What Greenspan’s Latest Talk Means for Gold
I traveled last week to the New Orleans Investment Conference, previously known as the ‘Gold Show.’ Jim Blanchard, a man known for promoting the right to own gold during the Nixon era, started the conference in 1974.
Early on, the conference was a gathering place for investors in precious metals. Speakers such as Rick Rule broke out into the investment scene through conferences like this one.
I’ll report later on the many speakers who attended the conference - and try to boil down some of the salient points from the highly valuable conference (attendees took nearly a week away from their regular lives to attend).
For now, I’ll confine myself to the headline speaker of the show – former Fed Chairman Alan Greenspan – and what his comments could mean for gold investors.
Greenspan ran the Fed from 1987 to 2006. He ran it right through the great technology bubble in the late 90’s and up to the housing bubble. He is widely accused of voluntarily inflating these asset bubbles through excessive money printing and ‘easy money.’
He’s also viewed as a big-government sell-out because he began his career as an adherent to the economic philosophy of Ayn Rand, with minimal government interference, and, relevant to his role as director of the Fed, sound money.
So what happened to the young ideologue that Greenspan had been? Did power corrupt him? Did he fold under pressure to run the printing presses, debasing the currency and propping up the government?
And why come to this conference? Why submit to being trotted out and publicly accused of his crimes for all to see?
At least that’s what we imagined would happen during his main panel alongside Marc Faber, and Porter Stansberry (of Stansberry & Associates).
Well, it wasn’t quite the public flogging we’d expected. As Rick Rule joked later on, ‘the man’s been through congressional hearings; I think he can handle us.’
We did, though, learn a few important things about the Fed.
First off, Greenspan claims he has always remained true to Austrian economics and the principle of sound money. He 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. It wasn’t his fault – that’s just how the system works. It’s set up to redistribute income from savers, who lose income because of low interest rates, to spenders.
In other words, Greenspan was a man who was forced by circumstance to go against his beliefs. Coming to the show, I had expected to disagree with Greenspan, but what I found was that the Fed Chairman was saying exactly what we have believed all along. Sound, stable currency is incompatible with the welfare state. Greenspan may have slipped away from the path, but he’s a great spokesperson for our message.
The Fed is unlike any other business in the world. It’s the only one that we know of that literally creates ‘something from nothing.’
The Fed wills new currency into existence, which it can then ‘sell’ by charging interest. Every dollar comes into existence as a debt due to the Fed; the more dollars are out there, the more money the Fed makes. The interest it receives is ‘pure profit.’ So it’s no surprise that as the government’s demand for capital has increased, the Fed has ‘accommodated’ that demand. Even if the Fed has to lend the government the money to pay its interest, that new money costs nothing to create, and it adds to the bottom line.
We did get one striking admission out of Greenspan. The Fed is not independent of the government, he said, calling suggestions to the contrary ‘naïve.’
Greenspan didn’t speak much to role of the Fed. He didn’t talk about inflation targets, or comment on how the Fed could help grow the economy, as he would have if it had been a New York Times interview I’m sure.
Hidden in his answers, however, was a big prediction for how the Fed will likely act in the future.
It’s not about juicing the economy or keeping the currency stable, although those are certainly justifications that are used.
The truth is, the Fed is merely adjusting supply to meet demand. That’s what he meant when he said that the Fed had to increase the supply of debt to avoid the private sector being ‘crowded out’ of the market.
Its mission isn’t to keep the currency stable, it’s to help fund the spending of the US government, and to defend the banking system.
This suggests that as long the US government resort to high levels of debt, the Fed isn’t likely to decrease the supply of money.
Greenspan might have an inkling of something he’s not telling.
Here’s what the former Fed Chairman had to say about the direction of gold and interest rates:
“Gold – measurably higher. Interest rates – measurably higher.”
The Fed isn’t just dangerous because it serves the banking system; it also has another fatal flaw – hubris.
In late 2013, Greenspan wrote in Foreign Affairs that he hadn’t seen the financial crisis coming because the economy hadn’t conformed to the Fed’s models:
The conventional method of predicting macroeconomic developments -- econometric modeling, the roots of which lie in the work of John Maynard Keynes -- had failed when it was needed most, much to the chagrin of economists. In the run-up to the crisis, the Federal Reserve Board’s sophisticated forecasting system did not foresee the major risks to the global economy. Nor did the model developed by the International Monetary Fund, which concluded as late as the spring of 2007 that “global economic risks [had] declined” since September 2006 and that “the overall U.S. economy is holding up well . . . [and] the signs elsewhere are very encouraging.”
The problem with this kind of thinking – that a mathematical model should be capable of predicting human behaviors in the markets – is exactly what went wrong with Long-Term Capital Management (LTCM) in the 1990’s. LTCM was a hedge fund management firm which deduced that there was only an infinitesimal chance of a serious crash in the stock market. It also claimed that the odds of correction were knowable, and could be hedged against. A few years later, in 1998, the market experienced an unforeseen crash, and LTCM went bankrupt.
Now the Fed has a new set of number crunchers, and a new, activist, leader. The Fed’s going full throttle, pushing ahead with low interest rates and easy money. It also has a brand new set of mathematical models. Are they now more humble about their ability to predict the future? Are they looking for the market to tell them what’s working, or are they favoring the theory?
In the years since the stimulus has been launched, spending has been muted while housing, stocks, and bonds have increased in value. Average incomes are stagnant or lower. Nearly all economic gains have been accrued to ‘rich people’ in the form of asset inflation.
Yet in a recent interview with Time magazine,1 Yellen’s view – that stimulus doesn’t just help rich people, but that it lifts the whole economy remained unchanged:
You know, a lot of people say this (asset buying) is just helping rich people. But it’s not true. Our policy is aimed at holding down long-term interest rates, which supports the recovery by encouraging spending.
In other words, the way the Fed models the economy has been wrong before; it will likely be wrong again.
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