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Greenspan Again…

Alan Greenspan is at it again. This time comparing the USA to Greece. Greenspan, the same economist who recently stated that his model for understanding the economy was wrong, is now trying to compare the world’s common reserve currency system to the broken EMU system in which Greece is a mere user of what is the equivalent of a foreign Central Banking system.

I won’t rehash all of the same arguments I’ve been making for the last few years, but the basic facts here should not be overlooked. It is flat out wrong to compare Greece, a user of what is essentially a foreign currency, to the USA who issues its own currency.  And it is flat out wrong to assume that QE will cause high inflation because of some sort of reserve multiplication mechanism. This is not how banking works and Alan Greenspan of all people should know better than to create such a stir over these potential risks.

More importantly, Mr. Greenspan seems to misunderstand the relationship better debt, credit and inflation. Yes, there is a very real risk of high interest rates if more debt and borrowing leads to such an outcome. But that is precisely the opposite of what we’re seeing today. We’re seeing record low levels of borrowing in the private sector and the government’s borrowing is barely offsetting the declines in private sector deleveraging.  All of this has resulted in very low levels of inflation that create very little risk of sustained increases in long-term interest rates. Mr. Greenspan seems to be thinking that the cost of US debt will rise just because the quantity of debt has become “unsustainable”, but what is the mechanism by which this could occur? After all, Greenspan himself acknowledges that “The U.S. government can create dollars at will to meet any obligation” so, if inflation is low and we are unlike Greece, because we can create our own currency, then what is the worry?

I fear Mr. Greenspan is sparking a concern based on economic theory as opposed to understanding economic reality….