Prologue:
One of my earliest memories as a child is of dashing around the house at high speed, totally intoxicated by the ability of my legs to transport me at the aforementioned high speed; with the secondary objective of catching my cat ‘Ginger’ in order to cuddle her enthusiastically - no doubt way past the point where she would have been able to ‘feel the love’. At a certain juncture this memory comes to a complete stop…at a point that I later learned corresponded perfectly with my head hitting a large oak table that was standing where it had always stood, minding its own business, doing what oak tables do – staying put.
Eventually I came round in my mother’s embrace…and what happened next scarred my philosophical horizons for the next two decades at least…until I finally saw the importance of the lesson which life had provided. After the usual ‘there there’, a nice cuddle and a thorough clean up job…my mother, no doubt wanting to make her little Prince feel better about his ‘sudden arboreal stop’…led me back to the table…took my hand in hers…lifted it up to my shoulder…and brought it down with gusto, smacking the table roundly with my hand. This was done to the accompaniment of the well meaning and yet insane words that I shall never forget…”Naughty table…Mark smack that naughty table…”
You may have witnessed parents performing similar acts in order to make their children feel better about their miscalculations…you may even have done such a thing yourself…and I’m sure you meant well if you did. But it’s a weird foundational lesson for a kid don’t you think: “Mark, when you make a mistake, find something that can’t argue back and blame it for your misfortunes – you’ll feel much better knowing it wasn’t your fault”. A far better pep talk would have been: “Mark – tables don’t move; you on the other hand, never keep still except when you’re asleep or occasionally unconscious. Tables never do anything or cause anything to happen, you cause lots to happen. So…in future I suggest you look where you are going and navigate round the table rather than attempting to go through it’. For those who think that such a thorough brief might be too much for a child, ‘watch where you’re going love’ would probably work just as well…
What on earth have childhood ‘lessons’ got to do with the price of eggs, you may ask? Well: have you noticed that most of the ‘adults’ who run this rock still seem to be suffering from misapprehension around the concept of ‘personal responsibility’? How they spend much of their time utterly confused by the concepts of ‘cause’ and ‘effect’, getting them back to front most of the time, cocking things up royally as a result…only to turn around and blame someone or something that had absolutely no causative role in the dynamics unfolding. Have you read a newspaper recently? Listened to a politician? Complained to someone about poor service? Queried the performance of a person who is taking your money (stored value) in exchange for providing a product or service that you want to receive (manifest value)? Do you notice an abundance of 'empathy', 'systemic awareness', ‘personal responsibility’, and/or ‘learning from mistakes’…or are you sick to the back teeth with ‘excuses’?
How about this one: have you read or heard a central banker talking about the economy lately? Well it’s funny I should mention that…because I have a recent example to share with you, which illustrates the lack of 'responsibility' that I believe is at the root of our economic woes.
A Teflon Tale:
Many of you will know Richard Duncan, a highly accomplished macro-economist who, whilst I don’t agree with all his solutions, is both astute and crystal clear in his analysis of the problems we face. He also has a refreshing ability to express economic concepts in ‘English’ rather than ‘pretentious gobbledegook’.
In January this year, Mr Duncan had the opportunity to ask former Fed Chairman Alan Greenspan a question at the Agora Economics Roundtable in Baltimore. Greenspan’s reply, or what I would call ‘his wriggling’ frankly beggars belief. The interchange, to use Richard Duncan’s words, is ‘of historic importance’. The full transcript can be found here:
Background: The US runs a massive trade deficit. So, when a Chinese company for example, receives payments for the products it has sold to the US, it takes the dollars to the People’s Bank of China (PBOC), which converts them into RMB and credits those to the exporter’s account. The PBOC then has a choice: does it allow this increased demand for its currency to push up the value of the RMB (making its exports more expensive), or does it print new RMB out of ‘thin air’ (to keep its exports relatively cheap). From 2000 to 2014 China did the latter. As a result China acquired trillions of US dollars that it needed to invest in ‘safe’ assets. Naturally it bought the ‘Go to’ option for governments with dollars to park somewhere - US 10 Year Treasuries. In a nutshell, China has been financing US debt for most of this century…helping to facilitate a massive credit bubble…in China…and in the US…and globally. This credit bubble formed a large part of what folks like Alan Greenspan, Ben Bernanke and Martin Wolf like to refer to as a ‘global savings glut’…because clearly they don’t understand the difference between ‘savings’ and ‘debt’. During his time as Chairman of the Federal Reserve, Alan Greenspan struggled with this ‘savings glut’, and a resulting ‘conundrum’. Over to Richard Duncan to explain these terms:
“The Conundrum”:
Between mid-2004 and mid-2006, the Fed increased the Federal Funds Rate by 425 basis points, but longer-term interest rates (such as the yield on 10-year US government bonds) did not go up as they normally do when the Fed hikes short-term interest rates. In the middle of this interest rate tightening cycle, a Senator asked Chairman Greenspan why long-term interest rates were not going up even though the Fed was hiking. Chairman Greenspan replied, “I don’t know. It’s a Conundrum”
“The Global Savings Glut”:
Both Ben Bernanke and Alan Greenspan explained that the Fed was unable to prevent the property bubble in the United States (and, consequently, the global economic crisis, because there was a “global savings glut”). By that they mean that people in the developing economies had a very high savings rate and they chose to invest their savings in US Dollar-denominated assets, instead of investing at home. Their investments caused US bond prices to rise and US bond yields (i.e. interest rates) to fall. And there was nothing the Fed could do about it.
Now an extract from his interaction with Greenspan:
Richard Duncan:
Dr Greenspan, we know almost everything about the crisis of 2008 by this point, but there’s one very important thing that we don’t know, in my opinion, and that is what was your thinking about the fiat money creation that was being carried out by the central banks of the trade surplus countries? They created trillions of dollars between 2000 and 2007 and they invested 70% of those into US dollar denominated assets, mostly treasury bonds.
For instance, during the “Conundrum years”, mid-2004 to mid-2006, foreign exchange reserves went up by one and a quarter trillion dollars; and 900 billion of those reserves were held in US dollars. Those dollars were invested in US Dollar-denominated assets, mostly treasury bonds. That was enough to finance the entire US government budget deficit for those two years, with 200 billion dollars left over. Doesn’t that explain “the Conundrum”? And how did you think of that at the time?
Alan Greenspan:
I don’t think it does. If you look at double-entry bookkeeping in the national accounts, the type of transactions you’re talking about don’t directly affect that. That is, if you get a central bank, let’s say the case in which is the most general way, in 2008 the federal reserve, because everyone wanted to hold dollars, which I found very fascinating as it was as late as … Remember, we were a fiat currency, we were a weak fiat currency, but stronger than everybody else so through that crisis reserves were US dollars and the federal reserve made a large number of swaps, which were temporary exchange of dollars for Lira, for Euros, any foreign currencies of other central banks…
Richard Duncan:
I’m sorry, could I interrupt. This wasn’t a swap, this was a central bank, the PBOC, printing money, buying dollars and buying treasury bonds, pushing up their price and pushing down their yield.
Alan Greenspan:
Everybody does that but you can’t push the yield down if the market’s running against you.
Richard Duncan:
You were trying to push them up by hiking the Federal Funds Rate by 425 basis points …
Alan Greenspan:
I wasn’t there.
Richard Duncan:
This was when you were hiking rates in 2004, 2005 and 2006, but the ten-year bond yield didn’t go up...
Alan Greenspan:
We thought, what we thought was that we had to tighten the markets and as we did the only tool that we had was the federal funds rate and historically we did not trade in the long end of the market.
Richard Duncan:
My question is, the long end didn’t go up because the PBOC was printing RMB, buying dollars and buying treasury bonds.
Alan Greenspan:
No, that’s not the reason. The reason was that the cold war came to an end and the Berlin wall came down and you have a huge increase in the number, it was something like a billion people came out from behind the iron curtain…
Richard Duncan:
The creation of the equivalent of 10 trillion dollars by the foreign central banks between 2000 and 2014 had no impact on the global savings glut?
Alan Greenspan:
We don’t know because you can’t tell. There were so many forces at play at that time it was difficult to separate them.
So there you have it – the ‘global savings glut’ was nothing to do with massive money printing in China and it's subsequent funding of US debt, which Greenspan could have raised the alarm about at any point…it was created by millions of newly liberated, and surprisingly well minted ex-commies rushing out to buy US Treasuries…yeah right…
As well as the full transcript at the link above, there is a very good interview with Richard Duncan in which he talks about this, at ‘The Investor Podcast”:
https://www.theinvestorspodcast.com
Epilogue:
This ‘gob-smacking’ lack of personal responsibility is nothing whatsoever to do with intellect or IQ, or any other term we use to measure a person’s ability at ‘left brain’ tests. The problem here is twofold: firstly 'hubris', which brings with it an inability to see the bigger picture, and secondly good old fashioned 'lying'. Dr Greenspan, along with the rest of his central banking brethren, has the need to maintain the mirage of control, to protect the ‘models’ that create this mirage, and to blame other people and factors outside of himself in order to keep the charade going. Ultimately of course, the complex dynamic system that we call ‘the economy’ doesn’t care two hoots about any of that. The collapse, when it comes, will not be impressed with excuses, and it will punish the innocent as much as, and probably far more than, people like Alan Greenspan, who were instrumental in creating it.
For all practical purposes, if you’re an investor, a saver, a central banker, or an observer, whatever you do…your mind-set is the most important thing to understand. You’re either part of a complex system that consists of its own laws, rhythms and cycles…that it is possible to respond to...or you are a victim of the world’s failure to comply with your theory of how it should behave.
Unfortunately for central bankers and most of the mainstream economists that they went to school with, mathematical models coupled with a Teflon coated mind-set have immunised them (or so it appears) when their models don’t work: ‘lack of aggregate demand?’ (naughty consumers), a ‘savings glut’ (naughty investors), ‘secular stagnation’ (naughty everybody). If you’re especially slippery and know how to suck up to the right people, you can even explain away a catalogue of significant personal failures with intelligent sounding, but utterly spurious reasons for why each one was someone or something else’s fault. Many a ‘theory’ has been born that way. Most of these theories don’t explain anything useful, but they do explain Alan Greenspan…and Ben Bernanke…and Larry Summers...et al....quite well.