Alan Greenspan, at the age of 94, recently gave a short interview on CNBC.  He warned about the growing debt and inflation.

Greenspan was the chairman of the Federal Reserve from 1987 to 2006.  He associated with Ayn Rand in his early days and wrote, in my opinion, one of the best essays ever on gold and central bank inflation.  His essay was published in Rand’s book Capitalism: The Unknown Ideal.

While Greenspan’s office was not an elected one (he was appointed by Reagan), he unfortunately ended up being like most people who get into government.  And despite what some people argue about the Fed being a private bank, let’s face it that it is a political office.

Once in office, Greenspan seemed to abandon his commitment to the free market and gold as a use for money.  He actually had the nerve to say that the Fed had advanced to where it could almost mimic a gold standard.  He had to invent crazy answers like these when questioned by Ron Paul.

I have been highly critical of Greenspan over the years because I know he knows better.  He wrote some great things on gold and how deficit spending is a scheme for the confiscation of wealth.  He wrote that, without gold, there is no way to protect savings from confiscation through inflation.  He knew this at a relatively young age, but he didn’t use his knowledge to do good in the world, especially when he became Fed chair.

I am not even accusing Greenspan of outright lying.  He just didn’t speak the truth when he had many opportunities to do so.

With all of that said, he is still interesting to listen to.  He also still shows some sympathy for the free market, or at least against outrageous government interventions in the economy.

So I take his warning seriously about inflation.  I am warning about the same thing too, but it’s actually nice to hear some confirmation coming from a former Fed chair.  While I think Greenspan could have spoken the truth more in the past, I also don’t think he wants to see the whole system implode.

Actually, I don’t think the current chair – Jerome Powell – wants to see the system implode either. But he is less sympathetic to the free market starting out than Greenspan was, and Powell may be a little more clueless.

If you use the Bureau of Labor Statistics (BLS) inflation calculator and plug in the number 100 into August 1987, it becomes 173 dollars in January 2006.  This means that from the time Greenspan took office to the time Greenspan left office, the dollar inflated by 73% according to the government’s own statistics.  The unsustainable housing boom occurred on Greenspan’s watch.

It’s nowhere near the worst outcome for a central banker, but it’s not the best either.  So when Greenspan warns of inflation, he is obviously thinking it will be quite a bit higher than when he was in office.

The CPI

The latest CPI numbers were released for August 2020.  The median CPI went up 0.3% in August.  The CPI went up 0.4% for the month, and this is after going up 0.6% the previous month.

Using the CPI and the “CPI less food and energy”, prices have gone up over 1% over the last two months.  If this becomes a trend, we will have double-digit annual price inflation not far down the road.

This isn’t a prediction, but a warning.  The Fed has created massive amounts of money in 2020.  The balance sheet is up nearly $3 trillion.  Much of this new money is going directly to individuals through stimulus and unemployment benefits.  Some of it went to business owners, many of whom were forced to close down.

It’s no surprise that Powell recently announced that the Fed would target 2% inflation as an average over time.  The Fed already uses a metric that comes in below the CPI.  Now it wants to average, which makes no sense at all.  If you have had five years of no price inflation, why should the Fed shoot for 10% inflation this year to make up for it?

It makes no sense, but it’s not supposed to make sense.  It is an excuse for the Fed to keep creating money and keep interest rates low, even when the official price inflation exceeds its 2% target. I’m sure Greenspan must recognize this too.

If the CPI keeps accelerating, I don’t know how the Fed gets out of this.  Congress is relying on the Fed to buy up most of its debt. And there is no sign of the spending out of DC slowing down.  They were already running a trillion-dollar annual deficit before March 2020 when the economy was essentially shut down.

I don’t know if we will see a 1970s-like scenario again.  It’s possible we may not, and it’s possible it could be worse.

There are a lot of moving parts with the supply of money, the demand for money, and lending. I am not predicting double-digit price inflation, but I am warning about the possibility.  You should prepare accordingly with some investments in hard assets.