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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

TUESDAY, 29 MAY 2001 


Today:  I, Greenspan...Part Duh

*** Markets closed yesterday...but the Daily Reckoning 
office remained open for business 

*** Consumers are still up to their necks in debt...but 
employment, not debt, is the key to consumer spending

*** Don't fight the fed!? The little engine that ran off 
the times in Paris...and more!

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Market Watch 

To remind you, this section of the Daily Reckoning is 
written by Eric Fry, editor of Eric is 
also the guest host on CNN-FN this week, 9:30 - 11 E.S.T. 
My notes and letter follow, as usual.

From Eric: 

*** The U.S. financial markets took the day off yesterday 
in observance of Memorial Day. The stock market ought to 
have its own Memorial Day to remember those stocks that 
have fallen in the pursuit of capitalism.

*** Nasdaq Stock Market delistings have tripled so far this 
year. Names like Inc., EToys Inc. and 
Inc. litter the battlefield. Through the end of April, the 
Nasdaq's ranks thinned by 147 companies - more than three 
times the 46 companies delisted in the same period last 

*** But as the NASDAQ stocks did not trade yesterday, 
neither were any additional companies delisted. No 
casualties reported. All present and accounted for.

*** European stock markets, although open for business 
yesterday, might as well have been closed. About the only 
noticeable trend was that the stocks of exporting companies 
moved a little bit higher, the thinking been that as the 
euro weakens against the dollar, any company selling its 
goods for greenbacks will enjoy rising profitability.

*** The shares of French cosmetics company L'Oreal and 
Dutch consumer electronics maker Philips, both advanced 
about 2% yesterday.

*** The slow US economy is opening up travel bargains in 
Europe as well as at home, according to the Wall Street 
Journal. "For vacationers, there's one pleasant side-effect 
to the soft economy: Summer travel is on sale, cheap." 

*** Even in the hoity-toity Hamptons to which wealthy 
Manahattanites flock every summer, rental rates for the 
summer season are softer than last year's. Thrifty 
multimillionaires, here is your chance. A beach house that 
cost about $80,000 to rent for "the season" last year might 
only cost about $70,000 this year.

*** Even as consumer debt levels soar, the retail sales 
trend is an Icarus cascading into the sea. It is becoming 
painfully obvious that employment levels, not debt levels, 
power retail sales. That is, because unemployment is 
rising, retail sales are falling.

*** Not only do the unemployed avoid shopping malls, they 
also avoid opening mail from their creditors. "The 
quarterly bad loan write-off rate rose to 5.6%," Moody's 
states, "and the rate at which cardholders repay their 
credit card debt fell to 14.9%. That was the first time 
since 1996 that [these] measures of US consumer credit 
quality have posted such a broad-based decline."

*** Yet, it is these consumers that Mr. Greenspan depends 
upon to pull the economy out of its slump. "Heavily 
leveraged consumers are in no position to take up the 
economic slack."'s Andy Kashdan 
observes. "Exuberance has returned to Wall Street in recent 
months and the mood on Main Street appears to be 
brightening as well. But lest this revived party mood 
completely obscure some of the imbalances that have built 
up over the last few years, we offer a friendly reminder: 
consumers are still leveraged to the hilt." 

*** Citing graphs provided by the International Strategy & 
Investment Group, Kasdan points out that mortgage debt, 
consumer installment debt and interest payments as a 
percentage of disposable personal income are all at record 
high levels. "At some point, creditors might actually want 
some of that money back," he notes dryly. 

*** Aware of these trends, most lenders are becoming a 
little more cautious about extending credit to consumers. 
Upon examining the May "Senior Loan Officer Opinion Survey 
on Bank Lending Practices," Charlie Peabody stated, "The 
banking industry continued to move toward a position of 
'tightening' in its standards for credit card loans and 
mortgage loans. Bankers are growing concerned about "the 
recent run-up in consumer delinquency rates."

*** Peabody continues, "The simplest measure of the banking 
industry's liquidity (the loan-to-deposit ratio) has 
deteriorated to its worst level since data started being 
kept in 1934."

*** Still, somehow Wall Street's faith in Greenspan remains 
unshakable. Most investors, when gazing across the Valley 
of Dire Economic News, still believe that they see the land 
of milk and honey and Dow 36,000.

And a few notes from Bill:

*** "Don't Fight the Fed!" Do a search of the financial 
media and those 4 words - in exactly that sequence - are 
likely to occur more often than any others. It is as if 
that is all we know and all we need to know. Is it really 
that simple, dear reader? I don't think so. More below...

*** "I see the funds rate coming down at least another 100 
basis points to 3% and possibly a little bit lower than 
that by yearend," said Morgan Stanley's chief economic 
strategist, Stephen Roach. "But the Fed won't get the bang 
for the basis points that it got in past periods of 
cyclical retrenchment..."

*** Why not? "Unlike in '98," Roach explains, "when America 
was the engine that pulled the world out, this time the 
engine is off the tracks." 

*** What will it take to put it back on the rails? "All the 
President's tax advisers and all the Federal Reserve's 
actions can't put the economy back together again," writes 
Stephen Gottdiener to Barron's. "The stock market will seek 
new lows and so will the economy."

*** All of a sudden global warming has reached Paris. It is 
hot - with temperatures reaching up into the 80s. It must 
be a little like American cities before air conditioning 
and the flight to the suburbs. Windows are open. You can 
see your neighbors dressing and smell when they are having 
for dinner.

*** Edward, 7, is scheduled to go on a class trip on 
Wednesday. He'll spend two night away - in Normandy . That 
is, if he goes. He's never spent a night away from his 
mother. And I don't know who's more concerned - Edward (our 
youngest child) - or his maman. Stay tuned.

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Bill Bonner asked me to write today's letter. 

"How did an Ayn Rand devotee become the world's most 
respected central planning bureaucrat" he asked. "How can 
you hope to overcome the business cycle and command the 
entire world's economic tides" he wanted to know.

Good questions. So earnest. So innocent. So silly.

And why not answer? Nobody reads this pathetic little 
electronic rag anyway. That is, nobody who counts. Nobody 
with real power, that is. And if anyone ever asks me...I'll 
deny I ever heard of it.

Besides, I've been dying to explain...

Do you think I really failed to see the bubble in U.S. 
stock prices? You would have had to be blind, deaf and dumb 
not to notice.

Do you think I really believe in this New Era nonsense...or 
the productivity miracle? Do you really think that I don't 
know what happens when I flood the world with cash...and 
take real short-term interest rates down near zero?

But what was I supposed to do? I couldn't exactly come out 
and say - "it's a bubble!" Investors would have panicked. 

Once stock prices got to bubble levels, I had to think of a 
reason why they might stay there...that was where that New 
Era and productivity razz-ma-tazz came from. People wanted 
an explanation and I gave it to them.

Do you think I learned nothing in all that time I spent 
with Ayn Rand - that miserable, self-absorbed old tart? 
Reading her books was painful enough - but can you imagine 
having to spend time with her? I tell you frankly, I got so 
sick of those ego-centric gab fests, in those pitiful 
little apartments of lower Manhattan...I thought I would go 

Rand had made herself into a minor cult figure. But what 
did it gain her? A following of marginalized nuts and kooks 
with bad taste, bad habits, and apartments cluttered with 
science fiction paperbacks.

What I wanted was power, love, money - the same things we 
all want. And I could never get them with the Randites. 

Instead, if you want power, you have to go to where the 
power is. Ceasar could have lived comfortably in any of the 
Romanized towns around the Mediterranean. Hitler could have 
had a pleasant life eating schnitzel and brautwurst in 
Austria. And Bill Clinton could have stayed in Hope, 
Arkansas. He could have married a local girl, worked as a 
courthouse lawyer, and become a colorful subject for a 
grotesque southern novel. 

Power in America is in two places. The political power is 
in Washington. And financial power is in New York. But the 
real power is where the two come together - in the Federal 
Reserve system.

You have to remember, that the purpose of the Fed - as with 
any cartel - is to make sure the member banks make money. 
But, the Fed gets its authority from has to 
pay for this privilege somehow.

The Fed was chartered to protect the currency and ensure 
the stability of the banking system. But its real mission - 
now - is to keep the economy expanding. Why? Because that 
gets politicians re-elected. Not only that, it keeps the 
money flowing to Washington. Give people the impression 
that they are better off...and they won't fuss about taxes.

The Fed was founded in 1913. At that time, Washington only 
took about 5% of the nation's income and the dollar was 
solid. Since then, Washington's percentage of GDP has 
increased by nearly 600%. Meanwhile, the dollar has fallen 

Do you really think that was an accident? C'mon...give us 
central bankers some credit. Inflation pushed people into 
higher and higher tax brackets. Plus, it gave people the 
impression that they were getting richer - just what 
Washington wanted.

Of course, if the inflation rate goes to high...then, 
people begin to complain and you have to take action. Thank 
God, Volcker was on watch back in the late '70s, and not 

But here's the important thing. Even when you have control 
of short term rates...and some control over the money can never completely master the markets. 
They're too big, too many players, too much money. If you 
allow too much inflation, you spook the bond markets...and 
the bond vigilantes mount up. Investors dump 
bonds...driving up long term interest rates...which has an 
effect opposite to what you're trying to accomplish. That's 
already happening a little bit. I've cut rates 5 times in 
the last 5 months - no one ever cut rates as aggressively 
as I have - and still mortgage rates are higher today than 
they were at the end of last year.

Could inflation go higher? Could the dollar fall? Mightn't 
the bond buyers get nervous and drive up long-term rates 
even higher?

Yes, of course. It's a risk. But it's a risk I have to 
take. You don't get power by being careful. And you don't 
do either the Fed or the politicians, or yourself, any 
favor by carefully protecting the dollar. 

The goal here - as with all government programs - is to 
produce the desired benefits...while pushing the costs onto 
someone else. That's how politics works. You promise 
something...and you force someone else to pay for it. You 
rob one rich Peter voter...and spread the loot among the 
poor Pauls.

Why do you think liberals always favor the poor? Why do you 
think every politician talks about programs for the 
disadvantaged, the sick, the unemployed? Why do they not 
give money to the least, not openly? You think 
they are just big-hearted, generous souls right? Ha ha. 
Look, you have to do the math. 

Politics favors the poor for two reasons - they are more of 
them...and they're cheaper. How many rich votes can you buy 
with a $100 handout? 

Does that sound cynical? Well, sorry. But you have to look 
at the situation, shall I say, objectively. 

In the long run, giving money to poor people hurts the poor 
more than the rich - but who cares about the long run? In 
the long run, said Keynes, we're all dead.

And now let me tell you another secret - how I became the 
most successful central banker ever. Keynes also figured 
out how to use fiscal policy to keep the economy expanding 
- beyond its natural cycle. The idea was for the government 
to spend like crazy when the economy was weak - to 
stimulate it. The government would run deficits during the 
down cycles...and then make up for them by running 
surpluses in good times. 

But guess what? The politicians forgot to run surpluses in 
the good times. Why? Because they really don't care about 
the long term or about fiscal responsibility. What they 
care about is promising voters new programs...and keeping 
the economy expanding. So, the debts mounted up. but people 
felt like they were getting something for nothing and so it 
worked for a long time.

And now, thanks to the economy that I helped create, 
government is looking at big surpluses. Well, don't count 
on it. Washington wants to appear to run surpluses - this 
allows the politicians to decide where to spend the money. 
But no one in Washington has any interest in actually 
running a surplus. Count on it. The surpluses - to the 
extent they were ever real (which they weren't) - will 
disappear before our very eyes.

Well, what I figured out was that you could use monetary 
policy in roughly the same way. The theory is that you're 
supposed to loosen up on the rates - lower them - in a 
downturn. And then, when times are good, you gradually 
increase rates to 'cool things down.' But the trick is, you 
forget to raise them as much as you should. You always 
favor rates that are lower than they ought to be. Because 
you want to encourage more business expansion - and the 
illusion of prosperity - than would otherwise be justified. 

Let me ask you a question: could you imagine me raising 
rates 5 times in 5 months to head off a bubble? Not a 
chance. I would be torn apart by the furies in Washington, 
the media, and Wall Street.

Of course, there will be a price to pay for this too. 
Nothing comes without a price. Investors who really believe 
this New Era nonsense will lose a lot of money. They think 
they can get 15% per year on their investments forever. It 
isn't going to happen. That doesn't mean stocks have to 
crash. In fact, I think I can keep them at present levels 
for many years - perhaps like the period between 1966 and 
1973. Easy money can perform wonders - for a while. But 
instead of 15% for the next 10 years, investors are likely 
to get zero percent for the next 15 years. Who knows? 

Probably bonds and the dollar will come down too...and a 
lot of people will be hurt. But it could take years. And it 
might not even be noticeable. Who knows or cares that the 
dollar today is worth only 5 cents in 1913 terms?

And eventually, the system of managed currencies will 
collapse. Every central banker is doing what I am doing - 
deliberately destroying the currency to insure the 
appearance of prosperity. Sooner or later, people will 
catch on. They will try to switch from one currency to the 
other - but all the paper currencies will be weak and 
untrustworthy. Most likely, they will turn to gold. It's 
the only thing that we can't manipulate.

But that is probably years ahead. And it's a problem for 
someone else.

Alan Greenspan, 
Public Servant

About The Daily Reckoning:

Daily Reckoning author Bill Bonner

Bill Bonner is, in spite of himself, a natural born contrarian. Early each morning, Bill writes The Daily Reckoning—his take on the financial markets and what’s going on in the world—and sends it off by e-mail before most Americans’ alarm clocks have buzzed. Many readers say it's the first thing they want to read when they get up—not only because it's informative and thought provoking, but also it's inspiring, in its own quirky and provocative way.

Of course, there's much more to Bill than his daily market commentary. He's also the founder and president of Agora Publishing, one of the world's most successful consumer newsletter publishing companies. Bill's passion for international travel and big ideas are reflected in the company he's successfully built. In 1979, he began publishing International Living and Hulbert's Financial Digest . Since then, the company has grown to include dozens of newsletters focusing on health, travel, and finance. Bill has vigorously expanded from Agora's home base in Baltimore, Maryland since the early ’90s—opening offices in Florida, London, Paris, Ireland, and Germany.

Agora's publication subsidiaries include Pickering & Chatto, a prestigious academic press in London and Les Belles Lettres in Paris, best known as a publisher of classical literature in bilingual editions.


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Last modified: May 29, 2001

Published By Tulips and Bears LLC