GRAYER MATTERS Wednesday, 2 October 2002
By Bill Bonner
Blue turns to gray
And try as you may
You just don't feel good
You just don't feel alright...
"Blue Turns to Gray"
The Rolling Stones
The economy reminds a casual observer of Keith Richards
after a concert: he is still standing, but he looks as
though he might have died during a riff in 'Sister
Morphine.'
"We are at a loss for words," writes popular economist
Paul Samuelson. "If nothing else, this baffling economy
has defeated the vocabulary of economics."
Popular economic theory has only black and white, growth
and recession, boom and bust...and a logic that has been
proven dead wrong. Interest rates go up, they say, and
an economy stifles; they go down and the economy grows.
But in Japan, rates have been near zero for years...
while the economy, off and on, sinks. American
economists paid no attention. Japan was different.
People eat raw fish...and make wine, yech, out of rice!
No wonder they've got problems.
But now it is coming home. After 475 basis points of
rate cuts in America, we are supposed to be in a
recovery, "but it doesn't feel like one," says Paul
Samuelson.
It doesn't feel like one, and here we offer a hypothesis
as to why this may be: because it is not one. It is
something else. In the rest of today's letter, we offer
Samuelson and others a few old words to help us all
understand just what it is.
Monday, we suggested 'bear market' to describe what is
happening in today's market. Today, we offer "savings"
and "debt" to explain why.
The words will be unfamiliar to modern American
economists. In the last decade, Alan Greenspan, until
recently the world's favorite economist and now a Knight
of the British Empire, rarely used them. Instead, his
speeches were greased with the hip new lingo of the New
Era. Scarcely a single discourse failed to slip in
'structural productivity growth' wrought by 'technical
innovation.' Missing were the tougher words of an
earlier generation of economist - 'savings' and 'debt',
for example. Also missing was any warning to investors
about the huge bubble the illustrious chairman had
suffered to expand during his watch at the Fed...or any
effort to do anything about it.
Mr. Greenspan's carefully-chosen words and inaction won
him a wide audience of admirers, friends and
accomplices. Mr. and Mrs. Clinton, for example. Ken Lay.
Dennis Kozlowski. The folks who run Fannie Mae...
millions of negligent investors and almost everyone else
who saw a chance for easy money. None was reminded that
he needed to save in order to expect to improve his lot
in life. Neither did the Fed chairman nag about debt
levels. "Borrow as much as you want," he seemed to say.
"This hot new productivity thing will make us all rich."
When Mick Jagger received his knighthood, his partners
were miffed. They accused him of 'selling out.' No such
squeal was heard when Greenspan greeted the queen; it
was understood that the former libertarian gold bug had
sold out long ago.
But the Queen's honors committee is slow to catch on. By
the time it has noticed a rising star, the poor thing is
often already burnt-out...and cold as a dead analyst.
"Now, hardly a day passes," says a Reuters report,
"without some newspaper carrying a column sniping that
[Greenspan] did not do enough to prevent the explosion
in asset prices and mismanaged its aftermath."
The French had better timing. They gave Mr. Greenspan
their highest award, the Commander of the Legion of
Honor, 18 months earlier. "Like great musicians, you
combine outstanding technical abilities and analytical
skills," said Ambassador Bujon de l'Estang, as if he
were Napoleon conferring a battlefield decoration on a
sergeant, "with charisma and gusto."
The French ambassador to the US seems to have discovered
that Alan Greenspan once played saxophone in a jazz
band. He couldn't leave it alone:
"Like most great soloists you are also a team player.
Most of all, you share with great musicians one
additional attribute: an infallible ear..."
Mr. Greenspan had a good ear, no one can argue with
that. He knew what tune the world still wanted to tap
its toe to when he put on the "Cravate" of the Legion of
Honor in January 2001 and began cutting interest rates.
And he knew the words people wanted to hear, too.
But that was then; this is now. And Greenspan's latest
honors are mocked. He should have been given "the Order
of the Bubble" says David Hale in the Financial Times.
And now as economists search for new words, we offer
them old ones.
"It seems to us an exceedingly straightforward logic,"
writes our favorite old-school economist, not yet
noticed by the Queen's honors committee, Dr. Kurt
Richebacher. "Moreover, it has historical experience on
its side. Assessing the present economic situation in
the United States, the key point to realize is that for
years it has been exposed to the most inordinate credit
excesses in history. It has been crystal-clear for a
long time that it was a typical bubble economy, being
defined as an economy where unusually sharp rises in
asset prices fuel extraordinary borrowing and spending
binges, either in businesses (Japan) or by consumers
(America)."
An economy makes progress, Dr. Richebacher explains, by
saving money - that is, taking resources away from
consumption and using them to build better machines or
new technologies or more efficient systems.
Savings require discipline, forbearance and sacrifice.
They are the 'something' without which you don't get but
'nothing'. But the word was forgotten by the last
generation of American economists...and replaced in the
dictionary of central bankers by the word 'credit',
which promised to do the same work at much less cost.
Central bankers could create credit out of thin air. And
it was widely believed that merely manipulating the cost
of this credit - by raising or lowering short term rates
- was the whole secret of keeping a modern consumer
economy on the road to growth.
Credit was as big a hit in the America of the 1990s as
its star central banker. But that was when Greenspan was
called the 'maestro.' Now Greenspan's ear seems to fail
him...the cool, blue jazz has turned gray...and the
chattering classes are looking for new words to describe
him.
More to come...
Bill Bonner |
