Media star Alan Greenspan

Wednesday, April 06, 2005

There was once a time when the chairman of the Federal Reserve kept himself to commenting monetary policy - and monetary policy only.
This has changed dramatically. In the first quarter of the running year he has almost become an anchorman of the American economy. From social security to fiscal discipline, from medicaid to medicare, from the price appreciation in real estate to demographics, from Fannie Mae to Freddie Mac, there seem to be few areas of interest left that do not need the reassuring words of Mr. Greenspan in order to keep the party going.
Greenspan now has also become an expert in oil, telling the oil industry where they are heading to.
In my opinion that's far too much of a reassurance that everything is OK with the US economy. It is a little bit suspicious that the only person with almost unlimited global credibility nowadays has to calm the markets so frequently. OK, not many people outside the US would believe president Bush, who talked the world into a war with a more than uncertain outcome (except for the staggering costs incurred) and keeps talking about freedom and democracy while acting the opposite way. But this is a different issue I will elaborate on in another posting.
The markets seemingly love Alan's guidance. His short speech on energy issues yesterday led oil prices lower, although for a day only. It is most ominous that he talked a lot about the future expectations for the use of liquefied natural gas (LNG) and the market forces that would help lower oil demand, i.e. higher prices. But while he pointed out that LNG accounts for only 3 percent of energy use in the US, he omitted any hints that the dramatically higher oil prices will dent growth expectations, let alone the price pressure they already create not only at the gas pump.
Reminding readers of my favourite comment by Greenspan, posted here on April 4, which clearly shows there are reasons for concern about monetary and market stability, I would not take all his words as an unbiased comment from a very wise man.
There is too much at stake and he knows it. While Greenspan managed to delay a severe economic downturn by lowering interest rates to their lowest levels in the last 100 years, he is now out of ammunition to save the consumers worldwide. Being a data-driven economist he surely must see the worrisome data as there are: low national savings, record budget and trade deficits, an accelerating inflation rate, a stagnant labour market (at best) and the falling value of the dollar. One can add the uptick in producer prices, equity markets in a sideways band, falling profit growth rates and the decay of the American infrastructure to the negative outlook that grows more negative with almost every economic statistic released these days.
The Fed's most powerful weapon - determining the interest rate level - has turned into a double-edged sword that is more than likely to rip open the chest of mankind either way.
In the now widely believed scenario A that sees the Fed rising rates further lies the problem that it will choke economic growth which is already burdened by rising energy and commodity prices. Scenario B is right now unthinkable at the best: Would the Fed keep interest rates stable or even lower them this would accelerate the fall of the greenback to levels that would hurt the whole world too as roughly 75 percent of the worlds savings are denominated in dollars.
In historical context the outcome of the looming crisis is clear. Whenever a government debased its money from the gold standard it invited its own decline from power. Being an agnostic I still value the bible where it says money shall be made from silver and gold only. Being a believer in democratic political systems that serve the population I also value the US constitution which says the same and even explicitly restrains the state from issuing fiat currency (= paper money).
It took 400 years for the Roman empire until its currency was not accepted anymore. It took Austria and Germany only 5 years in the 1920's until it was cheaper to burn the notes than to buy firewood with them.
If one believes the concept of gold equals money, it took the US 35 years to devalue its currency by 95 percent. In 1971 one still got an ounce of gold in exchange for 35 dollars. Today one needs 426 dollars to get an ounce of gold.
So far there has not been a single paper currency without gold-backing that survived for more than a few decades. Remember the times when a one pound note could be returned to the Bank of England in exchange for one pound of sterling (pure) silver. The ruling banking system has done everything possible to push gold as an enduring value out of people's minds. The best invention in this game was the phrase, "gold does not yield any interest". If one held gold since 1971, he now looks at a total return of more than 1200 percent!!! Show me a comparable IOU (I owe you) paper that did not get eaten up by inflation in the same period!!!
With the central banks having sold off a good portion of their gold reserves the return to a gold standard will be all the more painful. But it will happen within the next two decades, maybe already within the next five years. Gold has been the universe currency in the 6000 year old history of the monetarized world. To think this will not be the case again only because it has been abandoned for the last 35 years seems a bit unrealistic when one looks at the looming problems the coming acceleration of inflation will bring upon the world.
The smart money is already moving into gold: China and India are building up gold reserves and the European countries seem to be more and more unwilling to continue their drafted gold sale programs which helped drive the gold price down to 250 dollars only 5 years ago. Malaysia proposes a common muslim currency - backed by gold of course.
Not being able to imagine a painless way out of the dilemma of paper currencies without a backing with some real values like gold and silver I fear the day when the whole world will rush to the exit. All those dollars nobody will want any more will create the yet unknown scenario C which will make the 1930's depression look like like a bee-sting compared to the pain in our ripped open chests we will experience.


John Trudgian said...

Senario B is closer than you may think.

The western economies, including US, Europe, Japan just can't handle higher rates. The central banks can talk tough - but they have little amunition left.

We are probably closer to the end of the raising cycle than the beginning. In the US, a couple taps on the rate and the housing market falls over.

In Europe 12% unemployed is not a good starting point for a hard currency.

Better not even mention the Bank of Japan's "helicopter money" - nobody even listens to them anymore.

Greenspan's problem is avoid the Japanese syndrome - He has to get the rate high enough that he can make some sort of an impact when when he has to put it down again.

Now that the EU ministers have officially debased their currency - recent shredding the stability pact - Gold is by default the only game in town for those who desire a hard currency.

How long before markets react - as always a catlyst is required. A spectacular corporate default? - AIG, GM or Fannie May.

Watch this space ...

07 April, 2005 17:41

Well, I do not really imagine this is likely to work.

27 November, 2011 08:44

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