Greenspan: “Fiat Money has No Place to Go But Gold ... All Currencies are Moving Up or Down Together ... Gold is the Canary In the Coal Mine" → Washingtons Blog
Greenspan: “Fiat Money has No Place to Go But Gold ... All Currencies are Moving Up or Down Together ... Gold is the Canary In the Coal Mine" - Washingtons Blog

Thursday, September 23, 2010

Greenspan: “Fiat Money has No Place to Go But Gold ... All Currencies are Moving Up or Down Together ... Gold is the Canary In the Coal Mine"

Alan Greenspan told the Council of Foreign Relations last week:

Fiat money has no place to go but gold.

Greenspan also said that supply and demand explanations treating gold like other commodities “simply don’t pan out."

Greenspan also spoke of how, during World War II, the Allies going into North Africa found gold was insisted on in the payment of bribes, and said:

If all currencies are moving up or down together, the question is: relative to what? Gold is the canary in the coal mine. It signals problems with respect to currency markets. Central banks should pay attention to it.

As I noted last November:

Professor Emeritus of Mathematics Antal Fekete has argued for years that gold is the ultimate - and only - safe haven when things really hit the fan.

For example, in 2007 Fekete wrote:

The grand old man of the New York Federal Reserve bank’s gold department, the last Mohican, John Exter explained the devolution of money (not his term) using the model of an inverted pyramid, delicately balanced on its apex at the bottom consisting of pure gold. The pyramid has many other layers of asset classes graded according to safety, from the safest and least prolific at bottom to the least safe and most prolific asset layer, electronic dollar credits on top. (When Exter developed his model, electronic dollars had not yet existed; he talked about FR deposits.) In between you find, in decreasing order of safety, as you pass from the lower to the higher layer: silver, FR notes, T-bills, T-bonds, agency paper, other loans and liabilities denominated in dollars. In times of financial crisis people scramble downwards in the pyramid trying to get to the next and nearest safer and less prolific layer underneath. But down there the pyramid gets narrower. There is not enough of the safer and less prolific kind of assets to accommodate all who want to "devolve”. Devolution is also called "flight to
Darryl Schoon makes the same argument.

Here's a visual depiction Exeter's inverted pyramid, courtesy of FOFOA:

(Click here for full image)

Are Exeter, Fekete and Schoon right?

I don't know. But Alan Greenspan just lent some support to the theory.


Gold prices that jumped above $1,000 an ounce this week are signaling that investors are buying metals to hedge against declines in currencies, former Federal Reserve Chairman Alan Greenspan said.

The gains are “strictly a monetary phenomenon,” Greenspan said today at an investment conference in New York. Rising prices of precious metals and other commodities are “an indication of a very early stage of an endeavor to move away from paper currencies,” he said...

“What is fascinating is the extent to which gold still holds reign over the financial system as the ultimate source of payment,” Greenspan said.

In other words, Greenspan is saying that investors are moving out of the second-to-lowest step on the pyramid (currencies and government bonds) and into the lowest step (gold).

Greenspan is also verifying what goldbugs like Exeter, Fekete and Schoon have been claiming: that "the barbarous relic" still holds an important place in the modern investor's psyche.

In fact, Greenspan was famously a goldbug before becoming Fed chairman.

For example, he wrote an essay called "Gold and Economic Freedom" in 1966 which passionately argued for a return to the gold standard.

Of course, Greenspan could just be talking his book. He is an adviser to hedge fund Paulson & Co., which is - or at least recently was - heavily invested in gold.

As Fed chairman, Greenspan had a different view on gold. For example, GATA alleges that - as chairman - Greenspan argued that central banks should suppress the price of gold in order to protect the fiat currency:

Over the years Greenspan many times has acknowledged central bank interest in the gold market and even central bank interest in manipulating the gold market, such as his famous testimony to Congress in July 1998 that "central banks stand ready to lease gold in increasing quantities should the price rise" ( and his musing at the May 1993 meeting of the Federal Open Market Committee about the potential for central bank gold sales to change the psychology of the gold market, remarks disclosed and analyzed by GATA consultant Dimitri Speck here:

During his Fed tenure, Greenspan also:
  • Acted as cheerleader in chief for unregulated use of derivatives at least as far back as 1999 (see this and this)
  • Allowed the giant banks to grow into mega-banks. For example, Citigroup's former chief executive says that when Citigroup was formed in 1998 out of the merger of banking and insurance giants, Greenspan told him, “I have nothing against size. It doesn’t bother me at all”
  • Preached that a new bubble be blown every time the last one bursts
  • Kept interest rates too low
  • And did alot of other hinky things
In any event, I agree with Greenspan's current statements about gold.

1 comment:

  1. On a quick thought, Bernanke is somewhat wrong (again): the references are fundamental commodities such as grain and oil (housing too but this one has been extremely manipulated and inflated already and is much overpriced in most developed countries - artificially by market manipulation schemes supported by governments).

    Gold is just a refuge value, like Picassos, but not something that has a (large) market outside the financial one. In the end gold is also a fiat currency. In fact in an emergency situation gold may be totally worthless (valuable only as long as others trust and want it) while grain is a sure inversion (because we all, even the "Midas" of today) have to eat.

    However grain and such are, like gold itself, being propped in prices by the lack of trust on what? Markets? Maybe. But what makes markets possible and safe? The states! (Or equivalent mafioso organization, like in Somalia and other 'no-go zones'). And the states and other similar institutions like EU, and the WB-FMI-WTO conglomerate, are what are losing credibility as we speak. This is not only but largely centered in the loss of credibility in the USA as organizing and stabilizing superpower and its tactic of devaluating its own debt by devaluating its currency, which has been the real monetary reference for long. Investors looked briefly to the euro but it was sabotaged and/or exposed, they would buy yuans maybe but there is no real market (so far) for this artificially low currency: you can't trade in short only in long term (expecting the Chinese currency to be re-valuated and allowed to fluctuate freely many years from now - maybe).

    In the end it's that governments are not pulling their weight in the responsibility of guaranteeing a global market and there is no real international institution that can (it used to be the USA but now is justly perceived as weak and decadent). There are moves to create a convertible reserve super-currency but it does not look too promising.

    So what is valuable? What people (and investors and speculators demand). People need homes and food, little more if you push it (there are some other things maybe but are complicated to marketize, specially at global scale). Homes may be squatted or even improvised (slums) but grain (food) is and has been since Neolithic used in that way, with variants.

    The emphasis in biofuels has of course driven the prices higher, what would bring me to another key product: oil (or more in general fuels that can feed machines and hence production and consumption, and hence the productivist/consumerist market economy as such) but this is more complicated and I have already said a lot.


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