Forget "Meanie Greenie": Keep
Spending!
By Duru
November 20, 2004
I practically fell out of my chair when I
read the following quote from Greenspan essentially warning that the world will
not and cannot continue to finance the prolific spending of Americans forever:
"The
question now confronting us is how large a current account deficit in the
Resistance
to financing, however, is likely to emerge well before debt servicing becomes
an issue, or before the economic return on assets invested in the
Net
cross-border claims against
This
situation suggests that international investors will eventually adjust their
accumulation of dollar assets or, alternatively, seek higher dollar returns to
offset concentration risk, elevating the cost of financing of the U.S. current
account deficit and rendering it increasingly less tenable. If a net importing
country finds financing for its net deficit too expensive, that country will,
of necessity, import less." (from "Remarks
by Chairman Alan Greenspan At the European Banking Congress 2004, Frankfurt,
Germany" November
19, 2004, Panel discussion: Euro in Wider Circles)
Of course these are dire words from the one
person who probably personifies big spending and big debt. After all, it has
been Greenie's easy money policies over the years that have encourage
this huge run-up in debt. And now he wants to play
"meanie"? Amazing. But as usual, Greenie had
reassuring words for the audience: "… the marked increase in the economic flexibility of the American economy
that has developed in recent years suggests that market forces should over time
restore, without crises, a sustainable
The capper for me is the following quote as
reported from briefing.com. Greenie was responding during the Q&A after his
remarks quoted above: "Rising interest rates have been advertised for so
long and in so many places that anyone who has not appropriately hedged this
position by now obviously is desirous of losing money." (briefing.com,
Nov 19, 2004). Talk about getting real! Wow! When was the last time we
saw Greenspan talk so forthrightly and frankly? Ever?
Meanie Greenie indeed!
This apparent change in heart by our
esteemed money man was blamed for the market's big sell-off today. In the large
scheme of things, such a sell-off should come as no surprise. The market has
been moving nearly straight up for three weeks. Some kind of release has been
long over-due. I suspect that once people get over their initial shock over
Greenie's new no-holds-barred attitude, they will get back to ignoring the
precipitous decline of the dollar and continue buying more stocks. I suggested
in earlier missives that the bears have yet
again gotten the story wrong. Their one retort now is the looming specter
of a worthless currency. But since Greenspan professed ignorance over how
this whole thing will play out, market players (outside of bondland) are free
to pretend all sorts of rosy scenarios will unfold to take care of this mess. So
while I continue to endorse riding the bull here, I am quite concerned over the
larger picture.
In other related news….perhaps Congress got
the message from the new Meanie Greenie? Today, the House apparently passed a
penny-pinching spending bill…at least conservative by their newly adopted prolific
spending habits. Earlier in the week, cold hard reality forced Congress to
raise the Federal government's borrowing limit another $800 billion. In fact,
the Wall Street Journal said in response: "The measure was yet another
testament to record annual deficits, which reached $413 billion last year and
are expected to climb indefinitely." ("House Approves
$388 Billion Spending Bill" by AP, Nov 20, 2004). The emphasis is mine. It
indicates that there is no expectation that we will pay off our bills anytime
in the near, or perhaps even knowable, future. So now, not only do we fund new
spending by cutting taxes, we begin the hard sweat of cutting the deficit in half
by first raising the spending limit. Brilliant! If only ordinary Americans
could run their finances like this. We could all be rich in no time.
Speaking of ordinary Americans, I was quite
shocked to read in Barron's this weekend that Americans continue to get their
cues from the earlier version of easy-money Greenie. Randall Forsyth reports
that since the 1950's, Americans mainly operated household surpluses even when
counting housing as an expense rather than investment as is often conveniently
done. The nominal amount of this surplus generally grew before hitting a brick
wall in the early to mid-90s. Now, it is deep, deep in the red to the tune of
over $300 billion. Unfortunately, this data is not normalized for things like inflation
but the overall message is that for the first time in a very long time,
Americans are spending much more than they make…and doing it "Big
Willie" style. It is no wonder the dollar is falling like a rock. We
cannot spend our dollars fast enough or ship them overseas on imported goods on
speedy enough boats.
In summary, gold keeps looking better and
better to me. In fact, I am betting there is bound to be some kind of swift
bumrush on hard assets at some point soon that will extend the bull market in
commodities to unexpected new heights. Try to make sure you have already taken
your share by then.
Be careful out there!