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The Age of Turbulence
Alan Greenspan
June 11, 2008
Given his stature as the Chairman of the U.S. Federal Reserve Board for almost 20 years and with the inside look to nearly any economic data available and access to the top economists worldwide, any lessons and experiences that he is willing to share would be a lost treasure if left unexcavated. The book is in part an autobiography with chronological discussion of domestic politics and economy then in part a collection of case studies and his take in globalizing and world economy, with sections dedicated to Japan, Russia, India, China and Latin America. In the last chapters, he also offers view of education, energy, currency debt, central bankers, and a look of the world economy in 2030.
The reading itself reminds me of the same sentiment as from Benjamin Franklin’s autobiography then a transition to Milton Friedman’s Capitalism and Freedom. Like working on dissertation researches, the reading is not relaxation, which is particularly more so in later half of the book. The motivation has to be driven by higher purpose like strong interests in economics or textbook reading.
Through out the book, Greenspan gives open takes on the Presidents he served under. Some might find this interesting as most of us do not get to meet the presidents personally.
One of the particular discussions through out the first half of the book are his discussion on the economic cycle and the FED inner thoughts and remedies; I found these worth noting, and as the economists often say history will repeat itself.
1946: US Inflation
1950: US Inflation
1964: economy slow down -> Kennedy’s $10 Billion tax cut, biggest since WWII ->
1965: economy thriving 6% GDP;
1970: recession, unemployment 6% and inflation 5.7% equals stagflation -> interest rate cut, then
1971: 08-15 Nixon announced wages and price control
1974: 11% inflation and 5.6% unemployment rate and recession worsen as capital spending froze; low interest rate, tax rebate and Ford’s deregulation->
1975: unemployment rate hit 9% but recovery began in mid 1975;
1978: inflation went up to 9%;
1979 second oil crisis as gas lines formed gasoline price control and lead to stagnation with 12% inflation. -> Paul Volcker’s money supply control instead fine-tune short-term interest rate, thus controlling inflation, which lead to
1980: continue raise in interest rate of 20% and unemployment of 9%
1982: 11% unemployment rate; but inflation peaked at 15% in mid 1982 and begin to subside, so it took 3 years for inflation fully in check.
1987: rising inflation at 3.6%, once inflation begins, it will grow -> rate increase from 5.5% to 6%. 1987 Black Friday -> Fed provided safety net to business and supply liquidity by Billions of treasures in open market. ->
1988: recovery -> With increase in S&L a $1.5 Trillion in assets, and increase of inflation, corrective interest rate went up and put S&L in tight squeeze ->
1990: recession as caused by raising interest rate, mostly S&L and banks that were in speculative lending ->
1991: Recovery began in early 1991 with lowering interest rate;
1994: continue slow raise of interest rate to 5.5% apply brakes to economy vs 4% GDP growth; 1995-08-09 the day of dot-com boom was born.
1997: Fed began to raise interest rate, the market did gave up a little at each interest hike, but the Bull kept charging on. -> Further interest hike from mid
1999: to mid 2000 from 4.75% to 6.5% ->
2001: For year and half after 2001-09-11, economy was in limbo, from attacks, to Enron, to WorldCom collapse
2002: 1.6 GDP Growth -> Deflation became Fed focus -> another .25% rate cut to 1% -> consumer spending in housing carried economy through out 2000 to
2003: invasion Iraq. -> Fed rate cut to 1.25%
2006: 69% owned house ->
2007: lower interest rate of 2% in
2008: -> Inflation concern.
Quotes and notes
Fed Reserve transfer about $4 Trillion a day in money and security
Because Fed stay constantly in touch with bankers and business people in their districts, they can access to the official published data about a month prior. So shouldn’t listen to Fed when they give a short-term predication?
”The U.S. economy’s greatest strength was its resiliency.”
”Typically, the earliest clear indicator of what’s happening to the economy is the number of new claims for unemployment benefits…”
When total Market capitalization rose faster than total GDP it creates liquidity. So, possibly using total market cap (Wilshire 5000) as percentage of GDP to determine current market sentiment and speculation level? At 1990 recession Cap/GDP is about 60%
Competition and Capitalism: “All people appear motivated by an inbred striving for self-esteem that is in large part fostered by the approval of others.”
”in economies with cutting-edge technologies, people on average seem unable to increase their output per hour at better than 3% a year.”
Obstacles for decades ahead: border control to increase skilled labor force, education reform, Medicare.
Livermore: “Bulls and bears make money; but pigs get slaughtered.”
In John Maynard Keynes’ master work, The General Theory of Employment, Interest and Money, Keynes created the discipline now known as macroeconomics.
In Keynesian view: unemployment and inflation growth are opposite, which failed to account for when both could climb in tandem, which came to be called stagflation.
Logical positivism pioneered by Ludwig Wittgenstein: knowledge can only be gained from facts and numbers, heavily emphasized on rigorous proof.
Townsend-Greenspan opened for business in September 1953 on Broadway, NY. The main appeal was the ability to translate economic analysis into a form business can apply in making decisions. (mostly forecasts)
”CEO of large corporation are not going to take the word of a 30 years gold kid as to where the economy going. But they might very well listen to what he thinks are the various balances here and there, especially if they can check this input against their own knowledge.”
Federal Deficit: 1960s: President Eisenhower apologized publicly for running $3 billion deficit.
According to Greenspan: 2 smartest President: Nixon and Bill Clinton. Nixon has profane side and anti-Semitic, anti-Italian, anti-Greek, anti-Slovak.
Three top post for economists in D.C: Chairman of the Council of Economic Advisors, treasury secretary, and Chairman of Fed.
”Deregulation was the Ford administration’s great unsung achievement.” As oppose to the aggressive interventionism started under Kennedy, or reactive policymaking under Nixon that made nation panicky.
Take hot bath for an hour each morning for orthopedic.
Greenspan using technical analysis to demonstrate how recovery mirrored past ones. “The pattern is advance and pause, advance and pause.”
“Forecasting exchange rates for major currencies is as accurate as forecasting the outcome of the flip of a coin.”
The risk of investing its surplus. OPEC didn’t, banks did.
”The interest rate on ten-year treasury notes, one of the best indicators of investors’ long-term inflation expectation.”
Paul Volcker credited that Fed no longer fine-tune economy by focusing on short-term interest rates, instead it would clamp down on the amount of money available to the economy.
Friedman: Until you contained the money supply, you hadn’t tamed inflation.
Reagan: “A recession is when your neighbor loses his job. A depression is when you lose yours. And recovery is when Jimmy carter loses his.” “Tough love, in the long term, is love.”
A key element to Reagan’s fascinating temperament is his ability to convey politics and policy through use of stories and humors.
”Once inflation begins, it usually grows.”
1929 Great Depression Wiped out 80% market value; Black Friday 1987: 22.5% drop.
”I’m a believer in delivering bad news in person, privately, and in advance.”
”A sound budget will bring long-term rates down because inflation expectations will fall. Monetary policy, appropriately, should respond to that by lowering short-term rates.”
People like Greenspan impressed with people who are information hound and clearly enjoy explore ideas.
Often referred terms: Creative Destruction pg268, Dutch Disease pg257, soft landing pg155, irrational exuberance
”For most of the twentieth century, corporate leaders lacked timely knowledge of customers’ needs. This has always been costly to the bottom line.”
Bob Rubin: you can’t tell when a market is overvalued, and you can’t fight market forces.
”A conflict in human nature: the struggle between the desire to increase material well-being and desire to ward off change and its attendant stress.”
One of major reform was turn Social Security into a system of private accounts: this will probably require $1 Trillion dollars of additional fund.
”Chronic surpluses could be almost as destabilizing as chronic deficits.”
”U.S. economic policy required exploring the many ways human nature and market forces interact.”
”Reputation and the trust it fosters have always appeared to me to be the core required attributes of market capitalism.”
Adam Smith: individual who compete for private gain act as if “led by an invisible hand.” To enhance the wealth of a nation, every man should be free to pursue his own interest his own way.
”Competition, capitalism’s greatest force, creates anxiety in all of us. One major source of it is the chronic fear of job loss. Another, more deeply felt angst stems from competition’s perpetual disturbance of the status quo and style of living, good or bad, from which most people derive comfort.”
Happiness: “The evidence shows it is determined mainly by how we view our lives and accomplishments relative to those of our peers.” As shown in Brady and Friedman data that “American family spend on consumer good and services was largely determined not by the level of family income but by its level relative to the nation’s average family income.”
Japan: Why Japan never recover: “The Japanese had purposely accepted hugely expensive economic stagnation to avoid a massive loss of face for many companies and individuals.” (Did not want to cut losses and fire people)
China: “Replacement of government controls by market pricing began to weaken political control by the Party.” As the Party structured as in a pyramid formation, central controls are pass down through higher hierarchy, as market control replaces government control, consequences may cause instability. Some of the huge challenges include: rural population behind the city boom and political barriers that limits intra-country migration; remaining chunks of state-owned enterprises; lack of modern financial and accounting expertise; corruption; and political freedom. “any of these factors could spark a conflagration.” “As consequence, the economy remains rigid and I fear would not be able to absorb debilitating shock as the U.S did following 9/11.”
China: “I expect the Chinese to gradually replace their imported materials with high value-added domestically produced components.”
India: “The reason Foreign Direct Investment has lagged badly in India is perhaps no better illustrated than by India’s unwillingness to fully embrace market forces. That is all too evident in India’s often statist response to economic problems.”
Russia: from 1998 to 2006 oil account for fifth of GDP -> Dutch disease
Latin America: lack of capitalism and clear path.
”in a market economy, rising debt goes hand in hand with progress.” -> remainder to take risk, burrow and grow.
Greenspan 2 concern of material growth: increasing concentration of income which threats comity and stability and impact of the inevitable slowdown of globalization.
Hedge funds are critical for supply liquidity in otherwise stagnant market.
Central Banker principle: “Price stability is the path to maximum sustainable economic growth.”
Book also included globalization, central bankers, education, energy, corporate governance , currency and debt, future outlook in 2030.