Sunday, October 13th, 2019 MST

The new Alan Greenspan on gold

Before he was appointed chair of the Federal Reserve, Alan Greenspan was a “goldbug.”  He didn’t just believe that at times gold was a good investment.  He believed that gold was the foundation of an economic system (read below).

But when he became head of the Fed (1987-2006), he became a paperhanger of the worst kind, forcing interest rates far below what would have been the natural rate.  This resulted in the dotcom bust of 2000 and the Great Recession of 2008-2009).

Worse, his policies inspired those that followed him to implement even more dangerous policies, such as Ben Bernanke’s quantitative easing 2008-2011, when the Fed bought $4 trillion of dubious assets to “shore up the financial system.”

Recently, current Fed chair Jerome Powell lowered the fed funds rate a quarter of a point after having raised rates four times in 2018.  The Fed seems to have no fears of taking interest rates back to zero.  Some analysts think that sub-zero rates are coming for 10-year Treasury bonds.

If you think that gold is archaic or out of mode, consider what the “new” Alan Greenspan had to say about gold and our monetary system in a February 2017 interview with Gold Investor magazine.

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Alan Greenspan:
I view gold as the primary global currency. It is the only currency, along with silver, that does not require a counterparty signature. Gold, however, has always been far more valuable per ounce than silver. No one refuses gold as payment to discharge an obligation. Credit instruments and fiat currency depend on the credit worthiness of a counterparty. Gold, along with silver, is one of the only currencies that has an intrinsic value. It has always been that way. No one questions its value, and it has always been a valuable commodity, first coined in Asia Minor in 600 BC.

The gold standard was operating at its peak in the late 19th and early 20th centuries, a period of extraordinary global prosperity, characterized by firming productivity growth and very little inflation.

But today, there is a widespread view that the 19th century gold standard didn’t work. I think that’s like wearing the wrong size shoes and saying the shoes are uncomfortable! It wasn’t the gold standard that failed; it was politics. World War I disabled the fixed exchange rate parities and no country wanted to be exposed to the humiliation of having a lesser exchange rate against the US dollar than it enjoyed in 1913.

Britain, for example, chose to return to the gold standard in 1925 at the same exchange rate it had in 1913 relative to the US dollar (US $4.86 per pound sterling). That was a monumental error by Winston Churchill, then Chancellor of the Exchequer. It induced a severe deflation for Britain in the late 1920s, and the Bank of England had to default in 1931. It wasn’t the gold standard that wasn’t functioning; it was these pre-war parities that didn’t work. All wanted to return to pre-war exchange rate parities, which, given the different degree of war and economic destruction from country to country, rendered this desire, in general, wholly unrealistic.

Today, going back on to the gold standard would be perceived as an act of desperation. But if the gold standard were in place today, we would not have reached the situation in which we now find ourselves.

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