If fiat money... falters, we may have to go back to oxen
as our medium of exchange.
In that event, I trust, the Federal Reserve...
will have an adequate inventory of oxen."
(Alan Greenspan, The History of Money)
Hey, Mr. Chairman, in case you haven't noticed, the
Federal Reserve already has a goodly supply of oxen!
My father was fond of relating a story about a
professor lecturing on geography. A short fellow, he was extolling the
agriculture of Switzerland.
"In our country oxen are not even as tall as I am. In some countries you
see oxen just as tall as myself. But, believe it or
not, on the fat pastures of Switzerland
there are even greater oxen than myself". For emphasis the good
professor stood on his tiptoes and stretched his hand upwards above his head.
"We don't believe so!" - shouted someone from the back benches of
the lecture theater.
The reason for my dusting off this (not at all
funny) wisecrack of the Chairman is that a conjecture of mine got published
inadvertently. Rather than recanting, I elaborate on it lest there be any
misunderstanding about what I mean. In a private letter I have conjectured
that a conspiracy may exist between the Federal Reserve and the Bank of
Japan. The latter is buying U.S. Treasury paper through the good offices of
the former, over and above the deficit America
is running in its trade accounts with Japan. These highly secret
transactions are reported nowhere, as they are on custodial account.
I am well aware that this conjecture can be neither
proved nor disproved. The conspiracy, if one exists, is part of the highly
classified contingency plan hatched out at the Fed. It calls for bribing
(blackmailing?) the Bank of Japan to get its cooperation in forestalling a
run on the dollar led by other foreign central banks. If such a run were to
take place, it would destroy the dollar as well as the international monetary
system, and drive the rate of interest to stratospheric heights, rendering
the Japanese hoard of American paper worthless.
The run is widely expected by many a knowledgeable
observer, and the bond market is girding itself for a rise in interest rates
more vicious than that 25 years ago. The obituary of the bull market in bonds
has in fact been written already by the world's foremost bond trader, Pimco's
Bill Gross. However the market, like Mark Twain reading his own obituary,
talked back saying: "the reports of my demise are Grossly
exaggerated". Chances are that this particular bull, taunted by the oxen
at the Fed, is getting ready for another run.
The conjecture is eminently plausible. Why, the
Chairman of the Fed is so well conditioned that, even while thinking the
unthinkable, the faltering of the irredeemable dollar, he will not think of
gold. He compulsively thinks of oxen as the obvious alternative for defunct
fiat money. Any contingency plan prepared under his watch must likewise
ignore gold. I hereby issue a challenge for anybody to come up with a better
contingency plan to save the moribund dollar (barring to make it gold-redeemable)
than conspiring with the Bank of Japan to extend the bull-run in bonds in
order to massacre the Cassandras, on either side of the Pacific, who bet on
the collapse of the American bond market.
The conspiracy may be to the liking of the Bank of
Japan which has a reputation of dealing most ruthlessly with speculators who
oppose its policy of a weak yen. It prints yens clandestinely at no cost to
itself. The Bank's acquisition of bonds is therefore a windfall. Thrown in as
a bonus is the appreciation of the Bank's inordinate hoard of bonds in the
wake of falling American interest rates. These bonds were accumulated during
earlier decades, in consequence of the U.S. government twisting the
Bank's arm not to buy gold with unwanted dollars, which is what Charles De
Gaulle would have done. The Japanese know only too well that their hoard is
so enormous that the chances of getting rid of it in case of a dollar crisis
But isn't this conspiracy, if it exists, immoral? Yes,
of course it is! It is the epitome of the total depravity of the fiat money
regime. Printing yens to support productive enterprise is one thing; printing
yens to support bond speculators who have insider knowledge is another. It
must also be clear that, if such a conspiracy exists, it is nothing but a
rape of the American taxpayer who will have to be skinned alive by the
Treasury to pay the maturing coupons on the bonds given away by the Fed.
I have said that the Bank of Japan in printing the
yens was supporting bond speculators with insider knowledge. That's right,
there is a huge speculative scheme afoot called the yen carry-trade. Speculators
borrow yens at 1.5%, sell them for dollars, and buy U.S. Treasury bonds
yielding up to 5%. Not only do they pocket the difference, they are also the
beneficiaries of the huge appreciation of bond prices in the wake of the
falling dollar rate of interest. That is no conjecture. That is a fact. The
conjecture is that speculators are acting on insider information. The
conspiracy of the Fed and the Bank of Japan provides the favorable back-wind
to their speculation which, without it, would be nothing short of suicidal. But
with the back-wind, it is extremely profitable, especially in view of the
weak dollar which improves the terms of trade of yen sellers and dollar
buyers beyond their wildest dreams.
This takes us back to the supply of oxen at the Fed.
If the conjecture is correct, the Fed has engineered a scheme to push the
rate of interest lower in defiance of the falling dollar. Such a policy is
bovine. It spells disaster. It stokes the fires of deflation as I shall now
Let's define inflationary spiral under Kondratiev's
long-wave cycle as the decades-long rise of prices and interest rates,
and deflationary spiral as their similarly long fall. Interest rates may lead
and prices may lag, or the other way round. The important thing is linkage. The
long-term movements of prices and interest rates are inevitably linked. Linkage
epitomizes a huge oscillating money-flow back-and-forth between the bond and
the commodity markets. When the money-tide begins to flow at the commodity
market and ebb at the bond market, we have the inflationary spiral. When it
is reversed and flows at the bond and ebbs at the commodity market, we have
the deflationary spiral.
Chairman Greenspan in a speech on the History of
Money, from which I took the quotation above as well as the title of this
article, congratulates himself and his central banker colleagues in other
countries for "the success in containing inflation during the past two
decades and raising hopes that fiat money can be managed in a responsible
way." This is akin to the surfer on the beach boasting that he has
turned the flow of the tide back through skillful surfing. What the Chairman
calls "containing inflation" is nothing but the receding money-tide
from the commodity market that started in 1980, now flowing at the bond
market. The Chairman did not cause it but could make it a lot worse and more
devastating. In particular, if such a conspiracy between the Fed and the Bank
of Japan exists, the receding money-tide could become a tsunami, repetition
of the Great Depression of the 1930's wiping out sound businesses and the
life savings of most people.
A bull market in bonds is the sine qua non of
the deflationary spiral. Deflation is greatly aggravated by central bank
intervention in putting more money in circulation through open market
purchases of bonds. The central bank hopes that the new money will flow to
the commodity market. Speculators forestall it buying the bonds first. The
new money, thus intercepted and diverted, flows to the bond market, instead
of the commodity market as hoped by the central bank. Interest rates fall,
and linkage makes prices to fall with them. Contra-cyclical policy backfires.
No wonder, its author, Keynes, was ignorant of the linkage. If the conjecture
about the conspiracy between the Fed and the Bank of Japan is correct, there
is an insatiable demand for dollars, especially for falling ones, by bond
speculators. The Fed is the quartermaster general for the coming
depression that may make the Great Depression rather tame in comparison.
In 1980 the dollar had a close brush with sudden
death. It was saved, barely, by the shock-therapy of ultra-high interest rates,
quite openly administered by Chairman Volcker. The dollar now appears to have
another death-spell. Is it possible that there is a similarity between the
two episodes, except this time the attempt to save the dollar will be through
the shock-therapy of ultra-low interest rates, clandestinely administered by
Chairman Greenspan? If so, it won't save the dollar, only prolong the agony.
In his History of Money speech Chairman Greenspan
observes that "savers have been in sufficient abundance since the beginning
of the Industrial Revolution to enable investment to further material
well-being. Money, as a store of value, was an early facilitator of savings
and one of the great inventions of mankind. The history of money is the
history of civilization or, more exactly, of some important civilizing
values." We may add that it was the savings of the people that has made America
great. In the nineteenth century the American people working hard and saving
hard created an economic and financial giant on the continent. America was
the world's greatest creditor nation. Now, America is a financial and
economic dwarf. It has dismantled its great industries with the exception of
the industry producing military hardware. Now the capital, embodying the
great savings of earlier generations, is being dissipated. Now, thanks mainly
to Chairman Greenspan's long tenure, America is the world's greatest
debtor nation. Now, savers in America
are no longer in abundant supply. In fact they are an endangered species, at
the verge of extinction. Now, the dollar is no longer a store of value. It is
a certificate of guaranteed confiscation of value. The most recent history of
money is a history of decline of civilizing values.
In his speech Chairman Greenspan related a story. He
had met a friend and told him about the speech he was going to make on the
history of money. The friend's response was: "I know all about the
history of money. When I get some, it's soon history." He could have
added: "And if I save some, its value is soon history!" The
Chairman called his friend "spendthrift". He failed to mention that
it was precisely his policies at the Fed that had made his friend, and many
millions of others, spendthrift by turning the dollar into the peso of a
Chairman Greenspan said in his speech that "the
early history of the post-Bretton Woods system of generalized fiat money was
plagued, as we all remember, by excess money issuance." The cheek of the
kettle that dares to call the pot black! The excess money issuance under all
his predecessors combined is eclipsed by the excess money issuance during
this Chairman's tour of duty at the Fed! Nor can he have the excuse that he
was misled by the siren-song of the welfare state. As his earlier article
"Gold and Economic Freedom" will testify, he is one of the precious
few who understands the gold-freedom nexus.
The Chairman is traitor to the cause of sound money.
Antal E. Fekete