Submitted by Jeffrey Snider via Alhambra Investment Partners,

As if anyone needed any proof as to why economics needs to be so thoroughly debunked, it was on display again today. I am talking about Rome over Carthage defeat, where the textbooks of Economics (capital “E”) should be so salted and devastated in the same manner in which the Romans banished the Carthaginians forever to nothing but history. Economics remains powerful because in many ways the Age of Enlightenment was too narrow; science is more often used as a slur than an actual intended endeavor.

Alan Greenspan should have been banished from all mainstream outlets a very long time ago. No single person has done more intangible harm than he, and yet his opinion is still “valued” by all the places that should prize fact and observation above deference to credentials and highly manipulated reputation. His face should never appear anywhere except the most insidious cautionary tales of what not to do.

But there he was on BloombergTV today telling whatever audience they have that bond yields are heading up to perhaps 5% because he sees inflation taking hold. “I think up in the area of 3 to 4, or 5 percent, eventually. That’s what it’s been historically.” As if he wasn’t disqualified by his tenure at the Fed and the wreckage it wrought, in specific terms the last thing he should ever be asked for is an opinion about long-term bond yields. Did Bloomberg forget the “conundrum”, which despite all great effort has still to this day never been explained (at least not from his side)? Not likely; they would simply prefer it struck from the record.

But the man who admitted a decade ago that he was stumped by bond yields is now an expert in bond yields; and it’s not as if actual analysis on bond yields was a trivial concern in functional money of 2004. His presence in more recent years has become an exercise in marking time. By that I mean you can pretty much tell when bonds are selling even slightly by the number of times Alan Greenspan appears in the media to make the declaration about how the bull market in bonds is over. It’s easy to say these things when interest rates are at a temporary pause, which is why these are the only times when he shows up. It is here that, apparently, someone thinks he is useful; since the current Fed largely follows in his thinking the appearance of being correct has to be cultivated.

In October 2013, for one example out of dozens, the New York Times wrote an article(blog) that was aptly titled Alan Greenspan Sees Inflation. When does he not? What Alan Greenspan actually saw was not inflation, obviously, but rather his fervent hope that QE3 (and 4) would actually work without ever having to answer why there was a third one (and a fourth) in the first place. But the real economy, where inflation actually builds and eventually breaks out, was having none of it – which meant that Alan Greenspan was actually seeing just what he wanted to see.

Each time the Fed buys a bond, it pays the bank that sells the bond by creating money and putting it into an account that the bank keeps at the Fed. Mr. Greenspan’s inflation prediction is based on his estimation of the consequences as that money flows out into the economy.

If he had instead followed that thought to its logical conclusions, “money flows out into the economy” would never have been one of them. The byproduct of QE is bank reserves, but these are not money; they are only one form of bank liability, and a narrow one at that. No person or business can walk into a Fed branch and withdraw from those reserve accounts; they must be actualized by the bank holding them. Economists simply assumed that banks would do so; any rational analysis of 2013 that didn’t involve so much self-delusion would have shown that was just never going to happen – as it didn’t.


Likewise, Mr. Greenspan and economists have made the same mistakes for years (including the years before 2013) based on these kinds of misleading interpretations. The current case is no exception, as those like the disgraced former Fed Chair are over-emphasizing the direction of things because that is what they desperately want to happen (even more so now three years of predicting “overheating”, “liftoff”, “recovery”, etc.). In other words, the global economy has stopped for the moment getting worse. In the mainstream that translates into this intermittent “guarantee” that it must be getting better. This is what happened in late 2013 and the first half of 2014.

But that was the wrong point of view, and the economic data really did show it. The economy fell off sharply in 2012. Rather than recover starting in 2013, however, it was simply the absence of further deterioration. The former is the actual basis for inflation; the latter for Greenspan proving once more that he really should stop commenting on the bond market.


In their world of rational expectations, they really need bonds to selloff, and to do so very, very hard. That is why Greenspan is talking about 4% or 5% yields (and did so in 2013). But even though bonds have been volatile and negatively skewed (price) since July, they haven’t budged all that much even in relative terms let alone absolute terms like he is suggesting. The bond selloff in early 2015 was far more “convincing” than this one, and it still amounted to nothing more than misreading the actual established trend.

These inflation predictions are based on dollars of QE and bank reserves, when the actual economy is being dictated by “dollars” that have very little to do with QE and are, in fact, working to the opposite direction. When Alan Greenspan first raised his “conundrum” it should have been his official swansong; one final admission that he had no idea what he’d been doing all that time. At least there is some justice in that he has been reduced to a cheap stunt. We make actual progress when everyone realizes and appreciates him and his reputation as nothing more than that.


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