Forget "Meanie Greenie": Keep Spending!

By Duru

November 20, 2004


I practically fell out of my chair when I read the following quote from Greenspan essentially warning that the world will not and cannot continue to finance the prolific spending of Americans forever:

"The question now confronting us is how large a current account deficit in the United States can be financed before resistance to acquiring new claims against U.S. residents leads to adjustment. Even considering heavy purchases by central banks of U.S. Treasury and agency issues, we see only limited indications that the large U.S. current account deficit is meeting financing resistance. Yet, net claims against residents of the United States cannot continue to increase forever in international portfolios at their recent pace. Net debt service cost, though currently still modest, would eventually become burdensome. At some point, diversification considerations will slow and possibly limit the desire of investors to add dollar claims to their portfolios.

Resistance to financing, however, is likely to emerge well before debt servicing becomes an issue, or before the economic return on assets invested in the United States or in dollars more generally starts to erode. Even if returns hold steady, a continued buildup of dollar assets increases concentration risk.

Net cross-border claims against U.S. residents now amount to about one-fourth of annual U.S. GDP. A continued financing even of today's current account deficits as a percentage of GDP doubtless will, at some future point, increase shares of dollar claims in investor portfolios to levels that imply an unacceptable amount of concentration risk.

This situation suggests that international investors will eventually adjust their accumulation of dollar assets or, alternatively, seek higher dollar returns to offset concentration risk, elevating the cost of financing of the U.S. current account deficit and rendering it increasingly less tenable. If a net importing country finds financing for its net deficit too expensive, that country will, of necessity, import less."  (from  "Remarks by Chairman Alan Greenspan At the European Banking Congress 2004, Frankfurt, Germany" November 19, 2004, Panel discussion: Euro in Wider Circles)

Of course these are dire words from the one person who probably personifies big spending and big debt. After all, it has been Greenie's easy money policies over the years that have encourage this huge run-up in debt. And now he wants to play "meanie"? Amazing. But as usual, Greenie had reassuring words for the audience: "… the marked increase in the economic flexibility of the American economy that has developed in recent years suggests that market forces should over time restore, without crises, a sustainable U.S. balance of payments. At least this is the experience of developed countries, which since 1980, have managed and eliminated large current account deficits, some in double digits, without major disruption." In other words, never fear, even though we have no idea how we will pay off our obligations, good ol' American magic and can-do attitude will find a way - what a relief!

The capper for me is the following quote as reported from Greenie was responding during the Q&A after his remarks quoted above: "Rising interest rates have been advertised for so long and in so many places that anyone who has not appropriately hedged this position by now obviously is desirous of losing money." (, Nov 19, 2004). Talk about getting real! Wow! When was the last time we saw Greenspan talk so forthrightly and frankly? Ever? Meanie Greenie indeed!

This apparent change in heart by our esteemed money man was blamed for the market's big sell-off today. In the large scheme of things, such a sell-off should come as no surprise. The market has been moving nearly straight up for three weeks. Some kind of release has been long over-due. I suspect that once people get over their initial shock over Greenie's new no-holds-barred attitude, they will get back to ignoring the precipitous decline of the dollar and continue buying more stocks. I suggested in earlier missives that the bears have yet again gotten the story wrong. Their one retort now is the looming specter of a worthless currency. But since Greenspan professed ignorance over how this whole thing will play out, market players (outside of bondland) are free to pretend all sorts of rosy scenarios will unfold to take care of this mess. So while I continue to endorse riding the bull here, I am quite concerned over the larger picture.

In other related news….perhaps Congress got the message from the new Meanie Greenie? Today, the House apparently passed a penny-pinching spending bill…at least conservative by their newly adopted prolific spending habits. Earlier in the week, cold hard reality forced Congress to raise the Federal government's borrowing limit another $800 billion. In fact, the Wall Street Journal said in response: "The measure was yet another testament to record annual deficits, which reached $413 billion last year and are expected to climb indefinitely." ("House Approves $388 Billion Spending Bill" by AP, Nov 20, 2004). The emphasis is mine. It indicates that there is no expectation that we will pay off our bills anytime in the near, or perhaps even knowable, future. So now, not only do we fund new spending by cutting taxes, we begin the hard sweat of cutting the deficit in half by first raising the spending limit. Brilliant! If only ordinary Americans could run their finances like this. We could all be rich in no time.

Speaking of ordinary Americans, I was quite shocked to read in Barron's this weekend that Americans continue to get their cues from the earlier version of easy-money Greenie. Randall Forsyth reports that since the 1950's, Americans mainly operated household surpluses even when counting housing as an expense rather than investment as is often conveniently done. The nominal amount of this surplus generally grew before hitting a brick wall in the early to mid-90s. Now, it is deep, deep in the red to the tune of over $300 billion. Unfortunately, this data is not normalized for things like inflation but the overall message is that for the first time in a very long time, Americans are spending much more than they make…and doing it "Big Willie" style. It is no wonder the dollar is falling like a rock. We cannot spend our dollars fast enough or ship them overseas on imported goods on speedy enough boats.

In summary, gold keeps looking better and better to me. In fact, I am betting there is bound to be some kind of swift bumrush on hard assets at some point soon that will extend the bull market in commodities to unexpected new heights. Try to make sure you have already taken your share by then.

Be careful out there!


Ó DrDuru, 2004