Over the years, I have spent a lot of time analyzing the writings of Ben Bernanke. Several of his key speeches have proven to be roadmaps for economic policy.
Now, Alan Greenspan has written a piece that should prove to be the roadmap for the next decade -
http://www.ft.com/cms/s/0/e1fbc4e6-6194-11de-9e03-00144feabdc0.html?nclick_check=1Let’s rip it apart –
Asset Price Appreciation is the Key to Economic Recovery“The rise in global stock prices from early March to mid-June is arguably the primary cause of the surprising positive turn in the economic environment.”
“I recognize that I accord a much larger economic role to equity prices than is the conventional wisdom. From my perspective, they are not merely an important leading indicator of global business activity, but a major contributor to that activity, operating primarily through balance sheets…”
“…a significant driver of stock prices is the innate human propensity to swing between euphoria and fear, which, while heavily influenced by economic events, has a life of its own. In my experience, such episodes are often not mere forecasts of future business activity, but major causes of it.”
Does this really surprise anybody? I have told you for years now that Asset Price Appreciation is a policy tool which is used to mask the real pains of the underlying economy – drive Asset Prices up, over-tax those who hold the assets and increase entitlements to placate those who don’t hold assets.
A chart from
econompicdata.blogspot.com shows the reality of what has occurred in the Job Market over the last decade. That’s right, 6 million Manufacturing Jobs lost. The offset has been a 3 million job increase in Government Jobs and 1.5 million new jobs at Starbucks and McDonald’s. Holy cow…
Obama was elected to reverse this. He has been an epic failure. The Middle Class is still gutted. As Manufacturing Jobs went overseas, Manufacturing Workers went into the Construction business. This worked as the Real Estate Market was driven to excess via cheap lending to unqualified borrowers – but now we are left with millions of unemployed workers, about 2 years of excess housing inventory and the US Taxpayer in now on the hook for an additional $10 trillion in new Debt and Loan Guarantees to the banks.
Nobody at these banks is being prosecuted because the government needed them to lend to people who couldn’t afford to buy their houses. They were (are) all in on this together – technocrats and greedy policy makers trying to create the perfect economy to take care of the perfect storm that is the retirement of the Baby Boom.
Think about this – if asset price appreciation is the key to recapitalizing the banks, then it is also the key to recapitalizing the US Treasury. We could be in for one mother of a Bull Market…
Recapitalize Corporate America“The $12,000bn of newly created corporate equity value has added significantly to the capital buffer that supports the debt issued by financial and non-financial companies… Previously capital-strapped companies have been able to raise considerable debt and equity in recent months. Market fears of bank insolvency, particularly, have been assuaged.”
“…huge unrecognized losses of US banks still need to be funded. Either a stabilization of home prices or a further rise in newly created equity value available to US financial intermediaries would address this impediment to recovery.”
Greenspan sticks to his old playbook – get Stock Prices up, ignite the “Wealth Effect” and greed will drive the leverage that buoys other asset prices – Stocks drive Real Estate Prices, Wall Street drives the Economy.
Where Are Stocks Going?“Global stock markets have rallied so far and so fast this year that it is difficult to imagine they can proceed further at anywhere near their recent pace. But what if, after a correction, they proceeded inexorably higher? That would bolster global balance sheets with large amounts of new equity value and supply banks with the new capital that would allow them to step up lending. Higher share prices would also lead to increased household wealth and spending, and the rising market value of existing corporate assets (proxied by stock prices) relative to their replacement cost would spur new capital investment. Leverage would be materially reduced. A prolonged recovery in global equity prices would thus assist in the lifting of the deflationary forces that still hover over the global economy.”
Do you think Greenspan wrote this without a clear understanding of where things are going?
Ramping the Stock Market is very simply the cheapest way to save the Economy – and let the next Administration worry about cleaning up this credit-driven mess. Do you see why I am getting so Bullish about buying the next dip?
Inflation“For the benevolent scenario above to play out, the short-term dangers of deflation and longer-term dangers of inflation have to be confronted and removed. Excess capacity is temporarily suppressing global prices. But I see inflation as the greater future challenge.”
“Inflation is a special concern over the next decade given the pending avalanche of government debt about to be unloaded on world financial markets. The need to finance very large fiscal deficits during the coming years could lead to political pressure on central banks to print money to buy much of the newly issued debt.”
All this New Money creation will lead to inflation, unless we have a rational government that pulls the plug on the Cheap Money before things get out of hand.
“The Federal Reserve, when it perceives that the unemployment rate is poised to decline, will presumably start to allow its short-term assets to run off…”
“If political pressures prevent central banks from reining in their inflated balance sheets in a timely manner, statistical analysis suggests the emergence of inflation by 2012; earlier if markets anticipate a prolonged period of elevated money supply.”
“Thus, interest rates would rise well before the restoration of full employment, a policy that, in the past, has not been viewed favorably by Congress.”
Do you really think Congress has the desire to allow the Fed to raise Interest Rates in a timely manner? Can you imagine a Congressman going home and telling his voters that he is sorry they lost their job, but that lumps had to be taken to prevent large damage down the road?
Rising Interest Rates“…unless US government spending commitments are stretched out or cut back, real interest rates will be likely to rise even more, owing to the need to finance the widening deficit.”
“Government spending commitments over the next decade are staggering... Historically, the US, to limit the likelihood of destructive inflation, relied on a large buffer between the level of federal debt and rough measures of total borrowing capacity. Current debt issuance projections, if realized, will surely place America precariously close to that notional borrowing ceiling. Fears of an eventual significant pick-up in inflation may soon begin to be factored into longer-term US government bond yields, or interest rates.”
“The US is faced with the choice of either paring back its budget deficits and monetary base as soon as the current risks of deflation dissipate, or setting the stage for a potential upsurge in inflation.”
The US Government will overspend and that will lead to US Treasuries getting crushed in the bond market as foreign investors look elsewhere to stash their money. Look at how far prices can fall when rates eventually do rise –
This is just my opinion – but you are nuts if you are buying or holding 30-year Bonds right now. You should also be strongly considering refinancing into 30-year Mortgages at these artificially low Interest Rates. If your mortgage is 5% and inflation averages 10% for the next decade, then the real cost of your mortgage will fall by something like 40%. I expect a similar real loss in 30-year Bonds. I would expect the same from 30-year Triple Net Lease properties as well.
Government vs Free Capital Markets“Should real long-term interest rates become chronically elevated, share prices, if history is any guide, will remain suppressed.”
Greenspan is warning Congress to not kill the Gold-laying Goose. Without the Wall Street Casino to drive the Wealth Effect, Washington would have to make tough decisions about real sacrifice – and that is unacceptable to our Baby Boom leaders.
“Even absent the inflation threat, there is another potential danger inherent in current US fiscal policy: a major increase in the funding of the US economy through public sector debt. Such a course for fiscal policy is a recipe for the political allocation of capital and an undermining of the process of “creative destruction” – the private sector market competition that is essential to rising standards of living.”
“…for the best chance for worldwide economic growth we must continue to rely on private market forces to allocate capital and other resources. The alternative of political allocation of resources has been tried; and it failed.”
The Nationalization camel now has his nose in the tent, and the politicians just won’t be able to help themselves. Each time a new industry or politically connected company gets into trouble, the Government will step in to save the day.
The problem is that there is finite amount of risk capital in the economy. The decisions for how to deploy it used to be made by using a model of potential risk and potential profit. Then the credit bubble was unleashed and leverage made it much easier to fund many more projects. Now the Government is creating its own leverage, but instead of using the newly created capital to make profits, the government is using the money to effectively buy votes – and what could be more profitable for a Politician?
