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August 31, 2005

The Greenspan Legacy
by Rob Kirby

Soaring Like a Double Eagle Over Jackson Hole, Wyoming

This past week saw his eminence - a surprisingly sober Sir Alan Greenspan accepting the accolades of his peers and the press, taking a victory lap through the resort community of Jackson Hole, Wyoming. After 18 years stewarding the America's monetary fortunes at the Federal Reserve, many pundits claimed that this 'love in' and the platitudes were his due - so much so, I must admit - that I even found myself 'welling up' and reaching for a Kleenex at one point watching CNBC's Friday afternoon coverage of the proceedings. So, in the retrospective spirit of the moment, I've decided to write a snippet or a "look see" of Sir Alan's legacy from a contrarian's bird's eye perspective - highlighting one of his biggest achievements and zero in on how he's changed over the years.

The End of the Innocence

As I began writing this piece - I found myself wanting to open with a statement that attests to Mr. Greenspan's contributions or accomplishments as an economist - but truthfully, I've had a great deal of difficulty doing so. Years ago, I used to view Al the economist, in such pure terms - like pretty maids all in a row. My view of Alan Greenspan today is not one of economist - appointed to head the Federal Reserve 18 years ago with the solemn duty to execute the effective and responsible monetary policy of the United States of America. My view of Sir Alan today is one of a politician who deserted his roots. By examining an even cursory sample of his earliest writings, like Gold and Economic Freedom [circa 1967],

"The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy's books are finally balanced, one finds that loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion."

This passage is important because in it, Greenspan articulates how important and co-related money supply growth is to inflation. I'm going to go out on a limb, so to speak, and suggest that money supply growth and it's causal relationship with inflation is in fact one of the 10 commandments of economics. Now, if we juxtapose these words of his to the actions of the Fed - regarding money supply reporting - on his watch,

"..The Fed de-emphasized M1 as a guide for monetary policy in late 1982, and it stopped announcing growth ranges for M1 in 1987…"

The year 1987 was the year Sir Alan took over at the Federal Reserve. The essence of the passage cited above is this; in 20 short years, and in the first year of Sir Alan's reign, he repealed one of the 10 commandments, quite possibly the cornerstone, of economics . While it is more than evident that Mr. Greenspan is categorically a changed man [or revisionist, perhaps?]; certainly hell hasn't frozen over yet - or has it? For those of you who feel that this jiggering with M1 might have simply been a 'one off' or an innocent mistake, just take a look what followed this infamous 1987 action where the broader M's were concerned,

"By the early 1990s, the relationship between M2 growth and the performance of the economy also had weakened. Interest rates were at the lowest levels in more than three decades, prompting some savers to move funds out of the savings and time deposits that are part of M2 into stock and bond mutual funds, which are not included in any of the money supply measures. Thus, in July 1993, when the economy had been growing for more than two years, Fed Chairman Alan Greenspan remarked in Congressional testimony that "if the historical relationships between M2 and nominal income had remained intact, the behavior of M2 in recent years would have been consistent with an economy in severe contraction." Chairman Greenspan added, "The historical relationships between money and income, and between money and the price level have largely broken down, depriving the aggregates of much of their usefulness as guides to policy. At least for the time being, M2 has been downgraded as a reliable indicator of financial conditions in the economy, and no single variable has yet been identified to take its place."

And there you have it folks, right from the Fed's own web site, a précis of the complete and utter "unhinging" or re-writing of the relevance of money supply and money supply growth in the United States of America - all at the hands, or should I say stewardship - of Sir Alan. This all happened in a seeming New York Minute, by mid-late 1993.

I Can't Tell You Why?

Now, I'll bet you will never guess what actually happened to money supply once it was de-emphasized and the economic world was told not to bother watching it. That would be after the economic revisionists proclaimed it 'dead and buried'? It's really quite a sight to behold:

Fed Res. Chart compliments of Jesse: http://www.geocities.com/arthurcutten/jesse.html

After clearing the decks, so to speak, they didn't waste any time now did they? I mean, it didn't take very long, now did it? I ask, do you really think all of this stuff is just life in the fast lane - where accidents usually happen, or; is this the work of a driven achiever with a plan? Pretty cunning all the same, eh?

The Last Resort

So perhaps it's not so unusual that it would all come down to this; the brain trust all gathered in Jackson Hole, not in the city, taking it easy - for the last time with Big Al at the helm. It was spun as time for reflecting on the accomplishments of Sir Alan and no doubt plotting strategy - and a possible successor?

Soon, there will be no more Maestro; how will we ever get over it? And what type of qualities should a successor to Sir Alan possess, anyway? Linguistically, they will undoubtedly be required to have mastery over the smooth talk known as 'Fed Speak" to herd the pundits and masses alike. The requisite demeanor would imply a degree of unflappability. As a physical specimen, diminutive or imposing, now that's a good question, err, in keeping with the spirit of the piece - let's just say 'yet to be resolved conundrum', shall we?

Desperado

I must say that I find it somewhat odd - Greenspan's parting words at Jackson Hole seemed sobering [Tequila Sunrise, perhaps?] - almost lucid - like he was in fact coming to his senses. It had a familiar ring to it - like a girl from yesterday. He warned of growing excesses [asset bubbles] that pose systemic risk to the American financial system - the very ones that his economic stewardship outlined above helped to create. If, as and when Sir Alan finally checks out of this Hotel Jackson Hole, my fear is that his legacy and the imbalances he created just won't ever leave. Oh well, we've always got love to keep us alive!

I've got a funny feeling the Double Eagles just might make a comeback too. How bout you?

Rob Kirby
Kirby Analytics

Copyright © 2004 - 2006 Rob Kirby

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