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 toDarryl 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.
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" (http://www.federalreserve.gov/boarddocs/testimony/1998/19980724.htm) 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:
- Turned his cheek and allowed massive fraud
- Acted as cheerleader in chief for unregulated use of derivatives at least as far back as 1999 (see this and this)
- And for subprime loans
- 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”
- Argued that economists had conquered the business cycle, and that modern, technologically advanced financial markets are best left to police themselves
- 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