Reply #74: The Wizard Steps Down [View All]

http://www.thetrumpet.com/index.php?page=article&id=1887

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One of the not-so-obvious but enormously negative consequences of Mr. Greenspan’s economic policy has been the continual erosion of the dollar’s value. His guiding principle of managed low inflation, not zero inflation, is one factor that has led to the colossal loss in purchasing power of the dollar. According to Barron’s, “the damage to the dollar’s purchasing power … came not in the onslaught of historically high inflation during the 1970s, but in the continuous drip-drip of compounding some inflation every year” (Oct. 24, 2005).

Exacerbating the weak-dollar problem is the massive 334percent increase in the supply of money that has occurred over Mr. Greenspan’s18 years. As the supply of dollars has grown beyond demand, its value has fallen.

There are three other major problems with the economy that Ben Bernanke will have to confront.

First, federal government debt has been skyrocketing. Last October it reached a record $8 trillion, more than triple the $2.3 trillion the U.S. owed in August 1987. Just since June 2002, the national debt has increased by a third.

Frighteningly, the percentage of U.S. Treasury securities now owned by foreigners has also increased from 17 to 50 percent since 1987.

Second, Americans no longer save money. When Mr. Greenspan took office, the personal savings rate was a comparatively healthy 7.5 percent. From June to September, the personal savings rate was actually negative.

For four months, Americans spent more than they earned by borrowing on credit cards or home equity, selling investments (stocks, bonds and other assets), or by using savings from previous months. A lack of savings does not bode well for future economic growth, since savings fuels investment and a nation’s subsequent growth.

Third, the easy-money policy has helped create multiple bubbles and an economy more and more dependent on rising asset values to fund spending. In the late 1990s, people counted on the technology-stock mania to fund their retirement. Today it is the refinancing and home-equity-line-of-credit boom that is inflating the bubble.

Right now the markets believe the economy is as healthy as Mr. Greenspan says it is. Greenspan has the markets’ confidence. But the question is, will Bernanke be as successful?

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