Alan Greenspan speech on 9/27/05 - US Economic Flexibility - and Analysis.

Discussion in 'Economics' started by SouthAmerica, Sep 29, 2005.

  1. .

    Part 1 of 4
    Alan Greenspan speech on 9/27/05 - “US Economic Flexibility” and analysis.

    SouthAmerica: I heard the Alan Greenspan’s speech live on Bloomberg radio and these are some of the thoughts that crossed my mind during his speech. Here is a copy of Alan Greenspan speech of September 27, 2005 and some of my comments.


    Remarks by Chairman Alan Greenspan
    ”Economic flexibility”
    To the National Association for Business Economics Annual Meeting, Chicago, Illinois
    September 27, 2005

    Today I should like to reflect on some of the ways in which economic policy both affects and is affected by the increasing flexibility of the U.S. economy.

    For this country's first century and a half, government was only peripherally engaged in what we currently term the management of aggregate demand.

    Any endeavor to alter the path of private economic activity through active intervention would have been deemed inappropriate and, more important, unnecessary. In one of the more notable coincidences of history, our Declaration of Independence was signed the same year in which Adam Smith published his Wealth of Nations. Smith's prescription of letting markets prevail with minimal governmental interference became the guiding philosophy of American leadership for much of our history.


    SouthAmerica: Also published on December 26, 1776
    Adam Smith publishes “The Wealth of Nations”
    Edward Gibbon publishes “The History of the Decline and Fall of the Roman Empire”
    35th and last volume of “Diderot's Encyclopedie” published


    Alan Greenspan - 9/27/05: With a masterful insight into the workings of the free-market institutions that were then emerging, Smith postulated an "invisible hand" in which competitive behavior drove an economy's resources toward their fullest and most efficient use. Economic growth and prosperity, he argued, would emerge if governments stood aside and allowed markets to work.

    Indeed, within a very few decades, free-market capitalism became the prevailing stance of most governments' economic policy, even if it was often implemented imperfectly. This framework withstood the conceptual onslaughts of Robert Owen's utopians, Karl Marx's communists and later, the Fabian socialists.

    The free-market paradigm came under more-vigorous attack after the collapse of the world's major economies in the 1930s. As the global depression deepened, the seeming failure of competitive markets to restore full employment perplexed economists until John Maynard Keynes offered an explanation that was to influence policy practitioners for generations to come.

    He argued that, contrary to the tenets of Smith and his followers, market systems did not always converge to full employment. They often appeared to settle at an equilibrium in which significant segments of the workforce were unable to find jobs. In the place of Smith's laissez-faire approach arose the view that government action was required to restore full employment and to rectify what were seen as other deficiencies of market-driven outcomes.

    A tidal wave of regulation soon swept over much of the American business community. Labor relations, securities markets, banking, agricultural pricing, and many other segments of the U.S. economy became subject to the oversight of government.

    The apparent success of the economy during World War II, which operated at full employment in contrast to the earlier frightening developments during the Depression years, led to a considerable reluctance to fully dismantle wartime regulations when the hostilities came to an end.

    However, cracks in the facade of government economic management appeared early in the post-World War II years, and those cracks continued to widen as time passed. At the macro level, the system of wage and price controls imposed in the 1970s to deal with the problem of inflation proved unworkable and ineffective. And at the micro level, heavy regulation of many industries was increasingly seen as impeding efficiency and competitiveness. By the early 1980s, the long-prevalent notion that the centrally planned economy of the Soviet Union was catching up with the West had begun to be discredited, though it was not fully discarded until the collapse of the Berlin Wall in 1989 exposed the economic ruin behind the Iron Curtain.


    SouthAmerica: If you forget and don’t take in consideration the costs related to the Military Industrial Complex and the massive costs related to the Vietnam War – Then you can blame the 1970’s inflation on government regulation.


    Alan Greenspan - 09/27/05: Starting in the 1970s, U.S. presidents, supported by bipartisan majorities in the Congress, responded to the growing recognition of the distortions created by regulation, by deregulating large segments of the transportation, communications, energy, and financial services industries. The stated purpose of this deregulation was to enhance competition, which had come to be seen as a significant spur to productivity growth and elevated standards of living. Assisting in the dismantling of economic restraints was the persistent, albeit slow, lowering of barriers to cross-border trade and finance.


    SouthAmerica: Their solution - deregulating large segments of the transportation, communications, and energy.

    They did a great job – They bankrupted many of the major communications companies, the entire airline industry, and they are doing a great job regarding energy – they created Enron – a fast collapsing power grid structure of the US economy, and so on. (If the idea was to wreck the foundations of the US economy then they did a great job).

    Quoting from my article published on September 2002 – I said the following: “Countdown to Armageddon”.

    …Until recently, I used to believe in a completely free market economy. Today I know there is a place for government regulations and government protection of its industrial base against foreign competition. Deregulation has been a disaster in the U.S. to the airline, the energy, and the telecommunications industries. For example; many airlines are on the brink of bankruptcy in the United States.

    Business Week magazine of August 5, 2002 reported that since the Telecommunications Act was passed in 1996 to deregulate the telephone industry, investors have lost over US$ 2 trillion as the stock prices tumbled 95 percent or more from their highs. The crisis could relegate the U.S. to second-class status in the communications industry in the future.

    I used to think that governments at all levels usually wasted lots of money, and that they were a very poor allocator of resources. I used to think that the free open market system was the best allocator of resources. Today I have my doubts about unregulated and a savage and destructive type of capitalism I have seen in operation since the mid-80's. It started with the savings & loan scandals and debacle of that industry in the 1980's and culminated with the latest string of company scandals on Wall Street. I believe that the government has a role in stabilizing the economy.

    For years, an overvalued financial market built on misleading and false information sent highly misleading signals to investors who eventually lost trillions of valuable national savings, which were misallocated to unneeded and wasteful investments. Investors lost over US$ 2 trillion in the telecommunications industry and over US$ 1 trillion in the fiasco. These investments are gone and will have an impact on many people's retirement plans in the future, since a lot of their pension money was invested in these promising areas.


    Alan Greenspan - 09/2705: As a consequence, the United States, then widely seen as a once-great economic power that had lost its way, gradually moved back to the forefront of what Joseph Schumpeter, the renowned Harvard professor, had called "creative destruction"--the continual scrapping of old technologies to make way for the innovative. In that paradigm, standards of living rise because depreciation and other cash flows of industries employing older, increasingly obsolescent technologies are marshaled, along with new savings, to finance the production of capital assets that almost always embody cutting-edge technologies. Workers, of necessity, migrate with the capital.


    SouthAmerica: That is the natural way of a business life cycle: development, maturity, and decline.

  2. .

    Part 2 of 4
    Alan Greenspan speech on 9/27/05 - “US Economic Flexibility” and analysis.


    Alan Greenspan - 09/27/05: Through this process, wealth is created, incremental step by incremental step, as high levels of productivity associated with innovative technologies displace less-efficient productive capacity. The model presupposes the continuous churning of a flexible competitive economy in which the new displaces the old.

    As the 1980s progressed, the success of that strategy confirmed the earlier views that a loosening of regulatory restraint on business would improve the flexibility of our economy. No specific program encompassed and coordinated initiatives to enhance flexibility, but there was a growing recognition that a market economy could best withstand and recover from shocks when provided maximum flexibility.

    Beyond deregulation, innovative technologies, especially information technologies, have contributed critically to enhanced flexibility. A quarter-century ago, for example, companies often required weeks to discover the emergence of inventory imbalances, allowing production to continue to exacerbate the excess. Excessive stockbuilding, in turn, necessitated a deeper decline in output than would have been necessary had the knowledge of the status of inventories been fully current. The advent of innovative information technologies significantly shortened the reporting lag, enabling flexible real-time responses to emerging imbalances.

    Deregulation and the newer information technologies have joined, in the United States and elsewhere, to advance flexibility in the financial sector. Financial stability may turn out to have been the most important contributor to the evident significant gains in economic stability over the past two decades.


    SouthAmerica: Banking and financial sector deregulation helped us to achieve massive fraud on Wall Street, trillions of dollars in losses to shareholders including pension plans and WorldCom’s bankruptcy alone caused over 130 other companies to go out of business - During the 1990s, Jack Grubman comes to personify a new type of Wall Street analyst -- one celebrated for his close relationship with management of the companies he covers. He advises Ebbers on WorldCom deals, and attends three WorldCom board meetings.

    …The Telecommunications Act is designed to open up the telecom industry to greater competition by allowing the regional "Baby Bells" to enter the long-distance market if they open up their local monopolies to competition. (Previous regulatory restrictions had prevented local and long-distance companies from competing against each other.)

    Because of the difficulty in reconciling various technical and economic obstacles, Congress instructs Reed Hundt, then chairman of the Federal Communications Commission (FCC), to spend six months writing new rules to control the deregulation process. The Baby Bells urge Hundt to move slowly, while long-distance companies, including WorldCom, press him to act quickly in order to speed their entry into the Bells' local markets. Bernie Ebbers spends two days in June lobbying Hundt for faster deregulation.

    On Aug. 8, 1996 the FCC releases a 682-page "interconnection order" which sets the rules for opening local markets. Initially, the rules are tilted against the Baby Bells' in favor of their competitors.

    As old-fashioned telephone networks are being transformed into the backbone for the Internet, there is a large need for building new fiberoptics systems. Wall Street sees a potential gold mine for raising capital to finance the growth, for bringing new telecoms public, and for helping the burgeoning telecom industry finance corporate mergers, and sell corporate bonds.

    …In 1997 - Engineered by Travelers CEO Sanford Weill, the $9 billion stock swap combines the bond-trading firm Salomon Brothers and Smith Barney, a primarily retail brokerage, into an investment bank powerhouse.

    …In 1998 - In a brazen deal, Sanford I. Weill, chairman of the Travelers Group and John S. Reed, chairman of Citicorp, announce a merger of their giant financial empires in a $70 billion stock swap that dwarfs the WorldCom-MCI merger. The 1998 merger, which was engineered by Weill, brings together such brand names as Citibank, Travelers, Salomon Smith Barney, and Primerica. Because this deal goes beyond the limits of existing laws, Weill, joined by Reed, “privately obtains temporary approval of the deal from Alan Greenspan, chairman of the Federal Reserve Board,” and then helps mobilize the financial services industry to lobby Congress to repeal restrictive banking laws. Reed and Weill announce they will jointly run the new superbank, but Reed eventually resigns in early 2000 after losing a power struggle to Weill.

    … Former Salomon Smith Barney brokers say that during the late 1990s stock market bubble, Grubman and his team develop a strategy to win telecom banking deals by awarding favored customers, such as Bernie Ebbers, shares in hot telecom initial public offerings (IPOs), a practice known as "spinning." Salomon Smith Barney later tells Congress that Bernie Ebbers made $11 million through 21 Salomon Smith Barney-sponsored IPO allocations.

    In 1999 - Joshua Timberlands, a company controlled by Bernie Ebbers, receives a $499 million loan, which is later folded into $1 billion mortgage from Citigroup's Travelers unit for the purchase of half a million acres of timberland in Mississippi, Alabama and Tennessee. By taking a loan instead of selling stock, Ebbers is able to convert his WorldCom wealth into hard assets.

    In 2002 - On April 22 -- after the stock had fallen 94 percent from its June 1999 peak -- Grubman downgrades his rating on WorldCom from a "buy" to a "neutral." He never puts a "sell" rating on the stock before it is de-listed.

    In 2002 - On June 25, WorldCom admits that it had inflated its earnings by $3.8 billion -- the largest accounting fraud in history. WorldCom CFO Scott Sullivan is fired and arrested two months later on charges of securities fraud, conspiracy and filing false statements with the Securities and Exchange Commission (SEC). In August and again in November, WorldCom revises its financial statements, raising the total amount discovered from improper accounting procedures to $9 billion. WorldCom files for bankruptcy in July.

    In August 2002 - Under fire from investors who lost an estimated $2 trillion in telecom stocks, and sharply criticized by scores of Salomon Smith Barney stockbrokers who had advised customers based on his research, Grubman leaves Salomon Smith Barney by "mutual agreement." He receives a severance package worth $30 million, and Salomon agrees to cover his legal bills. The severance includes a $200,000 per year retainer to keep Grubman available to Citigroup and Salomon to help with their defense against lawsuits and government charges.

    Source of above info about WorldCom and Grubman - PBS / Frontline


    Alan Greenspan - 09/27/05: Historically, banks have been at the forefront of financial intermediation, in part because their ability to leverage offers an efficient source of funding. But in periods of severe financial stress, such leverage too often brought down banking institutions and, in some cases, precipitated financial crises that led to recession or worse. But recent regulatory reform, coupled with innovative technologies, has stimulated the development of financial products, such as asset-backed securities, collateral loan obligations, and credit default swaps, that facilitate the dispersion of risk.

    Conceptual advances in pricing options and other complex financial products, along with improvements in computer and telecommunications technologies, have significantly lowered the costs of, and expanded the opportunities for, hedging risks that were not readily deflected in earlier decades. The new instruments of risk dispersal have enabled the largest and most sophisticated banks, in their credit-granting role, to divest themselves of much credit risk by passing it to institutions with far less leverage. Insurance companies, especially those in reinsurance, pension funds, and hedge funds continue to be willing, at a price, to supply credit protection.


    SouthAmerica: Everything looks rosy until the day that the derivatives market has a major meltdown – which will happen in the future, and will trigger the next major worldwide depression.

  3. .

    Part 3of 4
    Alan Greenspan speech on 9/27/05 - “US Economic Flexibility” and analysis.

    Alan Greenspan - 09/27/05: These increasingly complex financial instruments have contributed to the development of a far more flexible, efficient, and hence resilient financial system than the one that existed just a quarter-century ago. After the bursting of the stock market bubble in 2000, unlike previous periods following large financial shocks, no major financial institution defaulted, and the economy held up far better than many had anticipated.

    If we have attained a degree of flexibility that can mitigate most significant shocks--a proposition as yet not fully tested--the performance of the economy will be improved and the job of macroeconomic policymakers will be made much simpler.

    Governments today, although still far more activist than in the nineteenth and early twentieth centuries, are rediscovering the benefits of competition and the resilience to economic shocks that it fosters. We are also beginning to recognize an international version of Smith's invisible hand in the globalization of economic forces.

    Whether by intention or by happenstance, many, if not most, governments in recent decades have been relying more and more on the forces of the marketplace and reducing their intervention in market outcomes.

    We appear to be revisiting Adam Smith's notion that the more flexible an economy, the greater its ability to self-correct after inevitable, often unanticipated disturbances. That greater tendency toward self-correction has made the cyclical stability of the economy less dependent on the actions of macroeconomic policymakers, whose responses often have come too late or have been misguided.

    It is important to remember that most adjustment of a market imbalance is well under way before the imbalance becomes widely identified as a problem. Individual prices, exchange rates, and interest rates, adjust incrementally in real time to restore balance. In contrast, administrative or policy actions that await clear evidence of imbalance are of necessity late.


    SouthAmerica: Today, the market imbalances are being corrected by the Central Banks of China, Japan, and other Asian countries - They finance the United States gigantic budget deficits in exchange for American jobs.


    Alan Greenspan - 09/27/05: Being able to rely on markets to do the heavy lifting of adjustment is an exceptionally valuable policy asset. The impressive performance of the U.S. economy over the past couple of decades, despite shocks that in the past would have surely produced marked economic contraction, offers the clearest evidence of the benefits of increased market flexibility.

    We weathered a decline on October 19, 1987, of a fifth of the market value of U.S. equities with little evidence of subsequent macroeconomic stress--an episode that hinted at a change in adjustment dynamics. The credit crunch of the early 1990s and the bursting of the stock market bubble in 2000 were absorbed with the shallowest recessions in the post-World War II period. And the economic fallout from the tragic events of September 11, 2001, was moderated by market forces, with severe economic weakness evident for only a few weeks. Most recently, the flexibility of our market-driven economy has allowed us, thus far, to weather reasonably well the steep rise in spot and futures prices for oil and natural gas that we have experienced over the past two years. The consequence has been a far more stable economy.

    In perhaps what must be the greatest irony of economic policymaking, success at stabilization carries its own risks. Monetary policy--in fact, all economic policy--to the extent that it is successful over a prolonged period, will reduce economic variability and, hence, perceived credit risk and interest rate term premiums.

    A decline in perceived risk is often self-reinforcing in that it encourages presumptions of prolonged stability and thus a willingness to reach over an ever-more-extended time period. But, because people are inherently risk averse, risk premiums cannot decline indefinitely. Whatever the reason for narrowing credit spreads, and they differ from episode to episode, history cautions that extended periods of low concern about credit risk have invariably been followed by reversal, with an attendant fall in the prices of risky assets. Such developments apparently reflect not only market dynamics but also the all-too-evident alternating and infectious bouts of human euphoria and distress and the instability they engender.

    Therefore, because it is difficult to suppress growing market exuberance when the economic environment is perceived as more stable, a highly flexible system needs to be in place to rebalance an economy in which psychology and asset prices could change rapidly. Indeed, as I have pointed out in the past, policies to enhance economic flexibility need to be as integral a part of economic policy as are monetary and fiscal initiatives.

    Relying on policymakers to perceive when speculative asset bubbles have developed and then to implement timely policies to address successfully these misalignments in asset prices is simply not realistic. As the Federal Open Market Committee (FOMC) transcripts of the mid-1990s duly note, we at the Fed were uncomfortable with a stock market that appeared as early as 1996 to disconnect from its moorings.

    Yet the significant monetary tightening of 1994 did not prevent what must by then have been the beginnings of the bubble of the 1990s. And equity prices continued to rise during the tightening of policy between mid-1999 and May 2000. Indeed, the equity market's ability to withstand periods of tightening arguably reinforced the bull market's momentum. The FOMC knew that tools were available to choke off the stock market boom, but those tools would only have been effective if they undermined market participants' confidence in future stability. Market participants, however, read the resilience of the economy and stock prices in the face of monetary tightening as an indication of undiscounted market strength.

    By the late 1990s, it appeared to us that very aggressive action would have been required to counteract the euphoria that developed in the wake of extraordinary gains in productivity growth spawned by technological change. In short, we would have needed to risk precipitating a significant recession, with unknown consequences. The alternative was to wait for the eventual exhaustion of the forces of boom. We concluded that the latter course was by far the safer. Whether that judgment continues to hold up through time has yet to be determined.

    Flexibility is most readily achieved by fostering an environment of maximum competition. A key element in creating this environment is flexible labor markets. Many working people equate labor market flexibility with job insecurity.


    SouthAmerica: The US Labor Department keeps unemployment rates low at around 5 to 6 percent range using a flexible way of reporting. It is very easy – just create a new category for discouraged workers and you dump any adjustments necessary to achieve the desired fictitious unemployment rate in that category.

    Since George W. Bush became president almost 5 years ago – about 4 million people from age group 44 to 57 disappeared from the US work force (most of them with advanced degrees) – you can find them during the week playing with their laptops and cell phones, and looking busy at Starbucks, Borders, Barnes and Noble - all around the country. (This trend reflects a real waste of talent and practical experiences going on in the US today).

    Another large group – probably in the millions – decided to call themselves consultants (because of various reasons including their age, pride, and so on). Others even though they still reasonable young (on their 50’s) decided to qualify themselves as retired.

    Another very large group of approximately 4 million mostly unemployed people are hiding on disability. In the first 3 years of the Bush administration the number of people who started receiving disability benefits went through the roof.

    The number of people in prison in the United States also continues to grow year after year and in the near future the United States will have over 2.2 million inmates in Federal, State, and local prisons.

    Sorry, if I forgot to mention in the above info some of the other creative ways to fudge the unemployment rate numbers.

  4. .

    Part 4 of 4
    Alan Greenspan speech on 9/27/05 - “US Economic Flexibility” and analysis.


    Alan Greenspan - 09/27/05: Despite that perception, flexible labor policies appear to promote job creation. An increased capacity of management to discharge workers without excessive cost, for example, apparently increases companies' willingness to hire without fear of unremediable mistakes. The net effect, to the surprise of most, has been what appears to be a decline in the structural unemployment rate in the United States.

    Protectionism in all its guises, both domestic and international, does not contribute to the welfare of American workers. At best, it is a short-term fix at a cost of lower standards of living for the nation as a whole. We need increased education and training for those displaced by creative destruction, not a stifling of competition.


    SouthAmerica: American business is finding new ways to be creative and innovative in eliminating business costs.

    Merge your company with another and have a big layoff of people from the merged company.

    Since most of the foundations of the American business are mature (they have been around for a long time) and they have a lot of people dependent on their pensions from these companies – a new strategy is to file for bankruptcy and pass the billions of pension costs for the US government such as steel companies, the entire airline industry, and very soon the entire auto industry – and so on…

    After the government takes over these pension liabilities – the retirees are lucky if they receive 1/3 of their company’s promised pension. (Screw the retirees – and this group of people represents a growing number of people of the US population)

    The other way to cut costs is to deny the promised health care insurance costs to the retired employees. (Screw the retirees – we are talking of millions and millions of old folks here)


    Alan Greenspan - 09/27/05: Moving forward, I trust that we have learned durable lessons about the benefits of fostering and preserving a flexible economy. That flexibility has been the product of the economic dynamism of our workers and firms that was unleashed, in part, by the efforts of policymakers to remove rigidities and promote competition.

    Although the business cycle has not disappeared, flexibility has made the economy more resilient to shocks and more stable overall during the past couple of decades. To be sure, that stability has created some new challenges for policymakers. But more fundamentally, an environment of greater economic stability has been key to the impressive growth in the standards of living and economic welfare so evident in the United States.


    SouthAmerica: Going forward we need new suckers to keep the game going – that is why globalization will be very important in the coming decades – by pushing privatizations, and more labor market and labor laws flexibility around the world (make it easier to take away their retirement funds, and deny them health care benefits) - we have been milking the US domestic market in every way possible to the bone, and since we are creating a massive number of very poor people and we are in the process of destroying the middle class in the United States – very soon it will be time to move any accumulated moneys out of the US (to a tax heaven country) and leave behind only a vast amount of debt, lots of poor people, a destitute group of retired senior citizens, a basically sharecropper economy, and an obsolete infrastructure.


    Final Thoughts:

    SouthAmerica: Alan Greenspan became Fed chairman in August 1987 at the time the cumulative US public debt was $ 2.4 trillion dollars as of 9/30/1987.

    During Alan Greenspan watch at the Fed the cumulative US government debt reached $ 7.9 trillion dollars on 8/24/2005. The US Total Public Outstanding Debt increased by 330 percent.

    Here is the actual Historical Data for Interest Expense Paid on US Outstanding Debt - FISCAL Year Ending 9/30 of each year.

    YEAR - Amount of Interest Paid

    2005 - $ 314,909,670,536.68*
    2004 - $321,566,323,971.29
    2003 - $318,148,529,151.51
    2002 - $332,536,958,599.42
    2001 - $359,507,635,242.41
    2000 - $361,997,734,302.36
    1999 - $353,511,471,722.87
    1998 - $363,823,722,920.26
    1997 - $355,795,834,214.66
    1996 - $343,955,076,695.15
    1995 - $332,413,555,030.62
    1994 - $296,277,764,246.26
    1993 - $292,502,219,484.25
    1992 - $292,361,073,070.74
    1991 - $286,021,921,181.04
    1990 - $264,852,544,615.90
    1989 - $240,863,231,535.71
    1988 - $214,145,028,847.73

    *Note: includes only 10 months of interest expense for year 2005.
    All the above figures are actual US dollars paid each year in interest by the US government on US government outstanding debt.

    During the 18 years that Alan Greenspan has been Fed Chairman (August 30, 1987 – July 30, 2005) the US government paid out $ 5. 8 trillion dollars in interest expense on its - humongous, extremely large, enormous, huge, monstrous, and tremendous – US Government Outstanding Public Debt.

    Source: US Department of the Treasury – Bureau of the Public Debt
    And US Department of Commerce - BEA – Bureau of Economic Analysis

    The cumulative US national debts were only $ 930 billion dollars as of December 31, 1980 - right before Ronald Reagan became president of the United States. Here is the detail of the additions to the US national debt by president:

    Ronald Reagan (8 years in office) added to US debt $ 1.7 trillion dollars.
    George Bush Senior (4 years in office) added to US debt $ 1.5 trillion dollars.
    Bill Clinton (8 years in office) added to US debt $ 1.6 trillion dollars.
    George Bush Junior (first term, 4 years in office) added to US debt $ 1.8 trillion dollars.
    George Bush Junior (second term, 1 year in office) added to US debt about $ 500 billion dollars.

    Since December 31, 1980 the Republican presidents added $ 5.5 trillion dollars to the cumulative US national debt, and the Democratic president added $ 1.6 trillion dollars.

    The Republican administrations added 77 percent of the new US national debt since December of 1980, and the Democratic administration added only 23 percent of the new debt. Since December 31, 1980 the United States had only one fiscally responsible president - former president Bill Clinton - a democrat.

    Note (1): During Alan Greenspan watch – in the last 4 years - George W. Bush started two wars (Iraq and Afghanistan) and at the same time the US government approved large tax cuts – moving the country from a position of government budget surpluses to a position of massive government budget deficits.

    Note (2): According to Federal Reserve data as of September 2004 the cumulative outstanding debt of the states were $ 2 trillion dollars.

    When we add the federal, state and county government outstanding debt – then we have over $ 10 trillion dollars of current outstanding debt.

    On top of that there is another $ 70 trillion dollars in outstanding liabilities related to government Pensions, Social Security, Medicare, Medicaid, and other entitlements.

    If we add on top of that other US government guaranties such as private pension system, and all kinds of other US government guaranties – then just “God” knows the trillions of current potential liabilities that can end up some day on the US governments lap.

    When we compare this level of liabilities on the balance sheet of the US government with companies such as Enron, and WorldCom before they went out of business – then we realized that these two companies were very well managed when compared with the current financial position of the US government.

    In my opinion Paul Volcker was an outstanding Fed Chairman and he did a great job. Regarding Alan Greenspan, only time will tell the entire story, and he is too old to see the real results of his performance as Fed Chairman.

  5. SouthAmerica..

    Outstanding commentary as usual....

    Seeing how the direction of the US is in question...Are there any countries that you do like...and why...etc...

    Which country if any is in the best position for the next 20 years..etc...?
  6. EBenson


    ...yea ,inquiring minds:p want to know...?
    btw,if i remember correcrtly its supposed that the US gov's share of the economy is around 36%(government expenditure as a part of GNP/BNP that is)...have any (historical) data on this development?

    best regards:)
  7. kowboy



    Excellent analysis.

    Part of the equation is the exponential expansion of the money supply M3 and the need to exponentially expand US issued debt instruments in order to finance the deficit. The Fed has not been able to influence government to reign in the deficits. The role of the Fed has been a reactionary one of attempting to do the impossible task of inflating the money supply in order to finance the deficit but without giving the appearance of this causing undue inflationary pressures. But in fact, actually allowing and encouraging a degree of inflation to occur without saying so. One of the main functions of the Federal Reserve has been to devalue the dollar over time so that it's easier to pay back US debt instruments in the future with cheaper devalued dollars, while all the time giving lip service to controlling inflation.

    Others such a John Templeton believe that the US is not the place to invest right now.

    Southamerica, do you have any suggestions for investing elsewhere and do you like any specific sectors?

  8. .
    Libertad: Seeing how the direction of the US is in question...Are there any countries that you do like...and why...etc...

    Which country if any is in the best position for the next 20 years..etc...?


    SouthAmerica: If you have been reading my postings then you know that the diction of the US is not in question – we are heading south.

    In the short term staying out of the market is the best choice until the right opportunities and the right time returns.

    There are a few countries that should do very well in the 20 year time period. Not for an immediate investment, but after the dust settles from the coming rough waters that are ahead.

    Brazil, and China, will provide great investments for the right investors at the right time. Then Russia, and India – the smart people will be able to make money on these emerging markets.

    I am very negative on the US market – and when the shit hits the fan here in the US that will have a major ripple effect around the world.

    The best bet is to stay away from the market until there is a much clear picture of what is going on. I don’t know how much damage it will be done to markets around the world when things head south here in the US.


    EBenson: btw,if i remember correcrtly its supposed that the US gov's share of the economy is around 36% (government expenditure as a part of GNP/BNP that is)...have any (historical) data on this development?


    SouthAmerica: What are you trying to figure out?

    US Federal government total expenditures as a percentage of Revenues plus deficit spending?


    kowboy: The Fed has not been able to influence government to reign in the deficits. The role of the Fed has been a reactionary one of attempting to do the impossible task of inflating the money supply in order to finance the deficit but without giving the appearance of this causing undue inflationary pressures.

    But in fact, actually allowing and encouraging a degree of inflation to occur without saying so. One of the main functions of the Federal Reserve has been to devalue the dollar over time so that it's easier to pay back US debt instruments in the future with cheaper devalued dollars, while all the time giving lip service to controlling inflation.


    SouthAmerica: As “The Economist” magazine reported in the following article below, the decline of the US dollar in the last 3 years makes the United States responsible for the biggest international monetary default in the history of the world.

    Imagine how happy would you be if you were a Central Banker holding from $ 50 to $ 800 billion of this currency. (In Wall Street jargon: the US dollar is becoming “Junk”)

    If you were smart you would have unloaded the junk after the investment declined 25 percent or less. But if the value of the investment continued to go down, then you have to be an “idiot” to continue holding that investment. (I understand that sometimes you get stuck with an investment that you want to unload because there are no buyers.)

    There are too many US Dollars floating around the globe total, and the US government still borrowing by the trillions from the rest of the world.

    If the United States continues to borrow so much money from the rest of the world then in the near future the United States will need to change the exchange rate of the US dollar in relation to 1 Euro and other currencies.

    The US dollar will be sold instead by a more realistic international measurement - The US dollar it will be sold in kilograms as follows:

    1 Euro = 1 kg of US dollars.

    Conversion value:
    1 Kilo = 2.2 lbs.


    The Economist had a Special Report regarding the US dollar on its December 4, 2004 issue – “The disappearing dollar.” (Pg 9)

    Quoting from that article:

    …America’s challenge is not just to reduce its current-account deficit to a level which foreigners are happy to finance by buying more dollar assets, but also to persuade existing foreign creditors to hang on to their vast stock of dollar assets, estimated at almost $ 11 trillion. A fall in the dollar sufficient to close the current-account deficit might destroy its safe-haven status. If the dollar falls by another 30 percent as some predict, it would amount to the biggest default in history: not a conventional default on debt service, but default by stealth, wiping trillions off the value of foreigners’ dollar assets.

    The dollar’s loss of reserve-currency status would lead America’s creditors to start cashing those checks – and what an awful lot of checks there are to cash. As that process gathered pace, the dollar could tumble further and further. American bond yields (long-term interest rates) would soar, quite likely causing a deep recession. Americans who favour a weak dollar should be careful what they wish for. Cutting the budget deficit looks cheap at the price.


    kowboy: Southamerica, do you have any suggestions for investing elsewhere and do you like any specific sectors?


    SouthAmerica: This is what I said to someone who asked me the same question late last year.

    Today, the only place that makes sense to park your money is in U.S. Government securities - "TIPS"

    Below is brief information about these US government securities. Better safe than sorry.

    Cash is king when the shit hits the fan. If you have cash on hand, after the decline you can pick up the pieces for a fraction of its previous price.




    The first issuance of TIPS was in February 1997. Now there are seven years of TIPS history, and the TIPS market, as of 11/30/03, has more than $176 billion, or 4.9%, of the total $3.6 trillion outstanding marketable Treasury debt held by the public. The U.S. Treasury department, under both Democratic and Republican leadership, has assured investors that they are an integral part of the government's debt management strategy. The current Administration's stated policy is to keep the TIPS program in place without a review for change for at least another five years, and has increased the new-issuance frequency from three to four times

    How They Work

    Currently, 10-year TIPS yield 1.96%. That is 2.29% less than the 4.25% that one will get with a 10-year U.S. Treasury note (the cash bond). The principal is adjusted to inflation and semi-annual interest payments are based on the inflation-adjusted principal at the same time interest is paid. As long as inflation remains greater than 2.3% - the difference between the regular Treasury's 4.25% yield and the 1.96% TIPS yield - TIPS are a bet. Like all U.S. Government securities, TIPS are guaranteed to return 100% of original par value even if deflation caused the principal value to fall below 100 as the Treasury will make up the difference when the principal is repaid at maturity.


    Like all U.S. government securities, TIPS are guaranteed to return 100% of the par amount at maturity, even in deflation.

  9. I would ask southamerica if the earthquake was a "warning" to Pakistan.
  10. .

    PoundTheRock: I would ask southamerica if the earthquake was a "warning" to Pakistan.


    SouthAmerica: The United States makes a big deal all the time about North Korea and Iran developing Nuclear Weapons.

    It does not bother me a bit that these two countries develops and built nuclear weapons.

    The only country that worries me – and they already have nuclear weapons – it is Pakistan. If nuclear weapons can end up in the wrong hands I bet the weapons probably were made in Pakistan.

    But in terms of one country using nuclear weapons against another country – I would say India would use it first against Pakistan than the other way around.

    #10     Oct 9, 2005