Open Letter to Federal Reserve Chairman Alan Greenspan
Dear Mr. Greenspan,
I write to you on behalf of American investors who see beyond the Dow and GDP, harboring sincere concerns about the dangerous decline in the dollar.
We have never met, but you knew my father, J. Irving Weiss, whom you met several times while at Townsend Greenspan.
Dad dedicated his life to averting the very dilemma we face today.
In 1959, he founded our Sound Dollar Committee, a nonprofit, nonpartisan organization that led a nationwide, grassroots protest against federal deficits, helping to swing Congressional support for Eisenhower’s balanced budget.
And in the 1960s, the Sound Dollar Committee rallied public support for your predecessor, Fed Chairman William McChesney Martin, Jr., who was fighting against inflation and for a strong dollar.
We won those battles thanks to Sound Dollar Committee supporters such as former president Herbert Hoover, presidential advisor Bernard Baruch, Arthur Andersen managing partner Leonard Paul Spacek, and General Leslie R. Grove, who built the Pentagon and managed the Manhattan Project.
Today, they are gone. But I am certain that if they were alive today, they would join me – along with millions of investors – in asking you the following urgent questions:
Why do you stand by so passively
while the dollar falls so sharply?
Overseas, the dollar just fell to still another all-time low on Friday, driving the euro past the $1.40 mark for the first time ever, pushing gold up as high as $458, and sending a shiver up the spine of investors everywhere.
Inside the United States, our dollar has also fallen in terms of its purchasing power. With the latest jumps in consumer and producer prices, it has suffered its worst one-month decline against consumer goods in 16 months, and the worst one-month plunge against producer goods in 14 years.
And most dangerous of all, foreign investors, holding over 40% of U.S. Treasury securities, are coming under increasing pressure to sell, threatening to trigger a massive decline in our financial markets.
But none of this should come as a surprise to you. You know that the U.S. budget deficit is out of control. You know that the $620 billion U.S. current account deficit is the worst of all time, even in proportion to our GDP.
And you also know that as long as our nation’s finances continue to deteriorate, the only thing you can do to persuade foreign investors to hold on to U.S. dollars is to pay them enough interest.
Yet, right now, you’re doing precisely the opposite.
Sure, you’ve nudged short-term interest rates up a bit. But investors are still losing more to inflation than they earn on Treasury bills. And for foreign investors, the situation is far worse: Due to the falling value of the dollar, they are getting smacked with immediate, outright losses. No wonder they’re so anxious to sell!
Mr. Greenspan, are you going to wait for a panic in the dollar before you take action? Or are you going to take action now to avoid a panic, while you still can?
Are you underestimating
the spreading inflationary fires?
Back in the 1960s, despite Fed Chairman Martin’s valiant attempts to nip inflation in the bud, he was continually under political pressure to do precisely the opposite. That’s why the Sound Dollar Committee tried to rally public support for him.
In the end, however, our accomplishments were undone by his successors, Chairman Burns and Chairman Miller. Had they been maintained, the U.S. economy would probably not have needed the traumatic inflation cures that Chairman Volcker finally resorted to in 1980 – the official discount rate of 13% (plus surcharges) and the 3-month Treasury bill rate over 16%.
I know that you and fellow board members have not forgotten the hard lessons learned from that era. Yet, you have done little to counter the recent surges in producer and consumer prices.
Are you willing to risk the consequences? Are you willing to risk the highest inflation rate since the Civil War, the greatest bond market collapse in history, $800 an ounce for gold?
I’m told you consider the gold market as an indicator of inflationary sentiment and fears. If so, why are you complacent about it now? After all that we know about past inflationary cycles, do you still believe it’s prudent to wait until after inflationary fires begin to spread? Have you no intention of acting preemptively?
Why have you helped create the
greatest consumer borrowing
and spending binge in history?
I trust you recognize that by keeping interest rates so low for so long, you not only aggravated the dollar’s decline, you have also …
* fostered unbridled speculation in the home and home mortgage markets,
* encouraged the creation of a massive bubble of automobile credit,
* fired up speculative activity among millions of investors, and
* effectively removed the natural risk of borrowing from the decision-making process of businesses.
Therefore we question why you have done so little to stop, or at least warn about, these trends.
We remember vividly how, in another context and another time – the tech bubble of the 1990s – you warned us of “irrational exuberance.” Now, however, despite bubbles of far broader and deeper dimensions, your pronouncements seem intended to soothe rather than to warn.
For example, you have recommended that Americans favor adjustable-rate mortgages on their homes. With interest rates still so low, and budget deficits already so large, are you sure the risk of an interest rate rise is that insignificant? Even if it were, do you really believe that American families should assume that extra risk?
Similarly, you have praised the worthiness of sub-prime bank loans. Are you not forgetting the continuing high risk inherent in this low-rated category of bank loans? Have you buried the memory of the recent bankruptcies at Superior Bank and others that got caught with bad sub-prime loans?
How long will you continue to
facilitate an irresponsible budget?
Congress recently passed a $388 billion appropriations bill and rejected an attempt to ensure that our government doesn’t keep digging the deficit hole deeper and deeper. It also recently increased the level of the debt limit by $800 billion, meaning the federal government can now borrow up to $8.2 trillion with no plan on how to pay it back.
Meanwhile, the 2005 Consolidated Appropriation Act passed by Congress is so stuffed with pork barrel projects that the Citizens Against Government Waste (CAGW) has named the entire U.S. Congress as winners of the infamous “Porker of the Month” award for November.
According to CAGW, “This year’s total reveals that Congress porked out at record levels. For fiscal 2004, appropriators stuck 10,656 projects in the 13 appropriations bills, an increase of 13 percent over last year’s total of 9,362.”
Clearly, Congress continues to spend record amounts on the cuff, and the federal budget process is largely broken.
But as Chairman of the Federal Reserve, you have the power to help counter this trend with a simple weapon at your disposal: You can restrict the nation’s purse strings at the source.
Instead, however, according to the editors of the Wall Street Journal, you “have been running an easy-money policy for more than two years, continuing with negative real interest rates despite such early inflationary warnings as $50 oil, nearly $450 gold and a 24% decline in the dollar since 2002.”
How long can you continue this policy without severe consequences for all Americans?
Why don’t you actively voice your support
for measures that would require
Congressional leaders to pay as they go?
One of the most urgent priorities right now is to stop the federal deficit from getting even worse. But under our current system, Congress can spend all it wants, with no immediate consequences.
So as a first step to avoid catastrophe, Congress should reinstitute pay-as-you-go accounting in the budget process (also known as “pay-go”). This would require that every time the government makes proposals to spend more money or cut more income, it must find equivalent savings or revenues in the budget to finance those proposals.
This approach is both fair and non-partisan. It was originally instituted in 1990 under George H.W. Bush and helped to achieve the fiscal responsibility and budget surpluses under both Republican and Democratic administrations. It worked then. It can work again.
As investors, we have recently embarked on a campaign for an honest budget through our Sound Dollar Committee. We are making our voices heard in support of pay-go and an honest budget process. Why do you remain silent?
What will all this do to
the stock and bond
portfolios of investors?
With the dollar falling so sharply … inflation spreading so quickly … consumers borrowing and spending so wildly … and the federal deficit process so utterly broken … are you not concerned how all this might impact investors?
What will happen to investors if you continue to stay mostly on the sidelines? Worse, what will happen if you wait until the last minute and have to suddenly raise interest rates in a big hurry?
What would that do to bonds, the housing market, and the stock market? How would you prevent the subsequent damage to the portfolios of millions of individual investors?
Our Pleas
We implore you to stop sacrificing the future of our children and grandchildren on the altar of today’s instant-gratification generation.
We implore you to open your eyes to the pandemic of debt addiction that your interest rate policies have fostered.
We urge you to rise above the nearsighted, politically-driven goal of stimulating the economy at all costs and return to your traditional role of safeguarding our nation’s financial health.
Until you do, however, you leave us little choice but to make the investment decisions we deem necessary to independently protect ourselves and our families:
Rather than loan money to the U.S. Government, we must largely withdraw from the long-term government bond market.
Rather than keeping our money almost entirely in U.S. dollars, your policies leave us little choice but to seek out hedges against a further dollar decline, including gold-related investments and foreign currencies themselves.
We are thankful for the freedom to make these investment choices without government interference, and we look forward to the rich profits they can generate, especially to the degree that you pursue the policies we have questioned here.
However, we would much prefer a win-win – for ourselves and for the country as well. We await anxiously for the day when we can make money because of a bright future, not despite a dark one.
We part with these words of warning: As investors, we don’t have to wait until the next election to protest the runaway budget and trade deficits that are threatening our portfolios. Nor do we have to bang our fists on the desk of some government official. All we have to do is pick up the phone or click on a mouse, issuing one, four-letter command: SELL.
That single act will send a very strong message to you, to Congress, and to the White House. “Wake up! Stop the dollar decline! Start immediately to put our budget and our country on a sounder path!”
Sincerely,
Martin D. Weiss, Chairman
Sound Dollar Committee
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