Monday, December 17, 2007

Alan Greenspan, just shut up already

File this under "Physician, heal thy goddamn self." Greenspan says that the Federal Reserve has the power to contain inflation, if it's willing to act. And he says that as if it were some miraculous revelation! He caveats that, saying,
"One of the lessons of the last 20 years especially is that low inflation is the major contributor to economic growth overall, and that fundamentally, inflation must be suppressed," he said. "It's ultimately the Federal Reserve in this country which is the key architect of doing that, and it's critically important that the Federal Reserve is allowed politically to do what it has to do to suppress the inflation rates that I see emerging, not immediately, but clearly over the intermediate and longer term period."
He's so completely dishonest and misrepresenting here that there must be a special place in hell, a tenth circle Dante couldn't see, reserved for Greenspan, Bernanke and other bad economists.

First, it's a Keynesian myth that inflation is necessary for economic growth. I explained in this post describing how an economy works, with each person producing and trading with others, creating wealth without subtracting in any way from what the others produce. My principal point was to explain why Tiger Woods earning another $1 million does not take away $1 million from the rest of us, but rather creates new wealth, because the rest of supply goods and services to, eventually, provide him with his $1 million. However, in describing the basic workings of an economy, I extended that to the observation that economic growth does not require inflation, let alone a central bank to regulate the money supply.

Greenspan's apologists might say he was talking about relative inflation, that high inflation hinders economic growth, but that an economy can grow if inflation is kept low. That doesn't wash in the least. First, inflation in any amount hinders an economy from growing at its full potential, because it skews market forces by which people know what to produce and how much of it. Moreover, Greenspan said, "low inflation is the major contributor to economic growth overall," ignoring that economies grow more from productivity and trade, not some clique of balding men in pin-striped suits who decide how much more to debase our currency.

Second, Milton Friedman taught us that "inflation is always and everywhere a monetary phenomenon." Inflation comes only from the central bank creating money. The Federal Reserve is officially not part of the United States (meaning "federal") government, but it is very much a full-fledged entity. Congress, warping its power to "regulate the value thereof" of our national coin (as proscribed in Article I of the Constitution), gives unconstitutional power to the Fed: to regulate our money supply and act as a lender of last resort. Most people believe it's in a sort of limbo between the private sector and government, when in reality there's no such thing. If something isn't 100% in the private sector, it's part of the government. There is no in-between. The private sector might be the major player, but it's still ultimately controlled by the government, because the government can always use force to steer things in the direction it wishes.

The Federal Reserve has authority over our money because it has the backing of the federal government, especially in forcing us to accept Federal Reserve Notes. Well, tyrants keep power in one of two ways: they force people to submit, or they make people think they should submit for their own good. The latter is worse because you willing accept such slavery, and most Western people believe that central banks are necessary. The Fed doesn't need to use physical force to make us accept it, because it justifies its existence by telling us that we need inflation for economic growth, and enough people believe it.

Third, Greenspan talks about inflation as if it's hard for the Fed to maintain. Don Boudreaux pointed out in November 2005 that
Because the Fed largely controls the supply of U.S. dollars, the Fed's role isn't to "tame" inflation. Rather, the Fed's role simply is not to generate it. It can achieve this goal very, very easily -- namely, by not increasing the money supply.

This is no difficult task.

But the popular account of inflation still portrays inflation not as something caused by excessive monetary growth but as some alien-like demon, or animal spirit, that visits us from time to time and needing "taming" by smart and brave central bankers.

Too often, things that are simple -- for example, not causing inflation -- are treated as though they are challenges of the first rank, while things that are impossibly complicated -- for example, government provision of health care -- are treated as though they are quite easy to achieve.
That last paragraph is especially telling. Greenspan and other Fed officials are like a spendthrift who laments, "Oh, we need to do something our spending." And the American people are like a patient spouse who shouldn't have to put up with it, but Americans instead convince themselves that they, too, are part of the problem, that somehow by creating wealth we distort the value of our money. Nothing could be further from the truth!

As Don Luskin pointed out way back in February 2006, Greenspan kept inflation in check when the Fed raised or lowered interest rates: a "virtual gold standard" that did work pretty well, because gold prices are a historically excellent barometer of the availability of dollars. You can find historical Federal Funds Rates here, which presently goes back to 1990. Side note: some time ago I pointed out to a friend the 8 percent FFR of July 1990, asking if it's any surprise that we had a recession. The Federal Reserve engineered it, just like it did with the Great Depression.

That leads to my fourth point. Greenspan, once upon a time, was a good economist and Ayn Rand acolyte who talked about gold and sound money. But power corrupts, and his speeches, like that on "irrational exuberance," often demonstrated how much he came to love the limelight. He's been called the first "economic superstar," being far more visible than any of his predecessors, and even now, he has to prove that he may be gone from the Fed but still has power. He has to prove that he can still roil financial markets with his mere words, and Americans are stupid enough to think he's prescient enough to predict a recession. How would he know if the odds are actually 50% that we'll have a recession, or that they really should be 60% or 70%?

Also, when will we have that recession? It's an old joke, sadly true, that "Economists have forecasted ten of the last three recessions." There's been a resurgence of punditry, absurd as ever, about a looming "recession," particularly from's chief "economist" Mark Zandi, whose soundbites have started to litter a lot of AP articles. This is a guy who has continually predicted recessions since at least 1997, which as I've said is like Red Sox fans predicting every year since 1919 that their team would win the World Series. Keep predicting it, and certainly it will happen eventually, but that doesn't mean the person has any analytical or prophetic ability.

With Greenspan, Zandi and "AP economic writers" like Martin Crutsinger and Jeannine Aversa, who needs Democratic presidential candidates to tell us how bad things are? But the truth is that this economy is incredibly robust and growing. The economy grew 4.9% in the third quarter of 2007, which in France or Germany would be an economic miracle, yet Aversa lamented the expected lower performance of the fourth quarter. So what? Salesmen live all the time on such expectations, that you'll have a very good season followed by a leaner one. And for heaven's sake, the economy in November added 94,000 jobs to payrolls, yet Reuters is still talking "recession."

The media, naturally, wants to make the 2008 presidential election a close remake of 1992: the American people are stupid enough to elect a Clinton, after being deluded into thinking George Bush wrecked the economy. Though the 1990-1991 recession (as I wrote above, engineered by the Federal Reserve) had ended in March 1991, NBER didn't reveal it until December 1992, allowing Bill Clinton to get elected after campaigning on the supposedly bad economy. In the next several months, expect to see the news talking about "recession" everywhere we you turn, just as it's been hammering us with the mythical housing industry collapse and the need for government to save us.

Now, besides getting his name in the news again, I don't know what Greenspan's angle is -- but he can shut up already.



Blogger JMR said...

some clique of balding men in pin-striped suits who decide how much more to debase our currency.

Board member Kevin Warsh has fantastic hair.

Monday, December 17, 2007 8:37:00 PM  
Blogger Perry Eidelbus said...

That's because he's not a real economist, according to the rest of the Fed.

I guess his hair's not bad, but my favorite is Val Kilmer's when he played Batman.

Monday, December 17, 2007 11:37:00 PM  

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