MW_ArticlePageView
The tide has turned on the bubble-blowers
By
Bill Bonner
May 30, 2008
What makes financial history so entertaining is that it is so full of jackasses and humbugs. Alan Greenspan will go down in it, of that we are certain. He will be remembered as the greatest central banker since John Law. Mr. Law invented modern financial bubbles. Mr. Greenspan perfected them.
In the early 18th century, John Law was on the lam in France, after having killed Beau Wilson in a duel in England. France was broke, thanks to Louis XIV. So Law proposed to solve the Regent’s financial problems with a novel monetary system, based on a new national bank – the Banque Generale – and a new currency backed by the future profits from Louisiana. Anyone who had set foot on the banks of the Mississippi at the time would have known that there was little easy money to be had in that savage place. But almost no one had seen it, so they could imagine all sorts of fantasies.
At first, Law’s project was a great sensation… by 1720 he was the richest man in the world… women threw themselves at him, and France even gave him a title – the Duc d’Arkansas. Here again, a little travel would have put the kibosh on the whole enterprise. Even today, you could be an Archduke of Arkansas; people would still laugh at you. It didn’t take long before Law’s adventure blew up; his bank sank into the Mississippi mud. Law was forced to flee angry mobs, and went to Venice, where he died, disgraced, nine years later.
Today’s news tells us that Alan Greenspan is still invited into polite society. But he’s no longer referred to as the “the greatest central banker who ever lived.” His reputation followed the dollar and the housing market. Still, Mr. Greenspan is not the subject of today’s pensee, just the point of departure. Nor is our destination the past, but the future. We explained last week why “The Great Moderation” is over. Inflation rates are rising all over the world; people are rioting over food; truckers are blocking roads to protest high fuel prices; credit is harder to come by. Today, the subject is: what next?
After you take out spending on the necessities, reported the Daily Mail, “families have less to spend on themselves than at any time for 17 years”. Discretionary spending, things you buy after you have paid for food, housing, heat and council tax, is at its lowest level since 1991. In America, meanwhile, staggering increases in personal, mortgage, and public debt have wiped out the accumulated savings of six generations. What kind of strange boom was it, we wonder, that left people poorer? It was the kind of boom John Law would have recognised like a bastard child – a financial boom, not an economic boom and one in which all the Anglo-Saxon economies participated.
“There are principally two different kinds of spending...” wrote the late Kurt Richebacher. “One kind is on goods and services from current output, adding to the gross domestic product. The second kind is spending on existing property, land, buildings, plant and equipment, and all sorts of paper assets (stocks, bonds, mortgages, and so on).” Keynes classified the two components in the money supply as “industrial circulation” versus “financial circulation”. The distinction is important; they are as different as Keira Knightly naked and the Duke of Edinburgh in full dress uniform.
In the typical financial bubble – say Tulipmania of the 17th century – asset prices crash and speculators lose money. All bubbles explode. Then, speculators wipe the powder off their faces, poorer but wiser, and people get back to work. But the bubbles of recent years have had something other bubbles lacked – the support of the world’s largest, most powerful central bank… and a currency as faithless as its custodians. This was largely the contribution of Mr. Alan Greenspan and now, his protégé, Ben Bernanke. They made the world safe for bubbles. The result was more and bigger bubbles than ever before.
“One bubble may be an accident,” noted a columnist in the Financial Times, “but two in the space of a decade beings to look like carelessness.” After the bubble in tech shares blew up in 2000-2001, another bigger bubble – in residential property – took its place. It was aided and abetted by coincident bubbles in mortgage derivatives – notably in the sub-prime area – and in the financial industry, generally. The popping of those bubbles is what has dominated the financial headlines for the last year.
But those bubbles were the result of neither accident nor carelessness. They were the result of central bank policy. When one bubble popped, the central banks pumped up another. Today, they are still pumping – with money supplies soaring all over the world and the Fed’s key lending rate at less than half of the rate of consumer price inflation. More bubbles are inevitable. But now the swelling goes where it is unwelcome – into oil, commodities and emerging markets.
But these new bubbles don’t lift up the economy the way bubbles in stocks, housing and finance did. The trick has turned against the tricksters. Now, the tide of liquidity pushes up consumer prices, while assets sink and families drown. And Mr. Greenspan’s reputation washes up like an empty, plastic bottle.
Published in Economics
| More
articles
by
Bill Bonner
MW_RelatedArticlesFooter
MW_MoneyMorningSubscribeFooter.ascx
FREE - MoneyWeek's daily investment email
Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Deputy Editor, John Stepek, and guest contributors.
Sign up, FREE, to Money Morning here.
