“Free Money” – And Other New Age Delusions

“Fear and euphoria are dominant forces, and fear is many multiples the size of euphoria. Bubbles go up very slowly as euphoria builds. Then fear hits, and it comes down very sharply. When I started to look at that, I was sort of intellectually shocked. Contagion is the critical phenomenon which causes the thing to fall apart.”

— Alan Greenspan

Turn Your Images On

A push to lower interest rates to 1% in a world of 2.5% inflation would essentially make
it free to borrow in real terms – and a bubble would result.

July 30, 2025 — Easy money is in its own way a mass psychology event.

As more and more money was spent on information technology, and computational power continued to follow Moore’s law — doubling every 18 months — GDP and productivity numbers began to look like someone with too many facelifts — grotesque and unrecognizable.

But it was not until the last quarter of 1999 that this hedonic measure really put the productivity numbers in their most flattering light.

Info tech spending went wild in the last half of 1999 — urged to excess by the Y2K threat.

This activity was amplified by the Bureau of Labor Statistics to such an extent that its message could be heard all over the world: 6% productivity was a triumph — the New Era was paying off! The third and final quarters of 1999 produced some very healthy numbers for labor productivity.

The Bureau of Labor Statistics recorded the rate of increase at 5% in the third quarter and 6.4% in the fourth. It was partly on the basis of these numbers that the historic shift of money from the Old Economy to the New Economy was justified and explained.

The Old Economy was said to be growing sluggishly, while the new one seemed to be propelled forward at ever-faster speeds by the incredible productivity gains made possible by IT. “Incredible” was the operative word. When the productivity numbers were deconstructed, they looked less than credible, if not outright fraudulent.

As Kurt Richebächer put it, “After three years of near-stagnation between 1992 and 1995, productivity growth all of a sudden began to spurt in [the last quarter of 1995]. What caused that?”

What caused it was that the Bureau of Labor Statistics changed the way it calculated productivity. It began to look at what it called a “hedonic” price index that took into account not just the price of computer equipment, but its computational power.

On the surface, this makes some sense. If a dollar buys twice as much computational power one year as the next, it is as if the price of computing power had fallen in half. The third quarter of 1995 was the first time this change took effect. It miraculously transformed $2.4 billion in computer spending into $14 billion of output, instantly boosting GDP by 20%, lowering inflation, and increasing productivity (output per hour).

The number for the fourth quarter, to repeat, was spectacular. Incredible. It was revised later to an even more incredible 6.9%. The only trouble was that it was not real.

It was, like the New Era that supposedly made it possible, a fraud. More computational power is not the same as economic growth. And being able to turn out more computational power for each hour of labor input is not the same as an increase in labor productivity.

Like the millions of lines of code and the millions of miles of fiberoptic cable, computational power is only as valuable as the money that people are willing to spend to get it. And that is measured not by hedonic numbers, but by real dollars and cents.

What was true for the nation’s financial performance was also true for that of individual companies. Companies engineered their financial reports to give investors the information they wanted to hear. What they were often doing was exactly what Alan Greenspan worried about — impairing balance sheets in order to produce growth and earnings numbers that delighted Wall Street.

Curiously, during what was supposed to be the greatest economic boom in history, the financial condition of many major companies actually deteriorated.

Regards,

Addison Wiggin
Grey Swan Investment Fraternity

Continued Below…

P.S., This essay is an excerpt from the third post-pandemic edition of F inancial Reckoning: Memes, Manias, Booms & Busts, Investing in the 21st Century.

Today, as investors clamor for all things AI, talk of increased productivity is back. Yes, AI tools can allow workers to do more in the time they have. And we could see a 1990’s-style productivity boom in the years ahead. But we are also running dangerously close to a bust…

President Trump’s push for lower interest rates would give the economy one last gasp higher – amid a speculative bull market driven by free money, not fundamentals.

Remember, President Trump is calling for 1% interest rates. But inflation is 2.5%. In that world, there’s a strong economic incentive to borrow money and put it to work in anything that could generate a positive return – even if it doesn’t end well a year or two down the line.

Those moves – which the most recent of which can be seen with the SPAC bubble of 2021 – are classic Grey Swan events.

You can forecast them, avoid losses when the bubble pops, and even come out ahead if you know where to invest.

Your thoughts? Please send them here: addison@greyswanfraternity.com

— Alan Greenspan

Turn Your Images On

A push to lower interest rates to 1% in a world of 2.5% inflation would essentially make
it free to borrow in real terms – and a bubble would result.

July 30, 2025 — Easy money is in its own way a mass psychology event.

But it was not until the last quarter of 1999 that this hedonic measure really put the productivity numbers in their most flattering light.

Info tech spending went wild in the last half of 1999 — urged to excess by the Y2K threat.

As Kurt Richebächer put it, “After three years of near-stagnation between 1992 and 1995, productivity growth all of a sudden began to spurt in [the last quarter of 1995]. What caused that?”

The number for the fourth quarter, to repeat, was spectacular. Incredible. It was revised later to an even more incredible 6.9%. The only trouble was that it was not real.

Curiously, during what was supposed to be the greatest economic boom in history, the financial condition of many major companies actually deteriorated.

Regards,

Addison Wiggin
Grey Swan Investment Fraternity

Continued Below…

P.S., This essay is an excerpt from the third post-pandemic edition of F inancial Reckoning: Memes, Manias, Booms & Busts, Investing in the 21st Century.

President Trump’s push for lower interest rates would give the economy one last gasp higher – amid a speculative bull market driven by free money, not fundamentals.

Those moves – which the most recent of which can be seen with the SPAC bubble of 2021 – are classic Grey Swan events.

You can forecast them, avoid losses when the bubble pops, and even come out ahead if you know where to invest.

Your thoughts? Please send them here: addison@greyswanfraternity.com

America has consistently reinvented itself in times of crisis. The founders survived monarchy. Lincoln survived disunion. We’ve survived bank panics, oil shocks, stagflation, and disco. We’ll survive deplatforming, too.

The Second American Revolution won’t be fought with muskets or manifestos. It won’t be fought with petty violence and street demonstrations. It will be written into code. And available to those who wish to take advantage of it.

Russell Kirk called the first American Revolution “a revolution not made, but prevented.” The second will be the same. We’re not tearing down the house — we’re going to rewire it in code.

The result may not be utopia. But it will be freedom you can bank on.

Treasury Secretary Scott Bessent has called stablecoins, including USDC, “a pillar of dollar strength,” estimating a $2 trillion market within five years. U.S. Treasuries back every coin.

Bessent’s formula even suggests that a broader, more efficient market for US dollars will help retain its best use case as the reserve currency of global finance… and, perhaps, help the current administration address the nation’s $37 trillion mountain of debt.

In trying to cancel a man, the establishment accidentally reinforced the dollar, and may add decades to its life as a useful currency.

As we approach the 250th anniversary of the United States, it’s worth recalling that our first Revolution wasn’t waged to destroy an order — it was fought to preserve one.

Political philosopher Russell Kirk called it “a revolution not made but prevented.” The colonists sought not chaos but continuity — the defense of their “chartered rights as Englishmen,” not the birth of an entirely new world. Kirk wrote:

“The American Revolution was a preventive movement, intended to preserve an old constitutional structure. The French Revolution meant the destruction of the fabric of society.”

The difference, Kirk argued, was moral. The American Revolution was rooted in ordered liberty; the French in ideological frenzy. The first produced a Constitution; the second, a guillotine.

Two and a half centuries later, the argument continues — only now, the battlefield is financial. Who controls access to money? Who defines legitimacy? Can a citizen’s ability to transact depend on their politics?

Trump and Powell are no buddies. They’ve been fighting over rate cuts all year—Trump demanding more, Powell holding back. Even after cutting twice, Trump called him “grossly incompetent” and said he’d “love to fire” him. The tension has been building for months.

And Trump now seems ready to install someone who shares his appetite for lower rates and easier money.

Trump has been dropping hints for weeks—saying on November 18, “I think I already know my choice,” and then doubling down last Sunday aboard Air Force One with, “I know who I am going to pick… we’ll be announcing it.”

He was referring to one Kevin Hassett, who—according to a recent Bloomberg report—has emerged as the overwhelming favorite to become the next Fed chair.