Trader Dan Comment’s On Greenspan’s Gold Standard

Posted at 12:16 AM (CST) by & filed under Trader Dan Norcini.

*An alert reader informed me that the interview we have posted on our site that deals with Alan Greenspan’s comments on a gold standard was not done yesterday as I initially believed but instead occurred a bit more than 3 years ago in October 2007. This in no way changes my opinion as reflected in the commentary other than to note that his supposed “reconversion” in favor of gold took place earlier than initially believed.*

Friends,

I want to go on record with comments about Alan Greenspan’s remarks about a gold standard that hit the news today. That this man, who has rightly been criticized for speaking in riddles so that his hearers could take from his comments that which they wanted to hear him say, has now apparently changed his tune once again and yet can do so without the least bit of remorse is infuriating to me. He basked in the accolades of his peers in the financial community being acclaimed, “The Maestro”, because of his supposed ability to deal with financial crises and keep the US economy humming along in spite of it all come hell or high water. Yet we all know that his manner of so doing was to ramp up the printing presses and have them running at warp speed, flooding the system with liquidity at the first sign of any potential danger signs. Whether it was Mexico, or Russia, or Y2K, or the breaking of the tech stock bubble , his solution was always the same, lower interest rates and increase liquidity.

It was under his watch that the stock market bubble burst at the beginning of the last decade which up until it did, he praised as the outcome of increases in productivity. It was he that praised the gigantic derivatives market as another arrow in the quiver of productivity until we all watched it disintegrate into a heap of goo as Lehman Brothers went under, setting off a cascade of defaults and credit deleveraging, the effects of which are still being felt today.

It was his policy of keeping interest rates artificially low that blew one bubble after another which moved from one sector to another, first in stocks, then in housing and then finally in commodities until they all burst in succession.

Yet, now that he is out of his office and no longer has to be the politician and the Central Banker, he can call for a return to some mechanism to hinder his successor from the creation of unlimited amounts of fiat currency in order to prevent the “deleterious” effects of inflation, as he terms it. Why did he not use his pulpit during his tenure to advocate such a thing as a return to some sort of gold standard or currency board? He shares as much blame as any for the condition of the US Dollar and the horrific mess that has been created by Federal Reserve policies over the last decade. While Chairman Bernanke is engaging in Quantitative Easing, he is only following the policies of his predecessor to their logical conclusion.

Here are the former Chairman’s own words in Congressional Testimony taken in July, 2005 in response to a question and some comments posed by Congressman Ron Paul. Note his remarks about returning to a gold standard a mere 6 years ago and contrast those with his recent comments of today. Note also the absurd comment in the last sentence that Central Bankers had been acting responsibly:

“But as I’ve testified here before to a similar question, central bankers began to realize in the late 1970s how deleterious a factor the inflation was.

And, indeed, since the late ’70s, central bankers generally have behaved as though we were on the gold standard.

And, indeed, the extent of liquidity contraction that has occurred as a consequence of the various different efforts on the part of monetary authorities is a clear indication that we recognize that excessive creation of liquidity creates inflation which, in turn, undermines economic growth.”

So that the question is: Would there be any advantage, at this particular stage, in going back to the gold standard?

And the answer is: I don’t think so, because we’re acting as though we were there.

“Would it have been a question at least open in 1981, as you put it? And the answer is yes.

Remember, the gold price was $800 an ounce. We were dealing with extraordinary imbalances, interest rates were up sharply, the system looked to be highly unstable ­ and we needed to do something.

Now, we did something. The United States ­ Paul Volcker, as you may recall, in 1979 came into office and put a very severe clamp on the expansion of credit, and that led to a long sequence of events here, which we are benefiting from up to this date.

So I think central banking, I believe, has learned the dangers of fiat money, and I think, as a consequence of that, we’ve behaved as though there are, indeed, real reserves underneath the system.”

Alan Greenspan in October of 2007:

"We have at this particular stage a fiat money which is essentially money printed by a government and it’s usually a central bank which is authorized to do so. Some mechanism has got to be in place that restricts the amount of money which is produced, either a gold standard or a currency board, because unless you do that all of history suggest that inflation will take hold with very deleterious effects on economic activity… There are numbers of us, myself included, who strongly believe that we did very well in the 1870 to 1914 period with an international gold standard."

Alan Greenspan 40 years ago:

"In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. … This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property
rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard."