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The Question I Asked Alan Greenspan

On January 18^th, I sat around a large conference table with Alan Greenspan and eight or so other people and had the opportunity to ask him a question of historic importance:

Did the central banks of the trade surplus countries, like the People's Bank of China, cause the global savings glut by printing the equivalent of trillions of dollars worth of their own currencies?

I am certain that they did.

Dr. Greenspan said he disagreed. He said he did not think that was the cause of the global savings glut. In this short blog, I'm going to explain why that was a history making answer.

Ben Bernanke, who succeeded Alan Greenspan as Fed Chairman in 2006, has said many times that the global economic crisis was primarily caused by a global savings glut. His Global Saving Glut theory contends that people in developing countries, like China, had a very high savings rate; and that millions of those people decided to invest their savings in US Dollar-denominated assets, like US government bonds, instead of investing their savings at home. That investment pushed up the price of US government bonds and pushed down bond yields (i.e. interest rates). Consequently, the Fed was not able to push up interest rates enough to prevent the US property bubble. When that bubble popped, it caused the global economic crisis.

Dr. Greenspan has agreed with this Global Savings Glut theory on numerous occasions, including in his reply to my question last month.

If it were true that millions of people were responsible for causing the global savings glut, then there was very little that Greenspan (or any one else) could have done about it. But that is not true. Only a few central banks were responsible. Half a dozen or so central banks flooded the world with excess liquidity and caused the Fed to lose control over US interest rates. They did that by "printing" money on an incredibly large scale and using it to acquire Foreign Exchange Reserves.

Central banks accumulate Foreign Exchange Reserves in only one way. They create money from thin air. They then use the new money to buy the currencies of other countries.

They do this to depress the value of their own currencies, so that their exporters will be able to export more. Increased exports generate more economic growth. In other words, foreign exchange accumulation is currency manipulation, plain and simple.

Between 2000 and mid-2008, when the crisis began, the central banks of the trade surplus countries "printed" the equivalent of US$5 trillion, which they used to buy the currencies of other countries. US Dollars accounted for 70% (or US$3.5 trillion) of that amount. That is roughly the same amount of dollars the Fed created in its three rounds of Quantitative Easing (US$3.6 trillion).

It is extraordinarily important to understand that it was money creation by the central banks of the trade surplus countries that was responsible for the so-called "Global Savings Glut", rather than the savings of millions of people in the developing world. This is important for two reasons:

1. Without understanding that, the greatest economic crisis of our time will remain misdiagnosed.
2. Since only half a dozen or so central banks around the world were responsible for creating so much money, something could have been done about it. The US government could have imposed trade penalties that could have forced them to stop. Had that occurred, the crisis of 2008 could have been prevented.

Between 2000 and 2014, the central banks of the trade surplus countries "printed" the equivalent of US$10 trillion, which they used to buy Foreign Exchange Reserves. This was fiat money creation on an entirely unprecedented scale.

It has always seemed inconceivable to me that Dr. Greenspan did not understand that this was the origin of the so-called Global Savings Glut. On January 18^th, he told me that he didn't. If he was sincere, we now know that the most powerful money man in the world, didn't understand that it was central bank money creation on a multi-trillion dollar scale that caused the Fed to lose control over US interest rates and over the US economy itself. In other words, he did not and still does not understand the true cause of the global economic crisis. In my opinion, that's one for the history books.