Finding connections between the AI hyperscaler trade and the risk of rising inflation with Alan Greenspan’s greatest hits.
Alan Greenspan, the 13th chair of the Federal Reserve, passed away this week at age 100. Nominated by four U.S. presidents, Greenspan was the second-longest serving chairman (1987–2006).
(Fun fact: William McChesney Martin Jr. was the longest serving, from 1951 to 1970. He once described the Fed’s role as “taking away the punch bowl just as the party gets going,” referring to the importance of the central bank’s role in controlling inflation.)
Greenspan steered monetary policy through the 1990–1991 and 2001 downturns, helping preside over one of the longest economic expansions in U.S. history. Among his most notable achievements at the Fed was leading the battle against inflation during the mid-1990s. Under Greenspan’s watch, the Fed managed a return to price stability while avoiding an economic downturn, and he is credited with being one of the few Fed chairs to achieve a soft landing, helping him earn the nickname “The Maestro”from Washington Post journalist Bob Woodward.
Of course, not all of Greenspan’s policy decisions were met with unanimous support. In fact, some critics argue Greenspan’s opposition to federal regulation and oversight contributed to the devastating Great Financial Crisis in 2007–2008.
While his record will be debated, and many argue he got more right than wrong, Greenspan left his indelible mark on monetary policy and the Federal Reserve. He is credited with implementing the policy statement release beginning in 1994 to more clearly outline the Fed’s assessment of conditions and anticipated policy directives. At the same time, Greenspan appreciated the value in remaining cryptic, limiting the language used in order to keep financial markets guessing, or at least to avoid being tied to one particular policy pathway.
Therefore, without further ado, here are some of my favorites from Greenspan’s repertoire.
“I made a mistake in presuming that the self-interests of organizations… were such that they were best capable of protecting their own shareholders.”
Greenspan owned his errors, and failing to protect against predatory subprime lending and overlooking systemic banking risk were among his biggest mistakes. But rereading that quote today has me also thinking about the interconnectedness of the current array of AI hyperscalers, and the risk of presuming they can protect their shareholders, no less society itself.
“The problem we face today is not one of too little knowledge, but of too little willingness to act on what we know.”
Greenspan hit the nail on the head with this statement, and it runs across everything from financial market stability, geopolitics, the climate crisis, the national debt, the disappearing middle class, the solvency of Social Security and Medicare, etc. We are in a leadership vacuum in so many areas, or perhaps more pointedly, in an ethics black hole. The general public yearns for our leaders to find and implement solutions, instead of endlessly debating and posturing for reelection or to maintain power.
“How do we know when irrational exuberance has unduly escalated asset values?”
This was Greenspan’s signature question, delivered in a December 1996 speech, that previewed the dot.com bubble to come, and went down in history for describing the difficulty of identifying bubbles in real time while acknowledging the risk of not being attuned to them.
As we consider the market action of this week, we can see the burgeoning worries over “irrational exuberance” in AI names seeping into the market’s consciousness. The rubber is meeting the road on hyperscalers’ ability to sustain massive capex while investors question if valuations are too high to justify the actual monetization and market growth opportunity for their products. In addition, bond markets were roiled by the risk of rising interest rates as the Fed’s preferred inflation gauge, the Personal Consumption Expenditures Index, rose at a 4.1% annual rate in May, the highest level in three years.
Even though oil prices plunged this week to levels last seen before the Iran war in February, with Brent crude at $72 and WTI crude under $70 per barrel, the consumer has been coping for weeks with average gasoline prices over $4 per gallon. They’ve fallen below $4 this week but are still up over 20% from this time last year.
In addition, AI hyperscaling has made computer components so expensive that outgoing Apple CEO Tim Cook said price increases are “unavoidable,” noting “we’re doing our best to mitigate the huge increases that are being passed to us, and we’ve been trying to shield our customers from the increases, but the situation has become unsustainable.” He went on to call the supply crunch a “hundred-year flood,” the likes of which he had not seen in over 40 years of working in the industry. Yikes. I guess it was good I bought my dad that new iPhone for Father’s Day before these comments.
This leads me to one of Greenspan’s most memorable quotes: “If I turn out to be particularly clear, you’ve probably misunderstood what I’ve said.” Witty, of course, but this statement also reflects Greenspan’s masterful penchant for strategic ambiguity, aka “Fedspeak,” forcing investors to ponder the meaning of his words and what they meant for the future path of the economy and interest rates.
As a person who started their career in the industry during the Greenspan era, I say rest in peace Alan Greenspan, thanks for the memories, and you will always be honored for the very “rational exuberance” you brought to monetary policy and public service.
Written by a human.