One minor encouragement from his Congressional testimony was Greenspan’s repeated theme that actual savings and the associated investment were needed to provide the goods and services for future retirees. Perhaps he realises that by putting interest rates unrealistically low he has favored borrowers (and consumption) over savers, and so suppressed the savings needed? And that, as the architect of the most recent reform of Social Security, he has a “legacy” to preserve?

During Congressional testimony today, Alan Greenspan publicly confirmed that the Fed leans against stock market declines with easy money. Under questioning from Sen. Sarbanes, who asked why, if inflation is ‘contained’ as Greenspan had earlier affirmed, the Fed is raising the Funds rate time after time.

Greenspan replied that the Fed had intentionally slashed the Funds rate to an ‘excessively’ accommodative 1.00% in response to ‘deflationary’ forces such as the fall in the stock market and the economy during 2001.

So now we know that the statements about the Fed not targeting equity markets were a lie. Of course.

An excellent, if pithy, interview with Sir John Templeton covering most major aspects of financial markets today.

“Q: As a global value buyer, what markets look best? Which markets are least attractive?

Sir Templeton: In the 92 years since I was born, investors could always find several nations where share prices were more reasonable, but recently, all over the world, share prices have been higher than the cost of creating similar corporations.”

Interview with Sir John Templeton

“The bull artist, on the other hand, cares nothing for truth or falsehood. The only thing that matters to him is “getting away with what he says,” Mr. Frankfurt writes. An advertiser or a politician or talk show host given to [bull] “does not reject the authority of the truth, as the liar does, and oppose himself to it,” he writes. “He pays no attention to it at all.”

And this makes him, Mr. Frankfurt says, potentially more harmful than any liar, because any culture and he means this culture rife with [bull] is one in danger of rejecting “the possibility of knowing how things truly are.” It follows that any form of political argument or intellectual analysis or commercial appeal is only as legitimate, and true, as it is persuasive. There is no other court of appeal.

The reader is left to imagine a culture in which institutions, leaders, events, ethics feel improvised and lacking in substance. “All that is solid,” as Marx once wrote, “melts into air.”"

A Princeton Philosopher’s Unprintable Essay Title (NYT - registration)

The Goldilocks conditions continue, with low mortgage rates supporting home prices and equity extraction, allowing debt to continue growing and funding consumption.

Trees don’t grow to the sky, and debts can’t grow indefinitely. Somewhere there is a limit.

The endlessly debated question is, as we approach the limit, whether we end up with a deflationary crash and depression as defaults cause the money supply to tank, or money-printing spirals out of control causing a Weimar-style hyperinflation.

The conflicting forces of inflation and deflation can clearly be seen. Commodities and financial assets are increasing in price at spectacular rates. But the supply of labor from rapidly developing countries such as China and India is exerting a strong deflationary pressure on wages and employment. The net result is that price increases in consumer goods and services are restrained, as of course are personal incomes.

The bond market is saying that inflation is not going to be a problem, that 4% yields will be a satisfactory return. Usually the bond market is right. Alan Greenspan is steadily ratcheting up short-term interest rates, a quarter-point every six weeks or so. He’s at 2.75% now. The big question is, where will he stop? We know that an inverted yield curve is an almost certain harbinger of recession. Every time he ratchets the short rates, the profit opportunity from the “carry trade” (borrow short and lend long) diminishes. Just by itself, this is already starting to hit the profitability of the financial services industry.

Unless we see consistent and sustained growth in wages and employment, it seems unlikely that an inflationary spiral in incomes can be sustained. This means that consumption will ultimately hit a wall as consumers find debt service draining their discretionary budget. If consumption hits a wall, then Alan Greenspan will once again start lowering interest rates and printing more money. Will that serve to increase incomes? I doubt it. Long rates will probably decline even further, encouraging more refis in a debt spiral. But eventually incomes won’t allow the debt service and it will be default time. When? Ah, there’s the question…