Today marks the end of an era.
The most powerful man in the world is stepping down after almost two decades as the guardian of global financial stability.
To mark this momentous occasion, Money Morning comes to you all the way from the United States, where later today, US Federal Reserve chairman Alan Greenspan is widely expected to hike the key interest rate one last time to 4.5%. And then he’ll be gone.
What legacy does he leave? Well, let’s just say we don’t envy his successor Ben Bernanke…
Many commentators believe that Mr Greenspan, or “The Maestro” as some like to call him, has been little short of an economic miracle worker.
In USA Today, they ran a gushing tribute piece. “During his 18 years as head of the Federal Reserve, Chairman Alan Greenspan presided over the longest economic expansion in peacetime history and guided the US economy through many jolts and upheavals.”
There are 11 quotes from a range of commentators from George Bush to Dick Parsons, boss of Time Warner. The sole negative comment is from a senator who accused Mr Greenspan of lacking compassion for “ordinary folks”. This was after he raised interest rates in September, when gasoline prices were at record levels following Hurricane Katrina.
He’s right – Mr Greenspan does lack compassion for ordinary folks. If he really gave a damn about them, he wouldn’t have allowed interest rates to fall as low as they did in the first place.
By slashing rates and keeping them low in response to every crisis that has arisen during his term of office, Mr Greenspan has left US consumers relying more and more on cheap credit to maintain their standard of living. Outstanding mortgage debt has soared from $1.8 trillion to $8.2 trillion in the last 18 years. In 2005, the US savings rate turned negative for the first time since the Depression years.
But as we’re already finding out in the UK, the party can’t go on forever. At some point, people simply can’t borrow any more. And with the US property market now looking decidedly peaky, that point looks like it may be just around the corner.
Unfortunately, if the US consumer stops borrowing, that means they’ll have to stop spending. And as consumption accounts for more than two-thirds of US economic growth, that spells trouble for the world’s most important economy.
However, there seemed to be little discussion of the dangers that lie ahead in the US media this morning. One gripping fact that did emerge is that Greenspan’s successor Ben Bernanke is apparently a very clever man. According to one news show, he scored 1590 out of a possible 1600 in his SATs – the US equivalent of A-levels.
We’re not convinced. If he was that smart, there’s no way he’d have accepted this job.
You can read MoneyWeek editor Merryn Somerset Webb’s take on the mess that Mr Greenspan leaves behind in our recommended article, further down this email.
Of course, the indebted US consumer might be the last thing any of us needs to be worrying about. There is still no progress in talks between Iran and the European Union over Iran’s nuclear ambitions. And the general tone of the media on both sides of the Atlantic suggests that citizens of the West are being softened up for another war in the Middle East.
Earlier last week, The Times’s US editor Gerard Baker wrote a column claiming that we must prevent Iran from becoming a nuclear power. And if that means oil at $150 a barrel and more carnage in the Middle East, then so be it. The Washington Post also wonders whether George Bush has yet figured out a strategy for pushing military action past the UN.
And as middle-aged newspaper columnists yelp for blood from behind their laptops, things are getting even worse in the last country that threatened the West with weapons of mass destruction.
As if the Iraqis didn’t have enough to worry about, UN inspectors have confirmed that a young girl has died of the H5N1 bird flu virus, and it’s likely that her uncle died of the same thing. Meanwhile, the disease has been discovered in Northern Cyprus, continuing its inexorable spread towards western Europe.
We don’t know if there will be a bird flu pandemic, just as we don’t know whether the situation in Iran will escalate into a war. But we do know that in these uncertain times, it pays to have insurance.
Gold remains close to its recent 25-year high of $567.90 an ounce. But if either of the above events were to unfold, it would shoot much higher. And even if pestilence and war don’t arrive, the shaky state of the US economy will mean that plenty of people will still be seeking out gold as a safe haven in the months to come.
You can read our guide to investing in gold on our website, here: How to invest in gold
Alan Greenspan once talked approvingly of using gold as a currency, before he became a central banker and had to profess his faith in paper money. Now that he’s about to give it all up, we wouldn’t be surprised if he picks up a few ingots himself.
Just in case Ben’s not as good at delaying disaster as he was…
Back in the City, the FTSE 100 slipped 7 points to 5,779. BP was the main riser, up 2% to 682p on stubbornly high oil prices. Meanwhile, the FTSE 250 ended 38 lower at 9,169. Music retailer HMV was the main riser, jumping 17% to 192p on news of a bid approach. For a full market report, see: London market close.
Over in continental Europe, the Paris Cac 40 shed 19 points to 4,936, while the German Dax climbed 12 to close at 5,660.
US markets were mixed. The Dow Jones fell 7 points to 10,899, while the S&P 500 rose 1 to 1,285. The tech-heavy Nasdaq gained 2 to 2,306.
In Asian trading hours, oil was steady, trading at around $68.20 a barrel in New York, while Brent crude was at $65.70.
And our two recommended articles for today…
Why you should steer clear of US stocks
– Many commentators praise outgoing Federal Reserve chairman Alan Greenspan for presiding over an era of low inflation and ‘astonishing prosperity and stability’. But MoneyWeek editor Merryn Somerset Webb believes that by putting off various financial crises, all he has done is store up even more trouble for his successor. To find out why that means you should avoid investing in the US, click here: Why you should steer clear of US stocks
Why gold mining shares look cheap
– Gold has performed very well in recent months, say John Robson and Andrew Selsby of RH Asset Management. But gold mining stocks are failing to keep up. To find out why the sector could rise by at least 38% before the end of this year, click here: Why gold mining shares look cheap