Can a Leopard Change Its Spots


GATA Members!

GO GATA again:

Here is a must read; lifted off the Hemingway Table at Le Metropole Cafe
half an hour ago. If anybody still has lingering doubts about
# Federal Reserve Board Chairman Greenspan being in a hopeless fix,
# the manic nineties being like the roaring twenties all over again,
this will put them right.

BTW, there is another Midas offering at the James Joyce table
( Gold is up again, at $294. Things are looking
good, and Midas also shares some interesting material about Goldman
Sachs. The information will hold till next week.

What I want to share with you right now is the bulk of the essay at the
Hemingweay Table by Charles Peabody of Mitchell Securities. I have
omitted the opening paragraphs, to take you straight to where Greenspan
is exposed, relative to what we know about his truer, pro-gold
orientation, from the earlier posting this evening (Can a Leopard Change
Its Spots?):

Federal Reserve Chairman Greenspan has had a busy week lauding the
"spectacular" performance of the US economy, first before the Mortgage
Bankers Association on Monday, and then yesterday at a Fed conference on
Business Access to Capital and Credit." He is, once again, trumpeting
"new era" thinking with a seeming complete disregard for the devastating
credit excesses that continue to proliferate throughout our financial
markets and economy. We clearly see huge credit growth as the fuel
behind the resilient financial markets and economy. Indeed, broad money
supply (M3) has grown at about a $20 billion weekly rate, or almost 18%
annualized, during the last month. Such excessive credit expansion
should be setting off alarms for Greenspan and the Fed. But Mr.
Greenspan apparently sees things differently, choosing to continue to
ignore obviously dangerous credit excesses. His explanation for the US
boom is basically summarized in one paragraph taken from his Tuesday

"A remarkable element in our recent prosperity has been the rapid
acceleration in the application of computer and telecommunications
technologies, which have engendered a significant increase in
productivity in this expansion. Although difficult to pin down
empirically, some calculations suggest that the rate of return on
capital facilities put in place during recent years has moved up
markedly. Meanwhile, the process of recognizing this greater value has
produced capital gains in asset markets that have lowered the cost of
investment in new plant and equipment. Dramatically declining inflation
expectations have helped to lower risk premiums on debt and have
contributed importantly to the favorable investment environment."

We, however, do not subscribe to such "new era" banter and, in fact, are
inclined to see it as disingenuous analysis used to justify the Feds
acquiescence to the greatest bubble in history. Economic and financial
booms, as history so clearly documents, have always at their core an
excess of credit growth. And while todays advancements in computer and
communications technologies are exciting, it is not easy to argue that
they outshine the great productivity increases garnered during the
1920s. This period experienced truly exceptional productivity growth,
made possible by great technological advancements electrifying
factories, the widespread use of autos and combustion engines,
refrigeration, radio and telephony breakthroughs. To have a clearer
grasp of todays extraordinary economic and financial environment, we
believe that, more than ever before, it is critical to study and
understand the 1920s boom and its devastating consequences. In this
regard, we strongly recommend the book Americas Great Depression, by
Murray N. Rothbard, one of the great thinkers from the Austrian school
of economics. It was only the Austrian School Economists who understood
and warned of the dire consequences of the 1920s credit induced boom.

Rothbards historical analysis focused on the major credit expansion
during the 20s and the resulting devastating distortions that it left
on the economy and financial system. Keeping in mind Mr. Greenspans
above comments, read carefully an excerpt from the introduction of Mr.
Rothbards book where he discusses the Great Depression - "pinpointing
the causal factors, tracing the chains of cause and effect, and
isolating the cyclical strand from the complex economic world."

Mr. Rothbard writes: "As an illustration, let us take the American
economy during the 1920s. This economy was, in fact, a mixture of two
very different, and basically conflicting, forces. On the one hand,
America experienced a genuine prosperity, based on heavy savings and
investment in highly productive capital. This great advance raised
American living standards. On the other hand, we also suffered a
credit-expansion, with resulting accumulation of malinvested capital,
leading finally and inevitably to economic crisis. Here are two great
economic forces one that most people would agree to call "good," and
the other "bad" each separate, but interacting to form the final
historical result. Price, production, and trade indices are the
composite effects. We may well remember the errors of smugness and
complacency that our economists, as well as financial and political
leaders, committed during the great boom. Study of these errors might
even chasten our current crop of economic soothsayers, who presume to
foretell the future within a small, precise margin of error. And yet, we
should not scoff unduly at the eulogist who composed paeans to our
economic system as late as 1929. For, insofar as they had in mind the
first strand the genuine prosperity brought about by high saving and
investment they were correct. Where they erred gravely was in
overlooking the second, sinister strand of credit expansion."

Ignoring egregious credit excesses, Mr. Greenspan, other members of the
Federal Reserve and economic community, and the Wall Street bulls are
constantly trumpeting the so called miraculous defeat of inflation,
stating this as much the force behind the huge rise in stock prices.
Well, again, this sounds all too similar to the bullish propaganda that
was at the heart of the regrettable "new era" and "permanent prosperity"
talk of the 1920s. In this regard, Mr. Rothbard stated: "One of the
reasons that most economists of the 1920s did not recognize the
existence of an inflationary problem was the widespread adoption of a
stable price level as the goal and criterion for monetary policy. The
extent to which the Federal Reserve authorities were guided by a desire
to keep the price level stable has been a matter of considerable
controversy. Far less controversial is the fact that more and more
economists came to consider a stable price level as the major goal of
monetary policy. The fact that general prices were more or less stable
during the 1920s told most economists that there was no inflationary
threat, and therefore the events of the great depression caught them
completely unawareThe economists who emphasized the importance of a
stable price level were thus especially deceived, for they should have
concentrated on what was happening to the supply of money."

It is Rothbards view, and certainly one we share, that booms caused by
run-away credit expansion lead to inevitable busts. This view has great
factual support today with the catastrophic busts that continue in
Japan, SE Asia and now Latin America. Mr. Rothbard stated that credit
creation beyond savings leads to problematic distortions in, as he says,
"price, production and trade indices." This is certainly the case today
with momentous inflation in the prices of US stocks, real estate and
other assets. And while the global crisis and massive worldwide
overcapacity for most goods and commodities keeps these prices low, the
consequences of our systems credit excesses lead to over-consumption
and huge trade deficits. And, importantly, we are seeing dangerous
distortions in our countrys manufacturing sector. Indeed, on a monthly
basis, we are now witnessing a gutting of our countrys industrial base.
Last month, our economy lost another 50,000 manufacturing jobs, bringing
the total goods-producing jobs lost during the past year at more than
330,000. And while these job losses are more than made up in the booming
service sector, especially in retail and financial services, this is but
more clear evidence of a maladjusted economy; a catastrophe where
massive credit excesses are feeding a disastrous asset bubble and
hopelessly distorting the structures of our financial system and
economy. It is todays combination of debt financed consumption as well
as malinvestment, the unprecedented borrowing and spending boom by
enterprises that will prove uneconomic with the passing of the boom,
that will so impair our economy and financial system for years to come.
That this somehow passes as a "spectacularly" healthy economy, devoid of
troubling excesses, as claimed by Mr. Greenspan and the bulls, is simply
beyond belief.

Charles Peabody

Mitchell Securities

March 9, 1999