Greenspan Proves He Doesn't Understand US Monetary System

Posted by Ian Cooper - Monday, January 10th, 2011

From Pragmatic Capitalism:

"In this week’s Big Interview with the WSJ Alan Greenspan lashed out at his critics.  Dr. Greenspan also gave his latest economic prognosis saying the economy is improving, the wealth effect is positively contributing to the economy and that inflation will become a risk down the line.

Unfortunately, not 3 minutes into the interview, the former Fed Chief proves that he still has no idea how our monetary system actually works.  When asked if inflation is a problem he responds by saying:

“Down the road most certainly.  Unless we reign in the extraordinary amount of excess reserves in the monetary system which is what the Fed will be doing when it has to do that”

These are extraordinary comments from someone who ran the US central bank for 18 years.  The most important myth that has been busted in the last 24 months is the myth of the money multiplier.  Despite a dramatic expansion of reserves via the Fed’s operations over the course of the last few years we have seen no pick-up in lending.  Greenspan has long worked under a false premise so it’s not surprising that the US economy has the structural flaws that it currently has.  He believes an expansion of the monetary base should lead directly to an expansion of the money supply.  This is the same theory that most hyperinflationists have been working under for the last few years and it explains why their forecasts have been so far off the mark.  Greenspan is clearly still working under this flawed model."

Read more here.

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