I.O.U.S.A. (46 page)

The comparable measure with respect to households is that if you don ’ t save adequately, you are wholly dependent upon the income you are getting — which, incidentally, indirectly will rise because other people are saving and investing. But as far as you ’ re concerned, unless you put money away for nest egg purposes, for retirement, for a variety of other purposes, you will fi nd that you are living an extraordinarily precarious existence. Savings is the buffer which is the gap between disaster and prosperity.

Q:
Let me follow up with the criticism or critique of someone
like Dr. Ron Paul who says that Americans don ’ t save for two
reasons. One is because they choose not to, and another is
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because there ’ s a false sense of wealth. Many Americans feel
richer than they actually are, and Dr. Paul would say that he
would lay some of that blame at the foot of the Federal Reserve.

You ’ ve probably heard this before from him personally. How
do you respond to that? Does the Fed play any role in the last
10 or 20 years in the falling savings rate?

Alan Greenspan:
By maintaining a stable fi nancial system, a stable monetary system contributes to economic growth through enhancing stability and, most importantly, keeping infl ation at a subdued level. The issue of rising wealth in the last 15 years or so is essentially a global phenomenon and one that results because of the consequences of what was seen when the Cold War came to an end. The extraordinary amount of economic devastation behind the Iron Curtain induced a very large part of the so - called Third World to move signifi cantly toward competitive market capitalism, the effects of which are twofold: (1) a major decline in the rate of infl ation, and (2) a huge increase in the propensity to save around the world, but most dramatically in those areas of the world which ordinarily save a great deal but were saving increasingly more. The effect of that was a major decline in long -

term interest rates, which in turn have always had the effect of lowering capitalization rates on real estate, commercial, and on stocks and bonds, obviously. As a consequence of that, there is a sense of wealth, because the concept of wealth is not the physical things that we have per se, but what human beings perceive that those assets will eventually be able to contribute to future standards of living.

The most important issue here is wealth, in that sense, is a psychological problem or a psychological phenomenon, to the extent that you have great confi dence about the capacity of physically existing assets producing far into the future, you will value those assets extremely highly, and when people talk about wealth, that ’ s what they basically mean. Now, the Federal Reserve has had very little to do in that particular scenario and therefore Ron Paul, with whom I agree with on a number of issues, is mistaken in this area.

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Interviews

Q:
How important is it for kids to learn at a young age the
importance of saving?

Alan Greenspan:
Well, remember what savings is all about: essentially putting aside part of what you produce, part of your income, to have provision for the future. In other words, people don ’ t live only in the day that we ’ re talking about. We ’ re always projecting where we ’ re going to be next week, next month, next year; we ’ re always looking forward to what type of careers we ’ re going to have, what we ’ re going to learn, and how our lives are going to evolve. In other words, we don ’ t live in the present and cannot live in the present only. Human beings cannot survive unless they create provision for the future, and a goodly part of the provision for the future is in monetary terms, and terms in which one can see what one needs as the years go on.

If you broaden this idea to the economy as a whole, without preparing for the future, and making provisions, the economy will be stagnant. It will not be rising as the United States has over our whole history, generation upon generation. It ’ s critical — without savings, there is no future. It is critical to human beings, it ’ s critical to a nation, and it ’ s critical to the world at large.

Q:
If there is a country that is choosing to live beyond its
means, is there anything a central bank can to do to fi x that,
ultimately?

Alan Greenspan:
If there are signifi cant fi scal defi cits or basically a lack of savings in an economy, what that will do — leaving aside for the moment what the Federal Reserve does — is to raise interest rates, because a demand for funds exceeds the supply of funds and there ’ s nothing that one can do to prevent interest rates from rising. Now the danger is that if the Federal Reserve does not keep monetary policy tight in such an environment, and in a sense facilitate the rise in interest rates, it can do so only by expanding the money supply, ultimately creating infl ation, and infl ation eventually disables an economy and standards of living. So in that sense, if fi scal policy is lax or savings are exceptionally low, there is nothing monetary policy or any central bank can do about that.

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All it can do is to try to protect the system from being excessively affected by what would be an irresponsible policy on the part of government.

Q:
Would you add, too, that there might be some irresponsibility
by individuals who choose not to save money in their own life,
in their own families?

Alan Greenspan:
Well, it ’ s always a very diffi cult problem to make judgments about what the motives of people are. If you ’ re in a free society, people have to choose the way they wish to live, the values they wish to implement, and it ’ s not up to government to tell them they act should differently, with the obvious exception of being acutely aware of what the nature of rights are and what the nature of laws are. But there ’ s very little government can do directly to affect people ’ s attitudes. That ’ s part of the culture.

That ’ s basically the function of society in general, of people who write books, people who think about issues, people who try to convince people about what they should and should not be doing. I ’ ve often found that one of the characteristics of a free society is that we are free to be irresponsible. I don ’ t like that fact, but the ability to do so is an essential freedom because unless you voluntarily do the right thing it ’ s not going to work. And if you are fundamentally an irresponsible person, no matter what government does, it ’ ll show up in one way or another.

Q:
Are you concerned about the level of foreign ownership of U.S.

Treasury bonds and the fact that it ’ s been increasing recently
rather quickly?

Alan Greenspan:
I ’ m not concerned by the fact that foreigners own a great deal of America. Indeed, one of the very important aspects of globalization is that there is a huge amount of trade amongst countries, and as a consequence of that the claims to wealth, which are a necessary concomitant of trade, grow. We in the United States own a good deal of the rest of the world, and the rest of the world owns a great deal of us, and that will continue to grow as globalization, which I think is a very powerful and positive force in a society, continues. So, provided we are dealing c13.indd 173

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essentially with business, private assets, and very little government involved in this, I have no concern.

Q:
Mr. Walker, he says that our country has a budget
defi cit problem, a savings defi cit problem and a trade balance
problem, balance of payments problem, all possibly made
worse by leaders that are not warning us of what lies ahead
fi nancially with unfunded liabilities. Do you think that there ’ s
a tidal wave on the horizon, a tidal wave of spending that if we
choose not to address and choose not to fi x, it ’ s going to make
life much different for our children and grandchildren?

Alan Greenspan:
There ’ s an extraordinary event for the fi rst time in human history about to occur, which is a tsunami of retired people as the baby boom generation over time doubles the number of retirees; and the fact that life expectancy continues to increase is going to increase that burden further. This means that the average working family, is going to have to produce, or I should say the average worker, is going to have to produce not only suffi cient physical resources for himself and his family, but also for the retired people. What this essentially suggests is that unless we fi nd a way to delimit the size of the physical resource shift that it ’ s implicit in current law, we are going to be in very serious trouble. You cannot consume more than you produce, and what these various different defi cits are suggesting is basically that we are trying to consume more than we produce. We can do that in the short run, but over the long run, it is of course impossible.

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