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Commentaries & market updates.
If Alan Greenspan were Pinocchio, his nose would literally have knocked his
congressional questioners off their seats. In testimony full of misstatements,
one assertion stood out as particularly outrageous.
During the question-and-answer period, Greenspan posed the following question: “If
foreign central banks and other foreign holders of U.S. government debt decide
to sell their holdings (my note: they hold about 40% of U.S. treasuries),
would U.S. interest rates rise?” Given that prices are determined by
supply and demand, the obvious answer is that not only would rates rise,
they would soar. However, Greenspan answered, “No.” Even more amazing
than his answer was his explanation: The Fed Chairman proclaimed that because
the maturities of the debts held by foreigners are so short, selling would
not result in any meaningful price declines, so interest rates would not
First of all, Greenspan seems to believe that the short-term nature of U.S.
foreign liabilities is advantageous for America, and that if foreigners owned
thirty-year bonds instead of ninety-day bills, the situation would somehow
be more troublesome. The truth is just the opposite. If foreigners held thirty
year bonds the only way to get out would be to sell. If prices collapsed
they would either be forced to sell at deep discounts, or have to wait 30
years for the bonds to mature. However, with ninety day bills, they don’t
need to sell… they only have to wait 90 days for the bills to mature.
If foreign holders of short-term U.S. debt instruments decide not to roll
them over, as they routinely do, not only would the size of U.S. debt auctions
increase dramatically, but the foreign buyers, currently representing over
80% of the demand, would be absent. Does Greenspan really believe that the
U.S. government could sell a much greater supply of bonds to a far smaller
pool of buyers at the same prices that it does today? Does Greenspan have
no knowledge of the basic law of supply and demand or is he purposefully
trying to mislead us?
Rather than acknowledge an obvious vulnerability of the American economy,
or the fact that foreign central banks now have more control over U.S. interest
rates than does the Federal Reserve, Greenspan chose to lie. He could have
easily answered, “Yes, under that scenario, of course rates would rise.” He
could have then added the caveat, “…but I do not believe that
foreign holders will sell.” Such an assertion would have been pollyannic,
but at least it might have represented an honest opinion. Instead, he made
the absurd statement that foreign selling would have no effect on interest
rates. I guess because he obfuscates so often, so routinely, and without
consequence, lying is simply his natural response to troublesome questions.
If, as is so clearly the case, Greenspan lied in this instance, isn’t
his entire testimony suspect? Doesn’t such a blatant misrepresentation call
into question his very credibility? And if Greenspan loses his credibility,
pondering the effects of foreign selling of U.S. debt will no longer be an
academic speculation, but a painful memory.
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