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	Forecasting America's Destiny ... and the World's

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Generational Dynamics Web Log for 14-Mar-05
Fed Governor Ben Bernanke blames America's sky-high public debt on other nations

Web Log - March, 2005

Fed Governor Ben Bernanke blames America's sky-high public debt on other nations

I'm normally wary of applying specific generational archetypes to individuals, but Bernanke is acting like a Baby Boomer.

As I've frequently reported, speeches by Fed Chairman Alan Greenspan have been getting increasingly alarming in the past year. At the beginning of 2004, he was congratulating himself that he'd saved America's economy from danger by his policy of near-zero interest rates. By mid-year, he was expressing concern about debt levels. And then in January of this year, he repudiated his own statements of the last eight years, and indicated that the economy was facing a global danger "without historical precedent."

Ben Bernanke

Ben Bernanke

Ben Bernanke is Greenspan's colleague at the Fed, and is considered the most likely candidate to replace Greenspan as Chairman when he retires next year.

Bernanke's statements in the last year have been getting, if anything increasingly sanguine.

Last October, we were highly critical of Bernanke's statements to the effect that the economy was being saved by Fed policy statements -- the mere publication of the Fed's view of the economy is keeping the economy under control. I considered, and still consider, this claim by Bernanke to be extremely bizarre because it completely ignores fundamentals. The economy is controlled by economic fundamentals, not by words published by the Fed, no matter how enlightened and sagacious those words might be.

On Friday, March 11, Bernanke gave a speech to the Virginia Association of Economics, Richmond, Virginia, with the most bizarre claim of all: he's blaming America's huge public debt on a "global saving glut" in other countries:

What then accounts for the rapid increase in the U.S. current account deficit? My own preferred explanation focuses on what I see as the emergence of a global saving glut in the past eight to ten years. This saving glut is the result of a number of developments. [One] well-understood source of the saving glut is the strong saving motive of rich countries with aging populations, which must make provision for an impending sharp increase in the number of retirees relative to the number of workers. With slowly growing or declining workforces, as well as high capital-labor ratios, many advanced economies outside the United States also face an apparent dearth of domestic investment opportunities. As a consequence of high desired saving and the low prospective returns to domestic investment, the mature industrial economies as a group seek to run current account surpluses and thus to lend abroad.

Now I won't, in fact, claim that Bernanke isn't technically incorrect. After all, if someone borrows money through a credit card, then you can say it's the "fault" of the credit card company for issuing the card.

And if someone gets mugged while walking through New York's Central Park at 3 am, then the mugger can blame the guy who got mugged for doing something so stupid as walking through Central Park at 3 am.

Total credit market debt <font size=-2>(Source: PIMCO)</font>

Total credit market debt (Source: PIMCO)

But America's total public debt is astronomical, as the adjoining graph shows, and blaming it on nations issuing the credits is just a little too convenient. Let's face it: It's just plain bizarre, and it appears that Bernanke is in denial about what's really going on.

I normally avoid applying specific generational archetype attributes to specific people, because the archetypes are generalizations that don't hold for every individual of a generation, but it seems compelling in this case, so I'm going to go out on a limb.

Alan Greenspan, born in 1926, was in the generation that grew up during the Great Depression, and saw around all the horrors of bankruptcy, homelessless and starvation that the Depression caused. And this doesn't even mention the horrors of World War II.

Ben Bernanke, born in 1953, is the Baby Boomer generation that grew up after WW II, and knew absolutely nothing of those horrors. To people in this generation, America had beaten the Depression and beaten the Nazis, and it had been easy, and there had never been any doubt about the result.

The two generations represented by Greenspan and Bernanke, respectively, clashed in the massive riots and demonstrations caused by the "generation gap" of America in the 1960s. Greenspan's generation wanted to impose austere savings rules and fight Communism, to prevent any horrors like the Depression or WW II from every happening again. The kids in Bernanke's generation saw no need for austerity or for fighting Communism, and fought against it, forcing two Presidents (Lyndon Johnson and Richard Nixon) to leave office in disgrace. Today, the Boomer generational is viewed by many, especially the people in Generation X that followed the Boomers, as extremely arrogant. (Incidentally, I'm in the Boomer generation.)

As I look at Bernanke's picture, shown above, from his Princeton University web site, he gives me the appearance of nothing so much as a 1960's radical student, still rebelling against his parents. His words give the same impression.

While the elder Greenspan is expressing caution and alarm, the younger Bernanke is making one bizarre, wild statement after another. The 1960's "generation gap" is alive and well at the Fed.

Meanwhile, Morgan Stanley's chief economist Stephen Roach was quoted this weekend as saying that the Fed's near-zero interest policy has simply shifted the stock market bubble into other assets:

"Unlike the excesses in equities five years ago, today's bubble is more of an interest-rate and currency phenomenon - complete with extraordinary compressions of interest-rate spreads in notoriously risky asset classes such as emerging-market debt, high-yield securities and a broad array of credit instruments.

In my view, these bubbles are joined at the hip, with today's excesses very much an outgrowth of the post-equity-bubble defence tactics of America's Federal Reserve."

This precisely coincides with my view, as I've been expressing it on this web site. It's quite possible that Roach reached this view in the same way that I did, and it's possible that Greenspan has done the same.

In 2002, when I first began to predict that we're in a 1930s style Great Depression, I believed that stock prices would continue to fall fairly steadily, from Dow 8000 to Dow 7000 and so forth, down to Dow 3000 or so. This would be generally similar to how stocks performed after the 1929 crash.

Obviously that hasn't happened, but the underlying fundamentals haven't changed: Stocks are still overpriced by a factor of 2 or more, according to standard price/earnings ratio index values, and stocks have come nowhere near correcting the 1990s bubble. Thus, the final destination (Dow 3000) hasn't changed at all, but now it appears that we'll be taking a different route getting there.

As I wrote a couple of months ago, the scenario I now expect is the "tsunami scenario," where the market is overwhelmed by a full-fledged panic that crashes stocks in a day or two, too quickly for most investors to get out in time.

The recent rise in stock prices to Dow 11000 is extremely ominous, because it means stocks are getting increasingly overpriced, while the underlying fundamentals remain unchanged. In other words, the higher stocks go, the farther the fall will be. That's what Stephen Roach is saying, and that may even be what Alan Greenspan is trying to say, but without saying too much.

But there's still one person over at the Fed who believes that the old folks are crazy, that there's nothing to worry about, that words trump fundamentals, and that everyone else is to blame for any problems: That's the person who is currently most likely to replace Alan Greenspan as Fed Chairman, Fed Governor Ben Bernanke. (14-Mar-05) Permanent Link
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Generational Dynamics Web Log for 14-Mar-05 Fed Governor Ben Bernanke blames America's sky-high public debt on other nations

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Generational Dynamics Web Log for 14-Mar-05
Fed Governor Ben Bernanke blames America's sky-high public debt on other nations