 Waterloo
Bill Bonner
The
Daily Reckoning
June 21, 2004
The Daily Reckoning PRESENTS: Throughout history we see heroes. But we don't
know if they were smart, virtuous or just lucky. Bill wonders
where Greenspan's luck will take him...
"Give
me lucky generals," Bonaparte used to say. The emperor did
not trust skill, or training, or brains. He didn't really know
why some generals won and some seemed to lose. He chose the lucky
ones. But on this day, 189 years ago, their luck ran out. Grouchy
had not kept the Prussians back. Ney had failed to take Quatre-Bras.
D'Erlon never quite got into the fight.
Arthur Wellesley,
Duke of Wellington, retired from the battlefield on the 18th
of June 1815 as a great hero. He fought the greatest military
genius of his time - Napoleon Bonaparte - and won. Never beaten
by the French, Wellington then became the head of allied forces
occupying France. He was generous, organizing loans to the get
the nation back on its feet. Then, he returned to Britain in
1818 and became Prime Minister in 1828.
"It was
a damned close thing," he recalled of the battle. Mistakes
were made. Communications were missed. The weather complicated
things. It might have gone either way. But in the end, it went
Wellington's way... and Napoleon was beaten.
Luck favored
the Allies. It rained. Bonaparte had to wait for the ground to
dry before launching his attack, giving his opponents time to
get into defensive position... and time for the Prussians to
come closer.
Looking through
the long lens of history, we see heroes. Vercingetorix, Washington,
Wellington, Jackson. We don't know if they were smart, virtuous...
or just lucky. Looking at today's wars up close, would-be heroes
often turn into villains, blunderers, and scalawags. We see too
much.
But money is
our beat here at the Daily Reckoning. So we turn away from war
to finance... where the stakes are lower and the characters are
funnier.
The present
chairman of the Federal Reserve is the most famous bureaucrat
since Pontius Pilate. He is also probably the luckiest.
And like Pilate,
he merely gave the mob what it wanted. Not blood this time, but
bubbles.
Alan Greenspan
came to the Fed when a very long cycle of falling interest rates
and falling inflation was just beginning. For the 38 years until
1981, bonds had been in a bear market that peaked out with average
yields on Treasuries over 14%. Paul Volcker had already done
the hard work; he had slugged the inflation monster so hard it
remained asleep for the next 2 decades. When Greenspan came to
the Fed, inflation was out cold... interest rates were falling...
and bonds were going up. All he had to do was nothing. Most likely,
the great trend would continue throughout his tenure in office.
The last bull market in bonds had lasted 26 years. It began in
1920 and continued through the '29 crash, through the Great Depression,
through WWII until it finally came to an end in 1945 with a Treasury
yield below 2%.
Greenspan might
have been a hero - just by being lucky. But there seems to be
some failing, some pernicious gene that drives the lucky to acts
of self-destruction.
Bonaparte could
have stayed on Elbe... written his memoires and enjoyed a satisfactory
retirement. Greenspan could have done nothing.
Instead, each
over-reached.
Mr. Greenspan cannot be blamed for Japan's bubble of the late
'90s - even though it happened during his watch. Nor is he the
real culprit behind the LTCM blowup or the technology bubble
in America in '98-2000.
But surely
he, more than any other human being, is responsible for America's
current real estate bubble, its consumer debt bubble, and even
China's capital spending bubble.
A predecessor, William McChesney Martin, once remarked that the
real job of the Fed was to "take the punch bowl away"
before the party got out of control. It would have been easy;
just follow the rules - take the punch bowl away. Volcker had
done it; the mob burned him in effigy on the capitol steps, but
he retired with dignity. When he speaks in public, people do
not snigger behind his back.
Yet Mr. Greenspan
did not remove the punch; he spiked it with the high-proof gin
of easy credit. Each time the former gold-bug faced a problem,
he eased over to the punchbowl and dumped more in, until Americans
were wobbling under the influence of the lowest interest rates
in 45 years... and a 1% key Fed lending rate for only the second
time in history.
According to
the central bankers' code, Greenspan has committed neither sin
nor crime. He is seen as a paragon of virtue, not vice. Yet,
as Talleyrand once remarked to Napoleon, "Sire, worse than
a crime, you have committed an error."
The Fed chairman's error was to offer more credit on easier terms
to people who already had too much - including consumers, business,
and the government.
During Greenspan's
reign at the Fed more new money and credit has been created than
under all the rest of the Fed chiefs combined. Consumer debt
rose to its highest level in history... the ratio of debt to
income also higher than it has ever been. The effect was not
only to inspire bubbles all over the world - but to make Americans
poorer.
"A taste
of the looming fiscal disaster is provided by the fact that,
in the space of just one year, the trustees [of the Federal Hospital
Insurance and Federal Supplementary Medical Insurance Trust Funds]
have moved up the expected date of 'asset exhaustion,' writes
James Grant. What he refers to is commonly known as Medicare.
And 'asset exhaustion' is another way of saying 'going bust.'
Senator Joseph
Liebermann summarizes: "the entire U.S. government is going
broke."
Mr. Greenspan's
error seems to be catching up to him. In the West, the armies
of inflation are approaching. The CPI is advancing at a 7% annual
rate... came a dispatch last week. This week, the PPI - producer
prices - are moving up at a 10% rate (also annualized from May
figures.)
In the East,
the forces of worldwide deflation are stalking him too. Mortgage
rates are going up; consumers are backing off. Asian factories
continue to spill out goods. Wal-Mart keeps offering, every day,
lower prices than the day before. Oil, gold, copper, and bond
yields - all seem to have peaked out.
Our man is
caught in a giant pincers movement, and his bubbles could be
pricked any day. He has no room to maneuver. He cannot cut rates
much further; there is little left to cut. Nor can he increase
them - to do that would be to bring crashing down the entire
proud tower of debt he built up.
 The day Mr. Greenspan's
luck runs out cannot be far off.
Regards,
Bill Bonner
The
Daily Reckoning
Editor's Note:
Bill Bonner is the founder and editor of The Daily Reckoning.
He is also the author, with Addison Wiggin, of the NY Times,
Wall Street Journal and international bestseller: "Financial
Reckoning Day:
Surviving The Soft Depression of The 21st Century" (John
Wiley & Sons).
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