The toxic legacy of Alan Greenspan
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Alan Greenspan is widely quoted in the world’s financial media. The former head man at America’s central bank is promoting his book, The Age of Turbulence. We saw it at Waterstone’s in Piccadilly this weekend, in a huge pile in the front lobby. Thumbing through, the first section appeared rather engaging. The great man recounted his early life in a matter-of-fact way. But when he began to write about economics, the words fattened, the sentences stretched, and the thoughts thinned. Pretty soon, the language was so obese you could barely get around it. If you did, you found nothing on the other side.
“If my suppositions about the nature of the current grip of disinflationary pressure are anywhere near accurate,” he writes, “then wages and prices are being suppressed by a massive shift to low-cost labour, which, by its nature, must come to an end.” He continues, “A lessening in the degree of disinflation suggested by the upturn in prices of US imports from China in the spring of 2007 and the firming of real long-term interest rates as this book goes to the press raise the possibility the turn may be upon us sooner rather than later.”
Speaking to the BBC, he made the same point: “I’m reasonably confident that the inflation tranquillity experienced throughout the world actually for the last 20 years is not something we can hope to readily replicate as we move into the future.”
First, we translate: Low-cost Asian labour has been holding down prices. Watch out, because it may be coming to an end now. Second, we add value: If you’re not rich, you’re probably not going to like what happens next. Rest assured, what we are working on here is not a serious quibble with modern macro-economic theory – we rise only to mock and ridicule its most famous practitioner.
The ex-Fed chief is right on globalisation. It suppressed prices; every sentient being on the planet knew it. Labour at $5 a day was bound to build cheaper products than labour at $50 an hour. He’s right too about it coming to an end. Sooner or later the $5-a-day man wants $6. The latest news from the middle kingdom tells us of shortages of labour in the coastal cities. All of a sudden, the Chinese working man has some bargaining power. Now, he also wants a little more butter on his toast. How does this affect the people Mr. Greenspan was supposed to be working for? It rises up like a teenager’s first pimple, a sure sign of ugliness to come.
While wages in India and China rise by about 10% a year, real incomes in the US and UK are mostly stagnant. Now the Asians are getting uppity. They want more than a few pieces of paper with green ink on it. They want the world’s real resources – the kind a central bank can’t print. Meat, corn, gas and gold – all are at or near record highs. Even Mr. Greenspan says he saw it coming. In the US and UK, too, the proles increased their standards of living. But not by earning more; they just borrowed more. Now, while the skinny Asians race along, our countrymen stagger under the weight of their own debt. How can they hope to compete with the masses of Asia for jobs, for food, for capital, for fuel? They could not be less prepared. They already live beyond their means. With three billion Asians hard on their heels, they can’t expect a breather – prices will continue to rise; wages will not.
Worse, the street value of their most cherished asset, houses, is going down. House prices in America are down 3.5%, the latest Case/Shiller report shows; in the UK the decline has scarcely begun. Mr. Greenspan pleaded ignorance and impotence: “It’s really not something which central banks any longer have control over”, he told the BBC. “We have never really successfully been able to forecast significant turning points in the economy.”
Mr. Greenspan told investors in the late 1990s that new technology had created a world of higher growth and permanent prosperity. Then, panicked by a micro-recession in 2001, he cut rates to their lowest in 60 years and held them there for over a year. In 2004, he urged homeowners to take advantage of innovations in mortgage finance, such as new subprime loans. And what was he thinking when he claimed that new collateralised debt obligations made the financial world a safer place, because they spread the risk around?
What got householders in such a fix was a mix of good luck and bad central bank stewardship. As to good luck, you can hardly blame Mr. Greenspan or Mr. King if the Asians wanted to work for nothing, save their money and then lend it back to us. But as to the stewardship, our central bankers might show a little contrition. Maybe they did not force the working man down the road to perdition; but they gave him a little shove.
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