-- Posted Tuesday, 18 February 2003 | Digg This Article
How can one not respect a man with the courage of his convictions. This somewhat phlegmatic professional, in respectful and diplomatic tones, delivered what can only be described, as a dire warning of disaster ahead. When seen in the light of his long held beliefs, publicly stated, he has to be recommending the return to Gold as a discipline to ‘rein in’ President George Bush.
As we have seen to date, he has raised the hackles of the incumbent Administration, against himself. Although they stand in an invidious position, because they appointed him, fully aware of his views they cannot, surely, expect him to change them, simply as a matter of political expedient?
With this in mind, we find his words extremely brave for a man, at both the pinnacle and close to the end of his career.
We make no assumptions in this article, relying entirely on quoting Chairman Greenspan’s publicly stated words, at a time when the U.S. was embarking on a similar undisciplined fiscal path, which he then, also condemned. At the time the U.S. was on the brink of breaking links with Gold, losing, as it had, these credible resources to European nations in vast quantities. His essay is entitled, “Gold and Economic Freedom” and was written in 1967. As then, we stand on the brink of similarly undisciplined days [but without the greater objective of $ Imperialism], with the difference being that Gold will, in these days be called back to give its vital credibility to the $, as it loses its own. We were troubled by the possibility that he may have changed his views since then, until we heard the statement he made to the Economic Club of New York on 19th December 2002: -
“Although the gold standard could hardly be portrayed as having produced a period of price tranquillity, it was the case that the price level in 1929 was not much different, on net, from what it had been in 1800. But, in the two decades following the abandonment of the gold standard in 1933, the consumer price index in the United States nearly doubled. And, in the four decades after that, prices quintupled. Monetary policy, unleashed from the constraint of domestic gold convertibility, has allowed a persistent over issuance of money. As recently as a decade ago, central bankers, having witnessed more than a half-century of chronic inflation, appeared to confirm that a fiat currency was inherently subject to excess."
By saying these words, Chairman Greenspan confirmed he still held the views he expressed on Gold.
To validate our conclusions and statements, we simply quote from this essay, in which he staunchly castigated those proposing deficit spending. To summarise his beliefs he was asked by a Senate Committee member: -
'Now my next question is, is it your intention that the report of this hearing should be that Greenspan recommends a return to the gold standard?'
Greenspan responded, 'I've been recommending that for years, there's nothing new about that.”
With that as our start point, we expand his muted testimony of last week as follows. To do this all we have to do is to juxtapose the pertinent portions of his essay, against last weeks warnings given to the Bush Administration.
In so doing we put the spotlight on this archetypal Central Banker carrying out his responsibilities to the nation’s monetary health, clashing with the heavy handed policy makers, throwing the restraints of responsible economic management out the door and carving a seemingly unmanageable course into economic profligacy. We ourselves read Greenspan’s statements as so strong, as to warn of a rupture in the stability of the American economy. But not just the American economy, but possibly all those dependant on the U.S. economy for their own financial health. Because the U.S. economy is the driving force behind most significant economies of the world, the health of the entire world economy lies in the balance.
No wonder war is being contemplated - its ambitions, if realised, may give desperately needed, but temporary relief, to the economy. Should these warnings from Chairman Greenspan, not be heeded, we will see the world economy dropping down several gears.
As we all know from the most cursory glance at history, Gold was the only monetary instrument that has controlled a world economy, not simply successfully, but over thousands of years, ensuring as it does, that discipline is brought to bear on economic management, a discipline sought so keenly by Central Bankers, charged with bringing discipline and order to a free economy and rejected, by those controlling such disciplines, as well as Commercial Bankers seeking profligacy, in the issuance of monetary instruments, from which they can profit. Greenspan comments on these as follows: -
“An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense-perhaps more clearly and subtly than many consistent defenders of laissez-faire -- that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.
In an economy disciplined by Gold, the synthesis Greenspan envisaged worked this way: -
A free banking system based on gold is able to extend credit and thus to create bank notes (currency) and deposits, according to the production requirements of the economy. Individual owners of gold are induced, by payments of interest, to deposit their gold in a bank (against which they can draw checks). But since it is rarely the case that all depositors want to withdraw all their gold at the same time, the banker need keep only a fraction of his total deposits in gold as reserves. This enables the banker to loan out more than the amount of his gold deposits (which means that he holds claims to gold rather than gold as security of his deposits). But the amount of loans which he can afford to make is not arbitrary: he has to gauge it in relation to his reserves and to the status of his investments……. Thus, under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth.”
In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value.
In addition, when commenting on an International Gold Standard, he added, “It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post-World Was I type of disaster”
Because Gold controls Statists and Bankers, it has only been allowed very limited space in the portfolio of solutions to crises. This role, currently relegated to the unspoken, can only be used, when all else fails. To a man like Chairman Greenspan, the discipline of a Gold Standard is just what is needed to keep Statesmen and Politicians in check, a factor never more pertinent than now, as Bush’s policies threaten the delicately poised attempts at encouraging growth, in an economy, becoming ever increasingly anaemic.
Chairman Greenspan’s testimony, diplomatically disagreed verbally, but in its impact, hammered its opposition, to the latest moves of the Administration to veer off course into Deficit financing. Deficit financing will, in the near future, destabilise the U.S. economy and turn more and more heads to Gold, the only monetary instrument not dependant on a nation’s promises. Deficit financing will further damage the already delicate state of confidence in the economy, as well as in other key world economies.
“Gold and Economic Freedom” states: -
“………. if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds….”
“……..A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights.”
“Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government's promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. “
“The abandonment of the gold standard made it possible….. to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which -- through a complex series of steps -- the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy's books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.”
The first impact of the Bush Administration’s plans is to impede growth, a situation Greenspan does not want at all, as he eyes the situation in Japan, where the lack of confidence is cited as the reason for the insistent deflation they have suffered for a dozen years to date, and now face the possibility of a banking collapse, unless the government nationalises key Banks.
We have no doubt, that Greenspan sees the spectre of Japan’s situation creeping ever nearer to the States.
· By calling the recent economic stimuli by Bush, “premature and short term” he gave a quietly spoken but demonstrated his opposition to these moves of the Administration.
· By saying that deficit financing affects interest rates, he voiced his opposition to these new moves of the Administration.
· By his calling for a re-establishment of fiscal discipline, he warned of a major financial accident.
Politically he flew right into the face of, not simply Bush’s proposals, but into the traditional modus operandi of the present administration.
Brave man!
His speech was a series of disaster warnings, to those who had stuck by the $, the U.S. economy and U.S. Investments. Their reaction has to be to downgrade their views on U.S. financial instruments, as they continue to move away from these hallowed institutions to mobile assets. We expect that his warnings will move people to gold in ever increasing quantities and out of the $, when they see that all else is waning steadily, but surely.
Chairman Greenspan faced the realities confronting the U.S. economy head-on, when he stated that the persisting ‘strains and imbalances were mistakenly seen as transitory’ in nature. This has to mean that they are either permanent, unless dealt with directly, or structural. Either way, the reality is that serious surgery is needed to remove them.
His statement that the present system of budget accounting seriously underestimates the government’s future liabilities was perhaps the most disturbing statement of all.
To give us perspective, perhaps we should factor in the recent Ted Turner resignation, after the revelation of his company’s massive losses, so what can we expect from this government’s Officers? What a frightening prospect for the credibility of that nation’s government, when their most respected Banker, points such a finger at them. What more unhappy discoveries, can we expect on the back of last year, replete with such unhappy revelations? What will we see when proper accounting is applied to these liabilities?
Bear in mind that government has different priorities and objectives to those of the caretakers of the nation. When they propose measures that are patently against the interests of economic health, they always have a nobler cause?
The immediate impact of Chairman Greenspan’s words is to further undermine the failing confidence in the economy, for which he will be blamed, instead of the destructive policies being proposed now. The government response, that they have support from 400 economists to their plan is hardly convincing, if only for the extravagance of this reaction. We believe that Greenspan alone carries a greater weight than the collective weight of these 400, including their Nobel Laureates, in the minds of the relevant public.
As though to reassure us, he stated that traditional fiscal and monetary discipline will be used to resolve these problems. This can only mean policies that counter the damage being done by the future Bush policies, possibly the release of liquidity to counter the drawing down of liquidity through deficit financing? Needless to say, this has tremendous inflationary implications. In the light of remarks emanating out of the Federal Reserve prior to Greenspan’s testimony, on the ability to “release liquidity into the system”, how can one not be alarmed, when reflecting on Greenspan’s own word: -
“When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve's attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain's gold loss and avoid the political embarrassment of having to raise interest rates.
The "Fed" succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market -- triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930's.
Can we see the drama now unfolding, when these earlier remarks of Greenspan are overlaid upon the present? When he hands over the baton, on retirement, will it be with relief, hoping that it will be into the hands of someone who caused the plight, they then find themselves in?
Chairman Greenspan has given the U.S. the direction in which it should go, that it has to go. Capital Investment, Growth, Confidence, are desperately needed. But this is out of his domain, and seemingly not a high priority of the incumbent Government .
As a simple analogy, think of the man who has a job, but overspends his income. Is the solution to give him a bigger overdraft or to get him a better paying job? Greenspan says his overspending habits are not just a splurge of buying, but have become a deeply ingrained habit, which must be broken. Bush is giving him the overdraft, raising the cost of that overdraft, while under accounting the size of the overdraft! For sure, debt could spiral out of control. The consequence will be the $’s value and credibility. At that point a Debtor looks to his assets! Seems logical that their value should be raised to give adequate surety to the Creditors. No doubt, Gold will rise in price to provide that collateral!
We repeat Greenspan’s own words: -
“It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post-World Was I type of disaster”
Thus, under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth.”
We sincerely hope that Greenspan really does have the strength of his conviction, in the short time he has remaining in his august office and keeps speaking out. We also repeat the pragmatism of this day, in that Governments will only accept such controls over their activities, if it dovetails with their current objectives, without relinquishing their power to this cold disciplinarian. To begin this process Gold must be priced considerably higher than it currently is!
Gold-Authentic Money put their Subscribers into Gold at $320 and pulled them out at well over $370. They are now out or short of the market and awaiting closing and re-entry signals. Subscribe now: -
Direct for check payments: gold-authenticmoney@iafrica.com
Online through our website: www.authenticmoney.com
-- Posted Tuesday, 18 February 2003 | Digg This Article
