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THE STATEMENTS OF GREENSPAN AND BERNANKE
CONSTITUTE A WATERSHED EVENT
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THE FATE FOR GOLD AND THE
U.S. DOLLAR IS SEALED
Shortly after Alan Greenspan’s momentous
statement regarding the methods that he would employ to overcome
deflation in our country, Federal Reserve Governor Ben Benanke
elaborated on a number of other possible means to achieve
that end. I believe that the statements of both Greenspan
and Bernanke have announced to the world the direction that
the U.S. will follow should our economic decline worsen. If
as I believe, a further deterioration of the U.S. economy
is inevitable, the Federal Reserve’s future plans have sealed
the fate for gold, silver and the dollar.
In mid-November, Greenspan stated
that, "there’s virtually no meaningful limit to what
we could inject into the system were that necessary".
He commented that he would release unlimited dollars into
our banking system by acquiring among other things, long term
Treasuries if he deemed it advisable. About a week later,
Governor Bernanke confirmed and reinforced Greenspan’s testimony.
He stated that, "the U.S. government has a technology,
called a printing press (or, today, its electronic equivalent),
that allows it to produce as many U.S. dollars as it wishes
at essentially no cost. By increasing the number of U.S. dollars
in circulation, or even by credibly threatening to do so,
the U.S. government can also reduce the value of a dollar
in terms of goods and services, which is equivalent to raising
the prices in dollars of those goods and services." He
went on to say that, "If we do fall into deflation, however,
we can take comfort that the logic of the printing press example
must assert itself, and sufficient injections of money will
ultimately always reverse a deflation".
Governor Bernanke continued and described
the various methods that the Fed could utilize in order to
inject liquidity in the banking system. Among these, in addition
to acquiring Federal backed debt such as Ginnie Mae securities,
they could purchase "foreign government debt, as well
as domestic government debt". He continued with; "the
Fed does have broad powers to lend to the private sector indirectly
via the banks, through the discount window. Therefore a second
policy option, complementary to operating in the markets for
Treasury and agency debt, would be for the Fed to offer fixed-term
loans to banks at low or zero interest, with a wide range
of private assets (including, among others, corporate bonds,
commercial paper, bank loans, and mortgages) deemed eligible
for collateral".
Bernanke then turned to the government’s
fiscal policy options that could complement those of the Federal
Reserve. "Of course, in lieu of tax cuts or increases
in transfers the government could increase spending on current
goods and services or even acquire existing real or financial
assets. If the Treasury issued debt to purchase private assets
and the Fed then purchased an equal amount of Treasury debt
with newly created money, the whole operation would be the
economic equivalent of direct open-market operations in private
assets."
These statements were meant to quell
the mounting concern that had been seriously undermining both
our economy and the stock market. I believe that they were
intended to convince our citizens that the government was
in control and would prevent a damaging economic downturn.
And, for the average American, I believe their efforts were
at least temporarily successful.
Had these statements not traveled
beyond the boundaries of the United States, Greenspan and
Bernanke would have achieved their end. However, given the
existence of instantaneous, global communications, the eyes
and ears of the world community immediately focused upon the
U.S., and the threat to the value of their mountain of dollar
and U.S.Treasury holdings.
Picture yourself as a foreign banker,
fund manager, central banker, or any of a number of individuals
controlling substantial wealth. Remember, the U.S. dollar
is the reserve currency of all of the major nations, and our
Treasury Paper is held as their major asset, representing
upwards of 75% of their reserves. Further, an enormous amount
of foreign wealth, the Arabs included, is invested in these
U.S. Treasuries and dollar accounts. How would you react if
you learned that the most powerful person in the U.S. was
prepared to issue an unlimited amount of additional dollars?
Wouldn’t you reason that these new dollars would cheapen those
that you held and others that were already in existence? Wouldn’t
you feel some level of fear that those dollars owed you, or
owned by you, were destined to depreciate in value? Wouldn’t
you feel betrayed by a nation in which you had invested so
much of your hard earned money? Wouldn’t you be angered by
the fact that the Federal Reserve was unconcerned about maintaining
the integrity and value of the currency which they had convinced
you, that they would forever protect?
I believe that numerous foreigners
experienced the above observations and feelings! Further,
I am certain that many of these individuals have already begun
to protect themselves. And, their first actions were to begin
liquidating dollars and to acquire gold.
For the past few decades our nation
has benefitted from the generosity of the other nations of
the world. Instead of demanding real payment, in the form
of goods and services for sending us their products, they
were convinced into accepting our Treasury Paper and dollars
in return. As our balance of payments deficits soared, instead
of acquiring our merchandise and services they were satisfied
in receiving our IOU’s in the form of dollar credits or our
government’s paper. Now, they are told that we are prepared
to arbitrarily issue an unlimited amount of dollars, thereby
reducing the value of those hard earned ones that they had
toiled and sweated to acquire.
We have heard of various reasons why
gold has finally broken above $330, after a five year period
in which it traded below that price. We are told that it was
because of the threatening war with Iraq. We hear and read
that it was due to the declining dollar, or the great gold
derivative short positions, or the rising price of oil. All
of these factors have set the stage for gold’s rise, and would
have contributed to it’s eventual penetration of $330, but
they were not the triggering event.
Contrary to Greenspan’s likely belief
that he could forever fool the world’s citizens, his and Bernanke’s
statements have sent a powerful message. Within a few short
weeks, the meaning of their announcements were quickly understood
and acted upon! Foreign governments and individuals have begun
the long process of reducing or eliminating their dollar or
Treasury holdings. Despite statements of "our strong
dollar policy" from our politicians, foreigners now recognize
that the dollar is destined to decline in value. They have
been irrefutably told by our central bankers that further
declines in our economy or a derivative melt-down will be
met with the wholesale creation of dollars. After all, our
nation is poised to create new dollars at "virtually
no cost" to us!
Many foreigners will hope, and some
will pray, that the U.S. economy will recover and the derivative
problem will go away, or at least be held off into the future.
It is not certain that the Fed will perform as Greenspan and
Bernanke have stated. Perhaps the economy will muddle through
for quite some time without a serious recessionary threat
or a derivative disaster. However, those who are the most
astute will move into action before it is too late for them.
They have already read the writing on the wall. They realize
that they are at great risk and will sell their dollars and
acquire gold, silver, various commodities, and other items
of tangible worth. They will jettison their U.S. dollar holdings
as if they were the plague! Later, an increasing number of
people will follow in their footsteps. This will increase
the magnitude of gold’s rise and the dollar’s decline as these
events unfold. Greenspan and Bernanke have finally awakened
the world to the fact that they are about to sustain serious
dollar losses. And, the first of the world’s citizens have
loudly heard their messages and have begun to protect themselves
by acquiring gold.
I believe that the die has been
cast for a substantial rise in the price of gold, silver and
virtually all tangibles! Further, we are witnessing the early
days of what will likely become the most severe dollar decline
in the history of the United States. It is potentially
destined to pale that which occurred during the decade of
the 1970's.
Further, it is likely that the Fed
is already intervening in the bond market. This is the reason
that despite predictions to the contrary from the various
bond experts, the bond market refuses to decline. If this
is the case we will likely experience surprising, continuing
bond strength. This will result despite a falling dollar,
the further burgeoning of balance of payments deficits, a
weakening stock market, and the unprecedented low interest
rates which would normally precipitate a sell-off in bonds.
INSIGHTS
A few days ago, on
December 19, Alan Greenspan mentioned gold in a speech before
the Economic Club of New York. His comments portrayed gold
in a light from which our nation’s politicians have shied
for over a generation. He began his speech by stating that,
"Although the gold standard could hardly be portrayed
as having produced a period of price tranquility, it was the
case that the price level in 1929 was not much different,
on net, from that of 1800. But in the two decades following
the abandonment of the gold standard in 1933, the Consumer
Price Index in the United States was doubled. And, in the
four decades after that, prices quadrupled. Monetary policy,
unleashed from the constraint of domestic gold convertibility,
had allowed a persistent over-issuance of money".
Greenspan continued
by stating that, "But the adverse consequences of excessive
money growth for financial stability and economic performance
provoked a backlash. Central banks were finally pressed to
rein in over-issuance of money even at the cost of considerable
economic disruption. By 1979, the need for drastic measures
had become painfully evident in the United States. The Federal
Reserve under the leadership of Paul Volcker with the support
of both the Carter and Reagan Administrations, dramatically
slowed the growth of money. Initially, the economy fell into
recession and inflation receded. However, most important,
when activity staged a vigorous recovery, the progress made
in reducing inflation was largely preserved. By the end of
the 1980's, the inflation climate was being altered dramatically".
This was the first
public statement form a high U.S. political official in decades,
that recognizes the importance of gold as a stabilizing force
for a monetary system. The fact that Greenspan opened his
speech with these words indicates the magnitude of importance
that he placed upon the world hearing these words. He chose
to begin his comments with this topic. He could have buried
it within the text knowing that most people would have been
confused, glazed over, and dazzled by his rhetoric by the
time that he uttered the statement. He wanted people to
hear him!
This is a watershed
event! Is Greenspan preparing us for an eventual reentry
of gold into our monetary system? He is un-hedged in his comparison
between 1800 and 1929 and the 60 years that followed. Under
the gold standard prices were stable for 129 years, but rose
eight-fold in the 6 decades after the discipline of gold was
removed and the gold standard was abandoned. His later statement
regarding the effects of the institution of monetary restraint
after 1979 is also telling. His comments pertaining to the
result that occurred, after the money growth slowed and the
initial recession ended and the economy staged a vigorous
recovery lead me to believe that he is tacitly recommending
this action!
******
A
monthly commentary on gold, finance and international resource
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FINANCIAL INSIGHTS, P. O. Box 793-Z, Oakhurst, NJ 07755
rsappel@yahoo.com,
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Disclaimer:
FINANCIAL INSIGHTS is written and published by Dr. Richard
Appel and is made available to subscribers for informational
purposes only. Dr. Appel pledges to disclose if he directly
or indirectly has a position in any of the securities mentioned.
He will make every effort to obtain information from sources
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Use of any information or recommendations is at the risk of
the reader without responsibility on our part. © 2002
by Dr. Richard S. Appel. All rights are reserved.
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