Run Away from the Economic Tsunami

This warning comes from “Big Al” Greenspan, age 88. He’s been in the news a lot lately, speaking with Gillian Tett of the Financial Times at the Council on Foreign Relations and at the New Orleans Investment Conference. After reading several reports of both events, I spoke with Casey Research colleagues who’d attended the conference and asked, “Did Big Al really say this, this, and this?”

Their response was crystal clear: “Yep! That’s exactly how I saw it and what I took his remarks to mean.”

Mr. Greenspan is issuing a warning to anyone who will listen, ‘fessing up to things many of us thought might be true. His candor reinforces many of my worst fears:

• The Federal Reserve is raining money down from the heavens to fund unprecedented government spending and to keep the banking system solvent.
• The credit needs of the US government are so huge that if the Fed didn’t add liquidity to the system, the private sector would be choked out, unable to afford to borrow money.
• An inflationary bonfire is just a spark away. Big Al likened the money supply to kindling awaiting a match to ignite an inflationary explosion.

The Fed’s Real Job

Greenspan made it clear that the Fed’s mission is to help fund US government spending and to defend the banking system. In his talk at the Council on Foreign Relations, he also mentioned coordinating with other central bankers throughout the world.

In essence, the Federal Reserve functions as a low-interest Visa card with no spending limit. The Fed enables a spendaholic government, dealing it trillions of doses of its drug of choice.

Frankly, Janet Yellen inherited a mess. When she talks about the Fed’s role in combating inflation and promoting unemployment, it’s window dressing. When push comes to shove, the needs of the US government and big banks take priority. As long as government spending continues, the Fed will continue to feed the beast with cheap money—just like Big Al says.

On Government Debt

While US government debt is reportedly in the $17-trillion range, that’s a drop in the bucket compared to its real liabilities. On top of Social Security obligations and unfunded pension promises, Big Al also reminds us that no one knows what the Fed’s true liabilities are because it has essentially guaranteed the liabilities of too-big-to-fail entities.

All this means that the US government cannot satisfy its debts without inflating the US dollar at a much greater rate than most of us could imagine.

He Who Has the Gold

Unlike Ben Bernanke, who’s likened gold to an ancient relic, Big Al sees things differently, stating: “Gold is a currency. It is still, by all evidence, a premier currency. No fiat currency, including the dollar, can match it.” Greenspan went on to discuss tapering and agreements with central banks, confirming that gold serves a very important role in monetary reserves.

All this reminds me of the other golden rule: “He who has the gold makes the rules.” Russia and China must believe that, given their buying habits over the last few years.

Warning Recap

Let’s review Big Al’s warning. The Federal Reserve’s primary mission is to support out-of-control government spending. To do so it’s “created” trillions of dollars. Regardless of who is in office, politicians can’t help themselves. Spending will continue. If the Fed tries to reverse the trend, there will be a significant market event. If it keeps doing what it’s doing, significant inflation is inevitable.

A lot of people will be hurt. Seniors and savers, particularly those holding the majority of their wealth in US dollars, are standing on the seashore so they can get a better view of the tsunami. There is a better way.

The day will come when the inevitable becomes imminent. I fear for those who ignore or refuse to accept the warning. Anyone who holds gold and/or other inflation hedges likely isn’t shocked by what Big Al is saying. For everyone else, don’t ignore Greenspan’s warnings—they are crystal clear.