Tuesday, June 21, 2011

Alan Greenspan: The Economy is a Mess, Greece, Inflation and U.S. Debt are All Problem Spots

The establishment's go to interviewer, Charlie Rose, sat down at the Harvard Club on Friday with former Federal Reserve chairman Alan Greenspan.

Rose interviews can often be dull because he won't punch any of these guys with tough questions, but the Greenspan interview proved fascinating, aside from Greenspan being politically correct and saying some positive nonsense about Geithenr, Paulson and Bernanke, Greenspan touched on a number of important topics.

He came right at the start of the interview and said that Greece will default and is even more bearish on Greece than I am. He believes that the default could occur during the current round of bailout talks, while I think Greece has until September, perhaps longer.

Of note, Greenspan used the term "time preference" during the interview, which is a concept that is most often associated with the Austrian School of economics. He was also very good in explaining some of the problems with regard to the Dodd-Frank Act.

But most important were his discussions on inflation, U.S. government debt and excess reserves.

At the 14:30 to 16:00 mark, he pretty much makes the same case that I do that there is huge amount on new liquidity in the system and that this will ultimately result in significant price inflation. I'm with him 100% here.

At 19:00 to 21:00, Greenspan discusses the debt problem and notes that most think the U.S. has about two years to solve the debt crisis. He suggests that a crisis could happen at anytime, which he says, in his understated manner, "would not be good for the United States." Again, I totally agree. At some point, given the current debt load, the lack of buyers for the debt, and inflation, interest rates are likely to skyrocket causing a huge crash in the bond market.

Finally, at 24:00 to 26:00, Greenspan discusses the technical concept, excess reserves. This is a topic I have been harping on. I have consistently pointed out that most of the QE1 and QE2 money pump never entered the system and is simply sitting as excess reserves with the Fed. Thus, those focusing on a QE3 are looking in the wrong direction. Like Greenspan, I believe that there is plenty of fuel in the Fed tank sitting as those excess reserves. If this money starts to flow out at rapid rate, the money supply could explode almost overnight---which would be very inflationary.

Bottom line: Greensapn makes clear, from Greece to price inflation to the U.S. government debt, to Dodd-Frank, there is much to worry about in the economy. This is the most blunt, though spoken in Greenspanese, warning I have seen come from a member of the elite insider circle. Do not take the message lightly.

The full interview is here.

(htJosephBerkeryJr)

8 comments:

  1. How come all his intellectual brilliance is coming out AFTER he has stepped down as the Fed Chairman? Why did he not take the necessary steps when he was sitting in the most powerful monetary policy office in the world?

    Greenspan is proof that even if one is intelligent about the gold standard, they will act only as per the commands of TPTB.

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  2. wenzel wrote:

    "At the 14:30 to 16:00 mark, he pretty much makes the same case that I do that there is huge amount on new liquidity in the system"

    "I have consistently pointed out that most of the QE1 and QE2 money pump never entered the system and is simply sitting as excess reserves with the Fed"

    aren't these two statements incongruent?

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  3. @1:31 the reserves wenzel is referring to are on deposit at the fed, BUT they are held on behalf of the TBTF's. those reserves are borrowed from the fed at low rates through the discount window thanks to ZIRP and "loaned" back to the fed at a higher rate. the TBTF's profit from the spread.

    another way the QE money gets to the fed is through the TBTF's buying up treasury paper at auction and flipping them to the fed immediately afterward. that way the QE money gets "washed" through the system because the fed is prohibited from buying directly from the treasury. that money can then also be "loaned" to the fed and receive interest.

    wenzel believes this is where most of the QE1+2 money now sits. its a staggering sum btw.

    ignore the fact it makes no financial sense for the fed to do either of these things. its purely welfare for the well connected banks.

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  4. Intersting ... Greenspan is going to write a book about "Human Action" ... he should have read the first one years ago.

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  5. Probably means ready to enter the system with respect to the first quote. The credit is there. It just hasn't flowed out yet.

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  6. The so-called excess reserves will be multiplied through the fractional reserve system. But the banks aren't lending and people aren't borrowing, so for now it sits. Gary North pointed this out in his excellent article "The Powder Keg in our Future".

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  7. @anon 4:20

    "those reserves are borrowed from the fed at low rates through the discount window thanks to ZIRP and "loaned" back to the fed at a higher rate. the TBTF's profit from the spread."

    Nearly all of the money held in excess reserve is from QE1, when the fed bought agency backed securities from banks, and QE2, when the fed bought treasuries through primary dealers. Its not from money borrowed through the discount window or otherwise. Its cash raised through sales to the Fed. Not that the Fed didn't give a total gift to the PD's ... just that the money wasn't borrowed.

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