as the NASDAQ, Greenspan watched in horror as his legacy and name were flushed down the toilet with the US economy.  Rather than allowing the free markets to work through and burn-off the myriads of speculative excesses, Greenspan masterminded the most aggressive easing cycle ever in the entire disastrous 88-year history of the Federal Reserve as one final great last-ditch attempt to re-inflate the mortally wounded bubbles.


Now every American, every investor in US assets, and every country that trades with the United States has to bear the painful consequences of the final manipulative actions of a mad man, as Greenspan is the greatest inflationist since John Law devastated early 18th-century France.


As American taxpayers and voters, we should all be extremely concerned about the dark path Greenspan has chosen for our country.  These far-reaching decisions by the Fed Chief to actively manipulate both the price and quantity of money that the Fed creates for our supposedly free-market economy will have resounding effects, for our own individual financial futures as well as the financial destiny of the United States of America.


Sound free-market economics are based on the golden premise that all transactions are voluntary and mutually beneficial, that both the buyer and the seller benefit from consummating a deal. 


As the Fed flounders and manipulates various markets to a degree that would make even Fidel Castro blush, the American people are only allowed to hear one side of the interest rate cutting argument.  Wall Street deftly uses the mainstream media as its propaganda mouthpiece, aggressively and repeatedly telling Americans how great the interest rate cuts are and that the fabled recovery is always “only a few months away”.


Yet, just as every free-market economic transaction has a buyer and a seller, slashing interest rates indiscriminately is not beneficial for everyone.  There is another darker side.  For every equity speculator hopelessly lost deep-in-the-red that the Fed is trying to save, there are other investors and markets upon which the Fed has declared unrestricted warfare.


Interest rate cuts by the private bankers at the private Federal Reserve, nothing less than blatant manipulation of the price of money, do not occur in a vacuum and are having and will continue to have far-reaching consequences.  Alan Greenspan bears the blame for this reckless course of action, as the entire Federal Reserve organization admits that he bends the Federal Open Market Committee to his will and decisions are only made with his leave.  Greenspan has certainly made one Fine Mess of the US economy and markets and it is going to continue to get worse the more he molests what should be free-market processes.


While debtors rejoice when the Fed throws them a bone, their illicit gains from the Fed’s manipulative largesse are torn from the hides of creditors.  Creditors, the people who actually save money, are the ultimate driver of economic growth.  True wealth is grown only through saving, not by accumulating endless debts.  As Greenspan throws-in his mighty lot with the legions of US debtors, the savers who have long fueled America’s economic growth and innovation are being cast to the wolves.


Our first graph of real interest rates clearly illustrates how Greenspan has utterly destroyed the economic return for saving in less than a single year.  This graph originally appeared in our “Real Rates and Gold” essay if you would like some background information including how it was constructed.


If you are disciplined and consume less than you produce to save the difference to try and build a better future, Greenspan has targeted a laser-dot on your forehead and is tightening his finger around the trigger that will blast a .50 caliber bullet through your financial dreams.



Savers, investors, and creditors have been declared second-class citizens by the Greenspan Fed.  If you believe that equities are overvalued or you have worked hard all your life to save capital and now you need fixed-income for retirement, outright war has been declared on your hard-earned savings and bond investments.  Alan Greenspan, in his desperate bid to bailout equity speculators and debtors, has destroyed all incentives for savers to lend their money as real interest rates (one-year Treasury interest rates less inflation as measured by the watered-down CPI) have plunged negative for the first time in two decades.


No nation was ever made great and no individual ever achieves grand wealth through debt-financed spending binges.  Only by sacrificing now and consuming less and saving for the future can capital accumulate and fortunes grow.  By deliberately torpedoing the massive debt market and making lending a losing proposition for savers, Greenspan is forcibly shutting-down the single biggest engine of innovation and capitalism on the entire planet.


If savers are by decree not allowed a fair return, and they cannot consummate mutually beneficial transactions and earn real income from their valuable savings, they will hoard their capital and innovation and economic growth in the United States will slow to a trickle and then painfully grind lower and lower.  By forcing real returns for savers negative, Greenspan has declared unrestricted warfare on the hard-working savers in the United States and abroad and he is unleashing forces that will ultimately have dreadful consequences for America. 


Did you ever wonder why the Japanese, the greatest major-economy savers on earth as a people, now never want to deploy any of their vast hoards of savings to help fuel their economy in Japan?  The reason is because the Bank of Japan, infested by sniveling bureaucratic socialist market manipulators like Greenspan and his dark ilk, destroyed all incentives for savers to deploy their capital!


If interest rates are artificially slammed so low that it is impossible to earn real returns on capital, why lend it out and take a real loss after inflation?  Negative real interest rates are one of the worst possible economic developments for any nation.


Gold investors, on whom is heaped endless abuse and scorn by the powerful advocates of New Era mythology in the government and on Wall Street, are used to being bombed into oblivion.  Greenspan publicly admitted during testimony before the US Congress that various world central banks dump gold to cap rallies, a vast amount of evidence has accrued of anomalous trading activity in the gold markets, and Reginald Howe’s landmark lawsuit alleging concerted manipulation of the global gold markets survived its hearing before a US federal judge.  Yet few will take the time to really research the gold market and ask tough questions.


Everyone admits that the short-term interest rate market is manipulated, many professional investors believe that from time-to-time the stock markets are manipulated, the whole world KNOWS the bond market is manipulated after the venerable 30-Year T-Bond’s untimely assassination, but most investors today somehow assume that the gold markets trade free.  What naive folly!


But even with vast forces arrayed against gold investors, forces that claim equities, regardless of their valuation, are the only politically-correct investment in the world, gold investors should examine the real interest rate graph above and take heart!  The greatest gold rallies in US dollar terms in modern history occurred the last time the US Federal Reserve tried to act as a twisted modern-day Robin Hood and steal from savers to hand-out to debtors through interest rate manipulation over two decades ago.  Negative real rates are ultra-bullish for the besieged Ancient Metal of Kings!


Dear friends, savers are not stupid!  If savers were stupid they would consume more than they produce and become mindless debtor automatons like much of the once proud and strong American middle-class today, and the whole economy would plunge into the dark ages as it was crushed under debt.  By the very act of saving, of sacrificing for the future, savers prove that they have what it takes to accumulate and preserve wealth.  These saving investors, whether they buy bonds, save cash, invest in gold and silver, or prefer for now some other non-equity investment venue because of current rampant mania stock market valuations, are highly intelligent and diligent planners.


Savers will not long be deceived by Alan Greenspan’s Fed’s market manipulation and unrestricted warfare against the prudent accumulation of capital.  While powerful forces work around the clock to flood the world market with artificially-augmented supplies of central bank gold, more and more bond investors and other diligent savers are gradually waking-up and will once again seek the unparalleled financial safety of gold.  As the above graph shows, when market manipulators like Greenspan make it impossible to earn real returns as a saver, savers begin fleeing to the six-millennia-old financial refuge of gold.


Greenspan’s Fine Mess has many important facets other than the war against savers and the brewing flight to gold, but the mainstream media simply spins the aspects they like and throws up a wall of black silence around the inevitable consequences of extreme manipulation of the price of money (interest rates) that are not bullish for Wall Street’s beloved equity markets.


If the Greenspan Fed was only manipulating the price of money at its most aggressive pace in history, Greenspan’s Fine Mess would be ominous enough.  But while short-term interest rates are held under water, Greenspan is inflating the narrow MZM money supply like there is no tomorrow!


Our next graph was originally published in our recent “The Inflation Tsunami” essay if you would like more background.  It is an exceedingly simple graph that compares the Money of Zero Maturity money supply today with the MZM money supply one year earlier.  At 10%, for instance, it means that the Fed has spurred-on or allowed MZM to absolutely grow 10% in a single year.  This data is NOT annualized and this year-over-year comparison is the most conservative possible measure of money supply inflation in the United States.



It is absolutely mind-blowing to realize that the Greenspan Fed is literally ballooning MZM at an almost 20% rate! 


Even well before the Mohammedan extremists pirated their hardware from Boeing to make a blazing and horrific political statement about US interventionist foreign policy on September 11, the Fed was aggressively inflating MZM at a faster pace than even during the 1998 Russian-debt default crisis as it frantically tried to re-inflate the great bubbles it had negligently spawned.  As this graph attests, the Fed has been in wholesale-panic mode all year!


As probably every economics textbook ever printed in world history points out, even the ones written by the socialist Keynesians, inflation is caused by relatively more money chasing after relatively fewer goods and services.  Yes, that’s right, inflation is a MONEY SUPPLY phenomenon!


The United States’ Real Gross Domestic Product has only grown by 0.8% in the last four quarters, yet the Fed is ramping-up narrow money supplies by an absolute 20% over the last twelve months.  In other words, the Greenspan Fed in this past year in its utter desperation has rocketed the narrow MZM money supply 25 times faster than the US economy has grown!  Yet, clearly living in some fantasyland, Wall Street proudly proclaims that inflation is dead.  Huh?


Make no mistake friends, monetary actions have consequences, and promiscuously increasing the money supply ballistically without adding goods and services on which to spend the newly-minted money is a highly-inflationary omen.


I am well aware of the great debate currently raging between the inflation and deflation camps, and as soon as we have gathered enough information so I am absolutely sure that I can write a good essay that will offend both factions, I will hammer out a Zeal essay on inflation versus deflation.  For now, however, here are some brief incendiary thoughts on the great inflation versus deflation conflagration.


First, money supply growth inevitably leads to inflation like summer inevitably leads to winter.  There are countless examples in history.  Yet, many today single out a commodity or two, note that its price is going down, and they become convinced on that narrow evidence alone that deflation is imminent.  But far before monetary inflation affects prices, the supply and demand of every individual good and service on the planet primarily determines their respective prices. 


For example, just because copper is cheap right now does not necessarily mean deflation is galloping over the financial horizon and bearing down on us like a juggernaut.  All it means is there is less copper demanded than is being supplied.  Watching the price behavior of one or two commodities alone is meaningless when analyzing inflation and deflation.  Inflation and deflation are macro-economic tides that affect the entire economy and are not easily discernable in small-scale micro-examples of price behavior.


Every analysis of inflation versus deflation MUST be extremely careful to examine the aggregate money supply growth in light of aggregate goods and services growth, not only a few commodities in isolation where supply and demand fundamentals have pushed prices awry.


Second, with the growing popularity of speculation amongst the masses during the mania, the classical definition of inflation of relatively more money chasing after relatively fewer goods and services must be expanded.  Now it should be relatively more money chasing after relatively fewer goods, services, AND investments.  As the second graph in our old “S&P Perpetual Motion“ essay illustrates, M3 monetary inflation was breathtaking in the late 1990s yet that flood of newly created fiat money did not all bid on potatoes or copper, it chased the great speculative bubbles of the day, primarily the US equity markets.


Every analysis of inflation versus deflation MUST take into consideration that monetary inflation can flood into intangible assets today as easily as it can flood into goods and services in the usual tangible economy.


Third, in our society today that has been relentlessly duped by the bankers into falsely believing that debt is a Good Thing, credit has all but replaced money in some markets, such as real estate.  For instance, if Americans weren’t willing to live under decades of crushing debt to “buy” homes and instead insisted on paying cash, real estate prices would be FAR lower.  Credit contraction is definitely deflationary, but credit is NOT money.  Would you rather have $1m in a bank savings account or a $1m credit line with Visa?  There is a BIG difference, no?


Every analysis of inflation versus deflation MUST distinguish between money, credit, and even wealth, which are related yet very different beasts.  They are not the same and the nuances of each are phenomenally important for discerning whether inflation or deflation may be roaring down the pike.


The current explosively hemorrhaging MZM money supply will be viewed negatively by two mega-markets that are each alone far more important than equities and dwarf the US stock markets in size, the bond markets and the foreign exchange (currency) markets.


With real rates artificially held at such abysmal depths by the Greenspan Fed that debtors now rob creditors in real terms, with the money supply exploding, and with the wizards at the US Treasury indiscriminately slaughtering the noble US 30-Year Treasury Bond because free-market long interest rates were considered too high by the manipulators (see our recent “Long Bond Assassinated!” essay), elite bond market investors are increasingly beginning to understand Greenspan’s concerted assault on the capital they manage.


Bond capital managers are the ultimate professional investors and they take the enormous fiduciary responsibility of managing their monstrous portfolios extraordinarily seriously.  Greenspan’s Fine Mess will drive bond investors out of the US debt market with his disastrous negative real interest rate policy.  While Greenspan probably hopes the bond players will throw up their hands in disgust and buy US equities, we suspect that will not happen with current rampant fantasy equity valuation levels.  The US Fed will probably effectively drive capital away from the US shores since there is now a guaranteed loss after inflation for investing in the US debt market.


On the ForEx front, Greenspan has created a similar massive disincentive for international investors to hold US dollars.  Foreign investors buy dollars primarily so they can invest in US Treasury debt and US equities.  With rates of return on Treasury debt eviscerated by the Fed and with the current atrocious profit fundamentals calling for stock prices far, far below today’s New Era levels, Greenspan’s aggressive actions will no doubt cause ever-increasing legions of foreign investors to sell their US dollar holdings.


The international dollar investors that the US desperately relies upon to finance its massive trade deficit will also see the Fed’s banana-republic-like money-supply creation blitz and realize that each dollar they hold is worth less and less every day the Fed carelessly runs the proverbial printing presses.  The Greenspan Fed has in effect hung out a massive sign in front of the United States of America that says, “Foreigners, take your capital and go home.  We don’t want you here.” 


Without the opportunity for foreign investors to obtain mutually beneficial financial transactions in the States many will simply pack up their bags and their capital and take it elsewhere.  There is a BIG world out there, with lots of appealing investment options outside of Greenspan’s demented playpen!


Alan Greenspan is foolishly mucking around in all kinds of markets and the ugly consequences of his frightening actions will manifest themselves more and more each week as the coming months pass.  While Wall Street is happy with Greenspan’s war on saving because they expect it to terrorize money back into the equity markets and give debtors a free-ride at the expense of creditors, other markets much larger and more important than the US stock markets are suffering horribly at Greenspan’s capital-market manipulation imperialism.


Manipulating the free markets may provide a temporary burst of good feelings, like a recovering drunk taking a gulp of strong alcohol, but the long-run consequences of Greenspan’s manipulations will be disastrous for US taxpayers and our children.  Rather than allowing our free-market economy to work-off the massive speculative excesses of the great bubbles, the mad inflationist Greenspan has decided to paper-over the speculative excesses in the vain hope that they will all just disappear.  Rather than helping the drunk recover, Greenspan is giving him more liquor so he feels warm and fuzzy for another few weeks or months, but is goading the drunk along to a much darker and tougher ultimate day of reckoning.


Greenspan’s strategy is nothing new dear friends!  Japan made the terrible mistake of manipulating markets as well rather than standing back so speculative excesses could be necessarily destroyed in the post-bubble bust.  Rather than letting elite cronies who made stupid bets go bankrupt and bear the consequences of their silly actions, the failed Japanese bubble’s enormous costs were spread over the entire Japanese population through bailouts and interest-rate/money-supply manipulation.  The Japanese government did the exact same thing in the 1990s that Greenspan is irrationally trying today, and it has led to over a decade of misery and deterioration for the once great Japanese economy.


Greenspan has certainly created a mighty Fine Mess in the United States of America and all his actions unfortunately witness to the fact that he has chosen the course of Japan rather than letting the necessary post-bubble bust take its quick and painful yet normal course in correcting the speculative excesses.  Manipulating markets does not solve economic problems, it just exacerbates them and pushes them deeper and further into the future.


For the great masses of perma-bulls today who believe that manipulating markets, declaring war on the savers, and flooding the economy with unbacked fiat funny money will bring about a great miraculous recovery, we sure marvel at their misplaced faith in their demigod Greenspan!  They are hoping against hope that Greenspan will prove to be the first exception in history to the iron-clad dark consequences of trodding down this highly-treacherous economic path on which Alan Greenspan is desperately dragging our great nation.


Adam Hamilton, CPA     November 9, 2001     Subscribe at