Greenspan Walks Policy Tightrope
March 3, 2005
In early morning trading [Wednesday] the U.S dollar rallied in
anticipation that Alan Greenspan's Congressional testimony would
include an upbeat forecast for the U.S. economy and hope for
a narrowing of its fiscal and trade imbalances. As should have
surprised no one, Greenspan did not offer these soothing words,
and the dollar's rally fizzled. Instead Greenspan delivered a
sobering, yet still sugar-coated, assessment of the significant
structural problems confronting the U.S. economy. Clearly, Greenspan
has perceived the contours of the cliff over which the U.S. economy
now teeters. His comments seem designed to allow him to claim
"I told you so" when it finally falls off, without
actually having to bear the responsibility for pushing it over
The following is a summary of some of his more interesting comments.
Greenspan said that there is no difference between federal debt
owed to foreigners and debt owed to Americans. This overlooks
the fact that interest payments made to foreigners represent
an actual drain on national income, while interest payments made
to other Americans merely represent an internal redistribution
of that income.
Greenspan said that our lack of domestic savings requires us
to borrow from foreigners to finance our investments. While this
is true, it overlooks the fact that most of America's borrowing
has been to finance consumption not investment. The difference
is that debts incurred to finance capital investments are self-liquidating,
as they generate the cash-flow necessary to pay the interest
and retire the principle, while debts incurred to finance consumption
are not, and merely further impair the solvency of the borrower.
Greenspan's claim that foreigners are buying U.S. debt because
it offers superior returns completely ignores the fact that foreign
private investors have actually been reducing their holdings
of U.S debt. The dramatic increase in net foreign holdings is
wholly a function of increased buying by foreign central banks,
which are perusing political, not financial, objectives.
Greenspan testified in favor of private social security accounts
because such accounts would increase national savings. This claim
requires you to ignore the offsetting reduction in national savings
implied by the increased budget deficits necessary to fund the
transition to such accounts.
Greenspan rightly criticized the U.S. for its lack of savings.
However, he ignored his role in perusing monetary policy specifically
designed to discourage savings and promote consumption. It seems
disingenuous for Greenspan to criticize a situation which he
deliberately helped to create.
With respect to financing budget and current account imbalances,
Greenspan's explanation of the difference between a "crisis"
and a mere "serious problem" was highly reminiscent
of former President Clinton's parsing of the word "is."
The way Greenspan defines it, a problem only becomes a crisis
after it is too late to do anything about it. It is similar to
Wall Street analyst's practice of waiting for a bankruptcy filing
to downgrade a stock from "strong buy" to "hold."
Greenspan's praise of how well the Social Security chain-letter
worked before it began running out of chain ignores the fact
that all ponzi-schemes work well for those who get in early.
It is precisely because pyramid schemes only benefit those few
at the top, at the expense of a far greater number at the bottom,
that they are illegal in the first place.
Greenspan reluctantly admitted that the U.S. government had over-promised
Americans with respect to future retirement benefits, while failing
to address the implications of this admission.
Greenspan's praise of the U.S. economy for its "flexibility"
and its 'ability to deal with economic shocks," ignores
the fact that this "flexibility" actually reflects
the ability and willingness to go deeper into debt, and that
the "shocks" have not been "dealt with,"
but merely postponed and exacerbated.
Greenspan's claim that foreign purchases of U.S. debt have only
"modestly" reduced U.S. interest rates, ranks as one
of the most dramatic understatements of the millennium.
Greenspan's assessment that the trade deficit merely reflects
American's new-found preference for foreign goods is ridiculous.
What Americans prefer is high-quality, low-cost, goods. The fact
that such goods are no longer produced domestically is a major
problem, reflecting a substantial erosion of America's industrial
base, and portending a significant reduction in the future standard
of living of its citizens.
March 2, 2005
not wait for pull backs that may never come. Buy gold at current
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In addition, as the dollar's
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investors can learn strategies to protect wealth and preserve
purchasing power by downloading my free research report on the
coming collapse of the U.S. dollar at www.researchreportone.com
and subscribing to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp.
C.E.O. and Chief Global Strategist
Euro Pacific Capital, Inc.
Mr. Schiff is one of
the few non-biased investment advisors (not committed solely to
the short side of the market) to have correctly called the current
bear market before it began and to have positioned his clients
accordingly. As a result of his accurate forecasts on the U.S.
stock market, commodities, gold and the dollar, he is becoming
increasingly more renowned. He has been quoted in many of the
nation's leading newspapers, including The Wall Street Journal,
Barron's, Investor's Business Daily, The Financial Times, The
New York Times, The Los Angeles Times, The Washington Post, The
Chicago Tribune, The Dallas Morning News, The Miami Herald, The
San Francisco Chronicle, The Atlanta Journal-Constitution, The
Arizona Republic, The Philadelphia Inquirer, and the Christian
Science Monitor, and has appeared on CNBC, CNNfn., and Bloomberg.
In addition, his views are frequently quoted locally in the Orange
Mr. Schiff began his investment career as a financial consultant
with Shearson Lehman Brothers, after having earned a degree in
finance and accounting from U.C. Berkley in 1987. A financial
professional for seventeen years he joined Euro Pacific
in 1996 and has served as its President since January 2000. An
expert on money, economic theory, and international investing,
he is a highly recommended broker by many of the nation's financial
newsletters and advisory services.
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