Reply #82: Greenspan's Legacy Of Debt (Lotsa ugly charts!)

[54anickel]

http://www.gold-eagle.com/editorials_05/kasriel111605.h...

On the day that Ben Bernanke, the nominee for the next Fed chairman, appears before the Senate Banking Committee for his confirmation hearing, it is only fitting that his predecessor's legacy be reviewed. Although it is true that under Alan Greenspan's command of the Fed the U.S. economy has experienced unusually low volatility, this low volatility may turn out to have been a Faustian bargain. That is, the low volatility was achieved by increasing the indebtedness of the U.S. economy, especially the household sector, to record levels. And increasingly, the debt is owed to foreign entities, not ourselves. The final chapter on Greenspan's legacy will not be written until we see how this indebtedness issue is resolved.

Greenspan's predecessor, Paul Volcker, provided us some insights on these issues in an article he wrote for the April 10, 2005 edition of the Washington Post entitled "An Economy On Thin Ice," (www.washingtonpost.com/wp-dyn/articles/A38725-2005Apr8.... ) excerpts of which are quoted below.

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Below are a series of charts illustrating aspects of record U.S. indebtedness. Although I have used most of these charts in various previous commentaries, they are assembled here in one place for your edification. The shaded areas in the charts denote Greenspan's tenure as chairman of the Federal Reserve.

Greenspan kept inflation-adjusted interest rates in negative territory for an extended period of time after the bursting of the NASDAQ bubble.

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The potential adverse consequences of Greenspan's legacy of debt are:

> McMansions and SUVs will not make us more productive in the future.

> Foreign creditors could start to question how we will be able to pay future interest and dividend payments without resorting to "printing" dollars.

> If foreign creditors should question our ability and willingness to repay them without resorting to the currency printing press, there could be a run on the dollar.

> A run on the dollar would lead to sharply higher U.S. interest rates.

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