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During the time Alan Greenspan and representative Ron Paul
had their famous series of exchanges (some might have labeled them
confrontations) during Congressional hearings from 1997 to 2005, the
congressman made what turns out to have been a prescient observation.
"My questions," he said, "are always on the same subject. If I
don't bring up the issue of hard money versus fiat money, Greenspan himself
does." I say "prescient observation" because here we are a
decade or more later and the "new" post-Fed Greenspan sounds very
much like the "old" pre-Fed Greenspan-––the one who
consistently advocated gold before he became Fed chairman.
Greenspan has always come across as a conflicted figure
forced to reconcile his responsibilities as chairman of the Federal
Reserve––the epicenter of the fiat money
universe––with a "nostalgia," as he put it, for the gold
standard, its diametric opposite. As such, I always saw him as torn between
the two––the devil on one shoulder and an angel on the other.
Outside those memorable proddings by Congressman Paul,
Greenspan rarely spoke publicly about the virtues of gold while Fed chairman,
and when he did his approach seemed guarded. Even in the years following his
tenure, he rarely broached the subject. In recent months though, as you are
about to read, the gloves have come-off not just with respect to gold but
with the dangers inherent to the fiat monetary system as well.
The reinvention of Alan Greenspan
Part one - an article in Foreign Affairs magazine
Greenspan's reinvention began with a surprising defense of
gold in the October issue of
Foreign Affairs magazine. In that article, titled "Golden
Rule: Why Bejing Is Buying," he reminds top level policy makers of
gold's role as a national asset of last resort. "If, in the words of the
British economist John Maynard Keynes," he says, "gold were a
'barbarous relic,' central banks around the world would not have so much of
an asset whose rate of return, including storage costs, is negative. . .Gold has special properties that no
other currency, with the possible exception of silver, can claim."
So why is Bejing buying gold?
"If China were to convert a relatively modest part of
its $4 trillion foreign exchange reserves into gold," he says, "the
country's currency could take on unexpected strength in today's international
financial system. It would be a gamble, of course, for China to use part of
its reserves to buy enough
gold bullion to displace the United States from its position as the world's
largest holder of monetary gold. But the penalty for being wrong,
in terms of lost interest and the cost of storage, would be modest."
In short, China sees gold reserves as a means to building
the credibility of the yuan as a global reserve currency that would compete
with the dollar. As I mentioned in a recent issue of this newsletter, China
could purchase the U.S. gold reserve in its entirety with only 8% of
its $4 trillion in currency reserves and the entirety of global gold reserves
with 32% of its foreign exchange holdings––some sobering
numbers.
Part two - a speech before the Council on Foreign
Relations (CFR)
Greenspan followed that article with a speech before the
CFR in late October. In that speech, he raised questions about the
effectiveness of the Fed's quantitative easing program. He also registered
concern that the Fed might not be able to adequately control either a future
rise in interest rates or the volatility (read downside) it might create in
the markets. He also cast doubt on the viability of the euro in the absence
of a European political union. In a surprise, he offered what I consider to
be some very sound financial advice: "Gold is a good place to put money these days given its
value as a currency outside of the policies conducted by governments."
Part three - an appearance at the gold-friendly New
Orleans Investment Conference
Greenspan also spoke at the New Orleans Investment
Conference in October and here he offered some important insights into the
role of the Federal Reserve in the present political economy. Henry Bonner
(Sprott Global) who was in attendance offers this summation:
"[Greenspan]
fell into his role as Fed Chairman purely by accident, he claimed, and what
he did there, he did it because he had to. He explained that the capital
needs of the Federal government were so massive that the only way to prevent
disaster for the rest of the economy was to keep feeding the beast with cheap
money. If the Fed hadn't created and circulated new money, the Treasury's
insatiable demand for capital would certainly have 'crowded out' the rest of
the economy, wrecking the entire private credit system. Political realities,
he explained, in the form of entitlement spending and off-balance sheet
obligations of the US government, trump the need for sound money every
time."
In this context, he explained, a gold standard is
impossible. Greenspan added flatly that he "never said the Fed was
independent and that its heavily monetized balanced sheet is "a pile of tinder but it hasn't been lit.
. . Inflation will eventually have to rise."
Why Greenspan's reinvention is important to
the average investor
So why go to the trouble of cataloguing Alan Greenspan's
October, 2014 epiphany?
We need to keep in mind that this is an individual who
actually sat at the controls of the most important central bank in the world.
As such he saw first-hand how the monetary system operates––the
good, the bad and the ugly. For him to graduate from that experience a
proponent of gold reveals more about the efficacy of central banks than
perhaps those institutions would like to be known. After all, the central
bankers' stock and trade is trust and belief. Wall Street trusts that the central
bank knows what it is doing and it believes
that it is powerful enough to make its will stick.
Greenspan in the course of thirty days has dispelled both
notions. He tells us unambiguously that the Fed's power is limited; that its
policies by and large are dictated by forces outside its control (as
mentioned earlier, he exclaimed at one point that he "never said the Fed
was independent"); and that the Fed's options are restricted by the
overwhelming needs of a government fiscally out of control. What's more he
recommends gold to the citizenry as a financial defense. Tellingly, the man
who was once called "maestro" for his apparent mastery of economic
orchestration appears to have been humbled by his experience. His born again
embrace of gold, and as one of the Fed's most vocal critics, should be viewed
as one of the more important curtain calls of the modern era. I am surprised
that more has not been made of it.
Epilogue
As a young man Greenspan wrote what has become a famous
tract––one widely referenced by gold advocates even now and one
that still ranks among the most highly visited pages at USAGOLD. "Gold
and Economic Freedom" is a strongly worded, no-holds-barred attack on
fiat money and the welfare state written in the late 1960s. It also endorses
the gold standard as a means to restraining those impulses.
Former Congressman Ron Paul once told the story of his
owning an original copy of "Gold and Economic Freedom" and asking
Greenspan to sign it. While doing so, Paul asked him if he still believed
what he wrote in that essay some forty years earlier. Greenspan, then still
Fed chairman, responded that he "wouldn't change a single word."
True to his word, and after serving a 19-year stint as chairman of the
Federal Reserve, he comes back to the place where he began. At nearly 89
years of age, he squares the books and adds a new and, in my view, useful chapter
to his legacy. At the New Orleans conference Greenspan was asked where he
thought gold would be in five years. He answered "higher." When asked how much, he
said "measurably."
Welcome back, Mr. Greenspan.
Links:
The Paul-Greenspan Congressional hearing transcripts.
Gold and Economic Freedom by Alan Greenspan (1967)
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