Monday, April 26, 2004

An Open Letter to Alan Greenspan

Dear Chairman Greenspan,

I note in your most recent testimony before the U. S Senate Joint Economic Committee meeting that you are not that concerned about inflation. In fact you said at that hearing:

More broadly, however, although the recent data suggest that the worrisome trend of disinflation presumably has come to an end, still-significant productivity growth and a sizable margin of underutilized resources, to date, have checked any sustained acceleration of the general price level and should continue to do so for a time...As yet, the protracted period of monetary accommodation has not fostered an environment in which broad-based inflation pressures appear to be building.

Chairman Greenspan, I think you need to get out more. You have been Federal Reserve Chairman for nearly 17 years now and it is must be hard to remember what it is like to be a common man. I wonder when was the last time you drove your own car, or pumped gas into one.

In the near 17 years you have been Fed Chairman, you have increased the money supply (as measured by M2) by some 3.4 trillion dollars. Yes, time goes by fast, doesn't it? But when you started to run the show in 1987, M2 money supply stood at only 2.7 trillion dollars, now it is at 6.1 trillion dollars.

Fortunately for you, foreigners have been absorbing a lot of these dollars or we would be having near hyper-inflation by now. China, Japan, Germany, Russia, everyone is seeing their dollar reserves explode. U. S. dollar denominated debt is also being absorbed overseas. Japan, for example, has been buying $20 billion of Treasury debt every month. They now own nearly $600 billon in Treasury debt. China owns about $170 billon. You are one lucky Chairman to have them around. Former Fed Chairman Paul
Volcker calls it the munificence of strangers.

But I think the Europeans and Asians are finally starting to get tired of absorbing all these dollars and, in addition, you are still pumping them out. Since the start of this year you have pumped in another 170 billion dollars. Because of this, inflation is starting to creep up. And one thing we all learned from the inflation of the 1970's is that once prices start to creep up, more and more people become less interested in holding dollars and much more interested in getting rid of them by bidding up assets--any kind of assets.

We are probably in the very early stages of this happening, right now.

In an attempt to put you more in touch with the experiences of the common man, I have put together a list of simple tasks that you might want to complete. I hope you try these. Once these tasks are completed, I would like to know if you still hold the same opinion about inflation as you did before you completed the tasks.

Your first task is to go by a gallon of milk. If you haven't done this in 17 years, it is going to be quite a shocker. Milk prices are high but it looks like they are headed even higher.

According to the Los Angeles Times, milk prices will probably hit record highs of $3. 50 per gallon soon.

Once you have the gallon of milk, make sure you stop to pump some gas into your car. And you guessed,it, gasoline prices are climbing also.

According to Reuters

There is no relief for U.S. consumers at the gasoline pump, as the national price for motor fuel hit a record high for the fourth straight week,
increasing 2.7 cents over the last week to $1.813 a gallon on Monday, the government said.

Now that you have your tanked filled it is time to take a drive out of Washington D.C. Drive over to Maryland and do a little house shopping. Here is what the Washington Post is saying about the current real estate market in Maryland:

[The] market is spinning beyond crazy toward unattainable... [One house
recently] attracted 15 contracts and sold for $100,000 over list price. [A] second house also fetched multiple contracts and sold for $1.1 million, also $100,000 over the asking price.... a builder recently paid $750,000 for a tear-down in Bethesda -- three-quarters of a million dollars for the land alone..."The only people who are selling are people who are dying, getting divorced or moving into nursing homes."

Once you have recovered from the sticker shock of housing prices and head back into Washington D. C., you should grab a meal. Now, don't head over to the Fed where you have your own private dining room. I want you to go out, have a meal, and reach into your wallet and pay for the meal yourself. Head over to Smith and Wollensky's, it is a first class dining spot. And I am sorry to say prices are up there also. Here's what the Washington Times reported about restaurant prices:

Restaurants are raising menu prices, reducing portion sizes and steering customers to less expensive items to offset the high costs of beef...Smith & Wollensky raised prices three times in 2003... "We've had no choice because it's been outrageous,"

Get a good nights sleep tonight because I have one more project for you tomorrow, Chairman Greenspan. Tomorrow, I want you to imagine that you have to fix up your house yourself, or that you are putting on an addition to your house. We are going to head over to Home Depot to do this. Here's what the New York Post is reporting about prices at Home Depot:

Prices have risen tremendously."...building wire prices jumped 25 percent to $500 for a 500-foot roll... I-beams cost $560 per ton versus $300 in April 2003, up 86 percent. Cut plate, the key structural for walls, is $650 vs. $320. Rebar is $420 vs. $300 a year ago...Lumber prices exceed $400 per 1,000 board feet.

And The Post didn't stop with it's reporting at Home Depot. Here is how they finished that story:

Soybeans and soy oil have been the strongest components of the Dow
Jones-AIG Index average. Beans hit a record of $9.52 per 60-pound bushel.

So,it's not only beef buyers that are seeing higher prices. Vegetarians are
feeling the pinch also, The Post continued:

Shoppers pay $4.19 for 5.25 ounces of soy-based vegetarian bacon vs.
$3.29 in July 2003.

So you see Chairman Greenspan, what most people do on a regular basis is something like this: They drink milk, fill their car tanks with gasoline, have an occasional dinner out and head back home. The only problem, Mr. Chairman, is that milk prices, gasoline prices, food prices and home prices are all headed higher. In other words, while your statistics may not indicate that there is much inflation, people that have to live daily normal lives are seeing it everyday.

I have seen reports that you like to go over these statistics (the ones that are leading you to believe there is no inflation) at night while soaking in the tub. Chairman Greenspan, I think it is time you get out of the tub.

Your 17 years of irresponsible money printing ( Paul Volcker calls it:

"Stimulus beyond anything I have ever heard of in history.") is about to make it very difficult for the average person to make ends meet as inflation kicks into high gear.

I know you are in a real bind, because the minute you start fighting inflation you are going to hurt all those people that have been speculating in the real estate bubble that will surely coming crashing down. On the other hand, if you don't start fighting infaltion, you know the inflation will only become worse, hurting pensioners,savers and laborers. You have certainly created a mess.

My only advice to you would be to stop playing politics. You are 77 years old, do what is right and end this money madness. Stop printing money. You know this is the right thing to do. You in fact explained the problem very well in 1966:

But the process of cure was misdiagnosed as the disease: if shortage of
bank reserves was causing a business decline-argued economic interventionists-why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely-it was claimed-there need never be any slumps in business. And so the Federal Reserve System was organized in 1913....The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices
must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods...The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists' tirades against gold. Deficit
spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.

Yes, Chairman Greenspan, "the law of supply and demand is not to be conned." The money explosion you have created is starting to be reflected in prices. Yes, just like you wrote in 1966 "prices must eventually rise."

I hope you do the right thing and stop printing money. But I am not betting on it. I'm putting a good chunk of my money in gold. You see. You had it right in 1966, "Gold stands in the way of this insidious process [An insidious process you are now controlling!]. It stands as the protector of property rights."


Robert Wenzel

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