Alan Greenspan just doesn’t go away. Even after steering the US economy in the direction of an iceberg (only to jump off just before it crashed) he continues to spread misinformation about the system he has so vastly misunderstood. In an interview yesterday Greenspan continued his “USA is bankrupt” tour.
He still doesn’t understand that a sovereign nation who is the supplier of currency in a floating exchange rate system has no solvency risk via traditional debt default. He says the bond vigilantes are just waiting to attack the USA. This man, who controlled the Fed, still doesn’t understand that a sovereign government that issues its own debt has full control of the rate of interest paid on that debt:
On current U.S. fiscal policy being a ‘dangerous game’:
“When the Greek crisis hit, everything reversed and the flood of monies obviously coming into the dollar turned it around again. The overall reactions in this market are really telling us that we’re involved in a dangerous game. I know everyone says, Let’s wait for a couple of years, keep the stimulus going and then we’ll solve the problem. I think that’s a very risky strategy. I don’t deny that if I knew that you could do that that is obviously the best strategy. I’m not sure the markets are going to allow them to do that.”
On the current amount of U.S. fiscal deficit:
“We are in this stage of increasing the debt held by the public at a pace that is closing the gap to capacity to borrow at an alarmingly rapid rate. All through the history of the United States, going back to 1791 when the Treasury began, we have always kept our debt level well below any measure of borrowing capacity and we’ve never had any problems. But that cushion is growing very narrow and we don’t know where the capacity level, top level is.”
Bring on the austerity he says:
On letting the Bush tax cuts expire:
“I think that we’re going to have to raise taxes because no matter how much we would like it be otherwise and I would like it to be otherwise, there is no political scenario in which I am acutely aware in any sense whatever that that’s going to happen. But I think we have to get started on this problem very quickly, so I’m advocating what seems to be a very radical position – let the tax cuts lapse.”
He actually seems to understand that QE is an exercise is futility. Adding more apples to the shelves doesn’t make the shopkeeper more likely to sell apples:
On whether quantitative easing is enough to get “money moving” and spur growth in the U.S. economy:
“Remember that success requires that the money multiplier generates. If you’re merely going to add x100 billion dollars to excess reserves and they just sit there on the asset side of the commercial banks’ balance sheet not being re-lent, you’ve merely gone through a very interesting bookkeeping calculation. It has zero economic effect. You’ve got to break that psychology that prevents the current trillion dollars from being invested. In other words, you need commercial bank A to lend to steel company B, the reserves it’s holding there. That’s the only way you get the system moving. That is not happening. And so implicit in this increase quantitative ease is basically the implication that somehow it is going to get the money multiplier moving.”
He also thinks the government is out of bullets:
On what the government can do to spark money movement:
“In my experience, triggering or dissipating that malaise if I may use the term, you’ve got to go through a period of boredom not sparking. You don’t spark. Human psychology being what it is rather we like it or not doesn’t get sparked. It gets a gradual erosion of fear. And all of a sudden, you start taking little baby steps and things are moving along well and you just pick up. That’s the way markets behave. I mean, you’re not going to change that.”
Source: Bloomberg Television
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.