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Alan Greenspan is a gold guy. His 1966 essay
"Gold and Economic Freedom" remains a popular touchstone.
"Gold and Economic Freedom"
But how many people actually read it? Click on the link and give it a try.
Actually, it is a hodgepodge of confusion. I would say that Greenspan, like a
great many other gold standard advocates, did not quite understand exactly
what it was that he was an advocate for. For example, he doesn't say anywhere
that gold's primary virtue as a monetary benchmark is that it is stable in
value. He knew that a "gold standard" meant keeping a
"stable price of gold," which is to say, the ratio between the
currency and gold. But, I would say that this was something in the nature of
a tradition, almost a superstition, that was not properly understood.
Here is a link to Greenspan's 1981 WSJ article, "Can the U.S. Return to
a Gold Standard?"
CAN THE U.S. RETURN TO A GOLD STANDARD?
This is 1981 now. Between 1966 and 1981 we saw the introduction of the
floating currency system, and an enormous inflationary event in which the
dollar's value slid from 1/35th oz. of gold to less than 1/800th at its
nadir.
Click on the link and read the essay. It is quite clear that Greenspan still
has no idea how exactly to operate a gold standard, or really what it is for.
He still advocates a gold standard, but doesn't understand exactly what it is
that he is an advocate of.
For example, by now, after ceaseless repetition (always the best way), you
should know that a gold standard -- i.e. the process of pegging an
otherwise-worthless paper currency to gold -- is accomplished by the
adjustment of the supply of paper currency.
January 3, 2010: The GLD Standard
What does Greenspan have to say about this?
Yet even those of us who are attracted to the prospect of gold
convertibility are confronted with a seemingly impossible obstacle: the
latest claims to gold represented by the huge world overhang of fiat
currency, many dollars.
[There are always more paper chits than gold reserves . This was true of the
Bank of England in the 1780s, and it is true today. It is only a
"seemingly impossible obstacle" if you don't know what you are
doing.]
February 28, 2010: A Gold Standard
is a Value Peg
The immediate problem of restoring a gold standard is fixing a gold price
that is consistent with market forces. Obviously if the offering price by the
Treasury is too low, or subsequently proves to be too low, heavy demand at
the offering price could quickly deplete the total U.S. government stock of
gold, as well as any gold borrowed to thwart the assault. At that point, with
no additional gold available, the U.S. would be off the gold standard and
likely to remain off for decades.
Alternatively, if the gold price is initially set too high, or subsequently
becomes too high, the Treasury would be inundated with gold offerings. The
payments the gold drawn on the Treasury's account at the Federal Reserve
would add substantially to commercial bank reserves and probably act, at
least temporarily, to expand the money supply with all the inflationary
implications thereof.
[No mention at all of managing the value of the
paper currency -- by supply adjustment or any other method -- to keep it in
line with gold. This gold standard system is maintained by prayer.]
Monetary offsets to neutralize or "earmark" gold are, of course,
possible in the short run. But as the West Germany authorities soon learned
from their past endeavors to support the dollar, there are limits to monetary
countermeasures.
The only seeming solution is for the U.S. to create a fiscal and monetary
environment which in effect makes the dollar as good as gold, i.e.,
stabilizes the general price level and by inference the dollar price of gold
bullion itself. Then a modest reserve of bullion could reduce the narrow gold
price fluctuations effectively to zero, allowing any changes in gold supply
and demand to be absorbed in fluctuations in the Treasury's inventory.
[Now we come to the crux of the matter. Greenspan
proposes that the Fed and U.S. government's job is to roughly approximate
stability, and then to jimmy the dollar/gold market into place with what
amounts to forex intervention.]
What the above suggests is that a necessary condition of returning to a gold
standard is the financial environment which the gold standard itself is
presumed to create. But, if we restored financial stability, what purpose is
then served by return to a gold standard?
[This is a strange and cryptic remark by someone
who is a gold standard advocate. But, look at his position. He doesn't know
how to operate a gold standard. The natural result of that is fear of
failure. That's what the first couple paragraphs are about.]
What did Greenspan learn in the interval between 1966 and 1981 -- a
time of great upheaval in the gold market, in the value of the dollar, and
thus, great discussion about related topics?
Apparently, nothing. Not much learning going on here. His ideas don't seem to
change much.
Greenspan became chairman of the Fed in August 1987.
Septenber 23, 2007: The Greenspan
Gold Standard
Greenspan was initially rather doveish in the summer of 1987, but turned
hawkish with the events of October 1987. This began a fairly aggressive period
of rather hawkish Fed policy that lasted into about 1990.
Here we can see how hawkish Greenspan pushed the Fed funds rate to 10%
in early 1989, to counter the move in the dollar to $500/oz. of gold. You can
read more about the history of that period in my book.
See how the dollar was breaking down badly in 1987? Greenspan's turn toward
hawkishness at the end of 1987 helped turn the tide. He eventually lowered
the Fed funds rate to 3.0% during the 1990-1993 recession, but that was
rather delayed. Three percent was considered a very low figure for that time.
It was the lowest since 1970. However, this was later, in 1992 and 1993. The
meat of the recession was in 1990 and early 1991, as marked by the grey bars
in this graph of unemployment.
Greenspan spent most of 1990 -- the recession year -- with a Fed funds rate
of around 8%. Pretty hawkish. Greenspan was taking a lot of flak at the time
from the Bush I administration to cut rates. Even after some cuts, it didn't
go below 4% until 1992.
Note that in 1990, the dollar's value relative to gold was quite volatile,
with a tendency to spike upwards. I think Greenspan was trying to keep the
dollar supported, which skewed his approach toward hawkishness. It wasn't
until 1991 that the dollar calms down somewhat. There is another spike in
1993, which I think is related to the Clinton tax hike passed that year (tax
hikes tend to lead to currency weakness).
September 30, 2007: Taxes and
Money
Then, there is a rather odd period from 1994 to 1996 where there is almost no
change in the dolar/gold ratio. This is then followed by a dollar move higher
in 1997 and 1998.
I talked about some of Greenspan's actions during the 1990s here:
August 5, 2007: What Happened to
the Greenspan Put?
February 4, 2006: Was Greenspan
Any Good?
Over the period of his tenure, 1987 to the end of 2005, the dollar's value
was indeed relatively stable versus gold. Greenspan began with the dollar
around $460/oz. of gold in August 1987, and he ended around $510/oz. of gold
at the end of 2005. Of course there were a lot of ups and downs in between,
but the overall result was pretty good for over seventeen years of a floating
fiat currency. During the 1989-1996 period, the dollar was more stable than
this, fluctuating in the $350-$400/oz. band. That is quite a narrow range for
a seven year period. It is +-7% from a central point around $375/oz.
To make a long story short: Greenspan was doing, in the 1989-1996 period,
exactly what he said he would do in his 1981 op-ed. He was sort of, kind of,
keeping monetary and fiscal policies in line (he was rather influential in
fiscal policies during the time), and -- maybe -- he, the Fed, and the Treasury
were using surreptitious intervention to jimmy the dollar/gold market into
stability.
That period 1989-1996 is a little too stable. Markets go up and down. They
may end up at the same place they began after ten years, but they don't just
flatline. During the era of floating currencies beginning in 1971, the dollar
went up and down, and the dollar price of gold and down and up. There were
huge swings in the 1980s. All of this calms down rather suspiciously in
1989-1996, under Greenspan's watch.
Here is Greenspan from August 5, 1993. Note the big spike upwards in the
dollar/gold price beginning at that time, which hits a wall at $400/oz.
"I have one other issue I'd like to throw on the table. I
hesitate to do it, but let me tell you some of the issues that are involved
here. If we are dealing with psychology, then the thermometers one uses to
measure it have an effect. I was raising the question on the side with
Governor Mullins of what would happen if the Treasury sold a little gold
in this market. There's an interesting question here because if the gold
price broke in that context, the thermometer would not be just a measuring
tool. It would basically affect the underlying psychology."
Here Greenspan himself considers direct intervention in the gold market, and
it is clearly about gold sales for the purpose of influencing price. It is
not about sales for other purposes (such as managing the reserves), which are
announced publicly as reasons for gold sales by the Federal Reserve.
Read "Greenspan suggested gold price suppression in 1993" by
Dimitry Speck
Note how bond yields also spiked higher along with gold in late 1993
and early 1994. This spike higher in bond yields -- to 8% on the ten-year
Treasury bond, from around 5.5% in mid-1993 -- blew up Orange County,
California, which was experimenting with interest rate derivatives. It also
killed Kidder Peabody, a major Wall Street investment bank. Certainly,
President Clinton didn't want a burst higher in yields to derail the economic
recovery at the time, which was weak because the economy was loaded down with
the new Clinton tax hikes. Banks were stuffed with bad debt from busted real
estate, which wouldn't be helped by higher mortgage rates. So Greenspan
wasn't just scratching his chin. He was dealing with a crisis.
This period coincides with another funny happening, the publishing of Larry
Summers's paper "Gibson's Paradox and the Gold Standard," in June
1988.
Read "Gibson's Paradox and the Gold
Standard"
The paper is of course a bunch of gobbledygook. Which should tell you
something about Larry Summers' brain.
Fortunately, we have some pretty good summaries of the relevant bits, including
how the conclusions of the paper translate into real world action.
Read "Gibson's Paradox Revisited:
Professor Summers Analyzes Gold Prices"
This essay is mostly gobbledygook too, but at least it is shorter and to the
point.
Note how much Larry Summers talks about gold in the paper. Gold gold gold.
All the time gold. He may like to give the public impression that it's of no
concern to him, that he is oblivious to gold like most mainstream economists,
but obviously he has a bit of history in this matter.
To translate into fairly clear language, people made the basic observation
that bond markets didn't like a rising gold price (as this would imply a
falling dollar value, and that you would get paid back in devalued dollars on
your bonds). The Clinton administration in particular was very aware of the
benefits of declining interest rates, and indeed Greenspan had some influence
there. So, they figured that if they put a lid on the "gold price,"
which is to say, they supported the dollar's value -- a "Strong Dollar
Policy" -- the result would be lower interest rates. And indeed, as we
see on the preceding chart of U.S. Treasury rates, they were right.
You can see how Summers and Greenspan could get to be good buddies. They
would have so much to talk about. Even when Robert Rubin was the official
Treasury Secretary, it was widely known that Summers was the go-to guy for
all kinds of technical matters.
Rubin is a bit of an interesting character too, since he apparently oversaw
Goldman Sachs' gold trading desk in the late 1970s.
Before he was CEO of Goldman Sachs and then US Treasury Secretary,
Robert Rubin worked in London for Goldman Sachs. One of his duties was to
oversee their gold trading operations. We know this because the CEO of
Kirkland Lake Gold, Brian Hinchcliffe, a staunch GATA supporter, worked in
London back then for Goldman Sachs and reported directly to Robert Rubin.
This was many years ago and interest rates in the US were very high, say from
6 to 12%. Rubin had Goldman Sachs borrow gold from the central banks to fund
their basic operations. They could do so at about a 1 % interest rate. This
was like FREE money, as long as the price of gold did not rise to any sustained
degree for any length of time.
Read "Gold Cartel
suppressing, manipulating gold price" by Bill Murphy
What about that funny rise in the dollar (decline in the dollar/gold price)
in 1997 and 1998?
The ability of the government to dictate a dollar/gold ratio through
intervention and coercion alone is limited. Greenspan envisoned that the
fiscal and monetary conditions would be roughly correct (i.e. nothing highly
inflationary), and then they could perform a bit of elbow grease via
dollar/gold intervention to pretty up the final result. The wild swings in
dollar value during the 1980s were exhausting.
Thus, I think the dollar's rise in the 1997-1998 period had a fundamental
component, namely the 1997 capital gains tax cut (tax cuts tend to lead to a
rising currency). However, this trend was helped along by a policy of
cramming the dollar/gold price lower through a variety of coercive techniques.
This dollar rise produced the Asian Crisis in 1997-1998. The Asian
governments had pegged their currencies to the dollar in the early 1990s,
after Greenspan had managed to stabilize the dollar vs. gold. This produced
an economic boom, in large part because stable exchange rates enabled trade
and financing. However, the Asian governments mostly did not have much of a
method to keep their currencies in line. They had some small-scale
intervention, but nothing in the nature of a currency board (except for Hong
Kong and Singapore). This arrangement worked OK when the dollar itself was
stable, but when the dollar began to rise, the Asian governments had no
technique to cause their currencies to rise alongside. As a result, their
currencies fell against the dollar, creating all kinds of chaos since by then
people had become accustomed to pegged exchange rates and had lots of foreign
currency denominated debt. (The proper solution would have been to have a
Hong Kong-style currency board.)
You can read more about that period in my book too.
Thus, I am proposing that the dollar's rise in 1997-1998 was a result of fundamental
factors (the capgains tax cut), and also interventional factors. You can read
some of the GATA stuff regarding the organization of forward sales of gold by
Barrick -- thought to be "Wall Street's gold mining company" -- and
others, suppressing the dollar price of gold. (Apparently,
"Barrick" means something like "fuck you" in Hungarian.
CEO Peter Munk grew up in Budapest, so he would know that.)
At an early brain-storming session, as described in the authorized
biography of Munk, the question was raised how to name the fledgling company.
Munk, who was obsessed with big and quick success had no patience with such
trivial details, exclaimed: 'Call it Baszik, Szarik, Barrick, as you will; I
couldn't care less'. The name Barrick stuck. Knowledge of the Hungarian
language helps the etymologist. The first two words' English equivalents are
'f...ck' and 'sh...t'. In Hungarian four-letter words have six letters to
sport and, as verbs, they are also distinguished by their '-ik' ending,
forming a special conjugation class of their own.
Read "To Barrick or to Be
Barricked, that is the question" by Antal Fekete
This paper also has some good descriptions of the Barrick-led policy of
forward sales and hedging, widely thought to have suppressed the dollar price
of gold (supported the dollar) during the 1997-2001 period.
As I mentioned a couple weeks ago, I regard gold's value to be essentially
stable, even when the dollar/gold market is subject to all sorts of
manipulation and intervention. The net effect of this intervention is to
alter the value of the fiat currency compared to gold, while having
relatively little effect on gold itself. Thus, "gold suppression"
amounts to "dollar support."
April 11, 2010: Interpreting Gold
and Currencies in an Environment of Official Intervention
We can see quite clearly that the dollar rose against other currencies. Also, commodity
prices declined in dollar terms.
A "strong dollar policy" combined with "gold price
suppression" makes sense when the dollar is at $500/oz., as it was at
the beginning of Greenspan's tenure. It makes sense when the dollar is at
$400/oz. and bond yields are bursting higher, as in 1993-1994. But it doesn't
make much sense when the dollar is at $325/oz. and rising to around $255/oz.
in 2001.
However, Greenspan seemed to feel that pounding gold lower/the dollar higher
was a good thing.
"Nor can private counterparties restrict supplies of gold,
another commodity whose derivatives are often traded over-the-counter, where
central banks stand ready to lease gold in increasing quantities should the
price rise."
What is notable about this comment is that he refers to the leasing of gold
as an instrument for influencing price. Admittedly Greenspan made the comment
in a different context (discussions about regulation); the discussion was not
about the framework in which intervention should actually take place.
Read "Greenspan suggested
gold price suppression in 1993" by Dimitry Speck
This comment dates from July 30, 1998. The dollar price of gold was
$290/oz., about the lowest it had been since August 1979. Wasn't that low
enough?
For a long time I didn't really get this. How is it that GATA and others were
accusing Greenspan of pushing gold lower/the dollar higher, via central bank
"leases" (this amounts to a fancy term for unofficial sales), gold
producer hedging and the like, when there seems like no reason at all for
Greenspan to engage in this at the time?
I've concluded that Greenspan doesn't really see gold the way we do, as a
stable measure of value, against which a currency's value is compared. A
"low price of gold" can cause problems (rising currency, monetary
deflation) just as a "high price of gold" can (falling currency,
monetary inflation). It certainly was causing problems in the 1997-1998
period, in the form of the Asian Crisis. However, Greenspan apparently sees
gold as an "inflation indicator." Lower gold means lower inflation.
That's a good thing, right? Especially if it leads to lower bond yields. Bond
yields did indeed head lower in 1997-1998, to their lowest level since 1965!
It was a big success! Greenspan, Summers and Clinton could slap each other on
the back in celebration. It all worked just like Summers's 1988 paper said it
would.
Also, gold is sometimes seen as a "go to asset in times of crisis."
Certainly there was a crisis in the summer of 1998, with sovereign defaults
by Brazil and Russia adding to the chaos in Asia. If the dollar/gold price
was held down, maybe people would be less apt to panic.
Remember Greenspan's "irrational exuberance" comment:
Wikipedia on the "irrational
exuberance" remark
It actually dates from December 5, 1996 -- almost exactly at the start of the
move higher in the dollar and the move lower in dollar/gold prices.
"But how do we know when irrational exuberance has unduly escalated
asset values, which then become subject to unexpected and prolonged
contractions as they have in Japan over the past decade?"
Here's a closer look at the timing:
"Bubbles" are sometimes associated with
"inflation." So, if you were worried about "irrational
exuberance" and a stock market "bubble," you might take some
sort of counter-inflation measure. A higher dollar/lower gold price
accomplishes that, without the politically difficult (and economically
destructive) step of raising the Fed's target rate from the 5.25% level it
was already at during that time.
But Greenspan had already become known for having a bit of a blind spot
regarding the potential negative effects of a rising dollar.
Let's go back to 1982. Greenspan is not at the Fed yet, he is an independent
economic analyst. He has a history of involvement in gold-related affairs,
including his participation in the Congressional Gold Commission in 1981.
Reagan was elected in November 1980, and he had a lot of gold-friendly people
on board, among the "supply-side economists." However, the great
Reagan boom had not yet begun. Instead, Volcker's tight money had driven
interest rates to eye-popping levels. The stock market was still in the
toilet after a seventeen-year bear market. The 1982 recession was being
called the worst since the Great Depression. Reagan himself had been forced
to renege on some of his tax cut promises, and signed a corporate tax hike
into law that summer. It was a crisis time for the new Reagan administration.
Among Reagan's "supply siders," a debate was going on. The dollar
bottomed in early 1980, and by 1982 -- as a result of Volcker's tight money and
Reagan's tax cut promises -- it was was rising, rising rising. In mid-1982,
the dollar rose to $300/oz., from its $850/oz. nadir in 1980. That is nearly
a tripling of dollar value! The official CPI inflation rate was falling
quickly, but it was still rather high around 6.0%. Some supply-siders argued
that the huge rise in dollar value was causing a deflationary recession,
even though the CPI was rising in reflection of the 1970s inflation. However,
Greenspan (and the Monetarists) saw it differently. The lower price of gold
meant less inflation, and since 6% was still rather high, and certainly the
10 year Treasury bond yield was much too high around 14%, less inflation was
a good thing no?
With the economy apparently being squeezed by a dollar that had risen too far,
too fast -- with all the attendant difficulties including exploding debt
defaults and an emerging markets currency crisis just like 1998 -- some
supply-siders wanted a monetary ease. Paul Volcker, until then a
super-hawk, was eventually swayed by their arguments and changed course. The
Fed didn't have a Fed funds target in those days. It was the middle of the
Monetarist Experiment. So, the ease took the form of the Fed buying $600
million of dollar-denominated Mexican sovereign debt in August 1982, and
monetizing it. (The number might be as high as $3 billion.) This also managed
to bail out the big U.S. banks on their huge losses on emerging market debt.
(The Fed has been bailing out the big banks for a long time.) When all this
"fresh liquidity" -- the new base money created by the monetization
of the Mexican debt -- hit the banks and the money market, the overnight
money market rate plunged lower. The dollar also headed lower, relieving the
monetary deflation on the economy with a "reflation." Lower interest
rates and a lower dollar, plus the promise of upcoming Reagan tax cuts, lit a
fire under the U.S. stock market and the Great Bull Market began. Reagan became a
big hero.
So you see, the supply siders in favor of monetary ease were right in 1982,
and Greenspan was wrong.
This little narrative is not just something I made up. If you want more detail,
read William Greider's book, The Secrets of the Temple, which runs to
800 pages of details about "The Turn" of August 1982 and the period
following. It's all there.
Buy The Secrets of the Temple
from Amazon.com
Thus, with that in context, we can get a little idea of Greenspan's thinking
process, and why he would try to push the dollar higher/gold lower even in
1998.
Here is an account by one of the Reagan "supply siders" who wanted
monetary ease in 1982, and how that was similar to the situation in 1998:
"At Last, Greenspan" September 24,
1998
Read it.
So you see, Greenspan was stuck in the same "lower gold price is
good" mindset in 1998 as he was in 1982!
Greenspan held the same stance as the dollar again rose to $300/oz. in 1985,
setting off deflationary consequences. According to Greenspan, a lower gold
price just meant less inflation, a good thing. Once again, Greenspan was
ignored (he was not yet Fed Chairman), and the dollar's value was pushed lower
beginning with the Plaza Accord in September 1985. (You can see the stock
market began a new leg higher right at that time, continuing the Great Bull
Market.)
Wikipedia on the Plaza Accord
Greenspan wrong again. Indeed, a commentary upon Greenspan's appointment as
Fed chairman dating from August 1987 identified exactly these two events
(1982 and 1985) as identifying a potential problem with the new chairman. He
just didn't know when to stop regarding a strong dollar/lower gold price.
(Unfortunately, I can't provide a link to that 1987 report.)
Greenspan wasn't the only gold guy on the FOMC in those days. He was paired
with Wayne Angell, who was on the FOMC from February 1986 to February 1994. I
mentioned Angell in my book because he traveled to the Soviet Union in 1989
to recommend a gold standard for that country. Angell was a tempering
influence on Greenspan at the Fed, and may have prevented Greenspan from
adopting an aggressively strong dollar/lower gold/deflationary policy during
that period.
Thus, we come to another interesting aspect of the Greenspan/Summers strong
dollar/gold manipulation/lower interest rates story, the introduction of the
fake tungsten gold bars around 1997 and 1998.
The "Genesis of the
Gold-Tungsten: the Rest of the Story" by Rob Kirby
The tungsten slugs came from Eastern Europe - most likely a former
strategic stockpile, a remnant of the failed Soviet Empire – which was
“acquired” as spoils of Cold War victory during the reign of Bush
I circa 1991-92. Between 1.3 and 1.5 million 400 oz tungsten blanks were
actually produced in an Eastern European country [not the U.S. as I
originally reported]. These tungsten blanks were shipped to Latin America
[Panama] and then air-lifted on to Mena, Arkansas. From Mena, Arkansas, the
tungsten blanks were shipped via truck [Brinks and Purolator] – 2
trucks at a time to a refinery in Southern California where they received
their gold plating and stamping. ...
Tungsten / gold bars destined for Ft. Knox were allegedly trucked direct to
Kentucky for exchange with “what ever was left” in the depository
which was stolen outright – but bringing the outstanding in Ft. Knox up
to 640 thousand - 400 oz tungsten bars which are there now.
10,000 metric tonnes of fake gold bars earmarked for the intl. markets were
supposedly hallmarked and “papered” as going through a holding
facility of Engelhard [Vancouver] and trucked back to Mena, Arkansas and then
on to Panama – TO SIT - awaiting distribution into the intl. market.
The big questions beside “greed” - is “why” and
“how” does one feed 10,000 metric tonnes of fake gold into the
international market?
The Motive
Take a look at when Rubin / Summers instituted their “Strong Dollar
Policy”: Understand, weakness [capping] of the price of gold along with
stimulative and arbitrarily low interest rates [to give the U.S. economy a
false, bolstered illusion of health]. ...
The Cover
By establishing and promoting an active, international gold hedging market
– enough traffic / movement, or ‘cover’ if you will, of a
formerly static asset was created where fake gold bricks could be merged into
the “flow” without arousing undue suspicion of willing, dupe
buyers who DID NOT ASSAY GOLD when they purchased it.
One can imagine that merging 10,000 metric tonnes of fake gold bricks into
the global market place would pose logistical challenges. If one were intent
on doing so – it could NEVER be done ALL AT ONCE. It would necessarily
have to be done over time. With gold bullion being a formerly
“static” asset which sat in the vaults of Central Banks –
any sudden large scale movements of bullion might draw unwanted attention.
So, one would want to create a credible vehicle where large amounts of gold
were seen to be “on the move” – in good amounts on a
regular basis – like a viable gold lending / leasing / swap market.
Also, to give the fake gold bricks a patina of authenticity – one could
imagine the desire to have a “market leader” involved –
tacitly endorsing the procedure, surrounding the fake bricks and the conduit
through which they would travel with highly credible individuals – like
former world leaders – whose actions and motives would NEVER be
questioned.
It was back in May, 1995 when Barrick Gold’s Peter Munk established his
International Advisory Board – chaired by none other than George H. W.
Bush [and other opportunistic former world leaders] and with representation
of Mr. Clinton through his White House legal counsel, Vernon Jordan.
Read the whole paper. It appears that the tungsten fakes were fed into the
market via the "central bank leasing" and "Barrick-led
hedging" avenue, in the 1997-2000 time period, as part of a Greenspan/Summers-led
"strong dollar policy" with the aim of lowering interest rates.
Within the context of what we have reviewed, I am particularly struck by this
comment by Greenspan at the end of his tenure, on July 20, 2005:
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.
The Ron Paul/Alan Greenspan Gold
Discussions
All of which brings us to today. To summarize:
1) That Greenspan, from 1981 if
not earlier, envisioned a regime in which the fiscal and monetary conditions
would be kept in what was perceived as a roughly stable fashion, and then the
dollar/gold market would be jammed into place via official intervention.
2) That this policy was apparently in use during the 1989-2000 period
if not earlier.
3) That this policy aligned with Summers' arguments that a stable or
lower gold price, aka "strong dollar policy" would result in lower U.S.
Treasury yields, which indeed was the case, much to the Clinton
administration's delight.
4) That this program was conceived in part because Greenspan and Summers
wanted the benefits of a gold standard system (low interest rates, currency
stability and macroeconomic stability) but they didn't know how to operate a
real gold standard.
5) In the absence of proper operating mechanisms involving the
adjustment of the supply of money (base money), a regime of surreptitious
gold sales/leases/hedging was implemented. This ran down the government's
gold supplies.
6) The lack of bullion for use in gold market manipulation caused a
reliance on counterfeit tungsten gold bars, plus every sort of fakery
including lies from the Comex, LBMA etc.
7) The "gold suppression" (dollar support) schemes today get
ever more aggressive, and ever more desperate, as the inherent problems with
this program are gradually blowing up in their face.
I just want to give you a sense of the history of it all. This goes back to 1980,
and earlier.
How much earlier?
If you look at the above list, it is almost exactly the same as the problem
which led to the breakup of the Bretton Woods gold standard in 1971! The
U.S. monetary authorities are still using the same old worn-out playbook.
When are they going to figure out that it doesn't work?
Throughout the 1940s, 1950s and 1960s, a similar program was in place. Then
too, the Fed did not properly administer a gold standard system by pegging
the dollar to gold by a currency-board-like system of direct monetary base
adjustment. They just tried to maintain what they felt was
"responsible" fiscal and monetary policy, and then jammed the
dollar/gold ratio into place with official gold sales. This discipline tended
to break down in recessions, however, when Keynesian "easy money"
policies were favored, which tended to lead to dollar weakness and more gold
outflows. During the Bretton Woods days, the U.S. government had an immense
amount of gold, so the dollar support/gold suppression program mostly
involved real sales of real U.S. government bullion. Gold futures, ETFs etc
had yet to be created. However, the end result was the same. Without a proper
operating mechanism, a currency-board-like system to maintain the dollar's
gold peg, the dollar's value could not be maintained with coercion alone. The
London Gold Pool -- which in those days was "all the king's horses and
all the king's men" -- could not keep the dollar from the natural
consequences of its mismanagement.
Wikipedia on the London Gold Pool
November 11, 2007: The London Gold
Pool I and II (and a David Frum-bashing contest!)
November 19, 2007: Bretton Woods
II: The Folly of Large Gold Reserves
How far back does this silliness and incompetence go? Before World War II,
certainly. The last time the U.S. managed a gold standard with a hint of
competence may have been in the 1930s. However, even in those times there
were probably some funny games being played, so you would probably have to go
back before 1913.
I want to bring this up to give an idea of the long history of incompetence
by U.S. authorities and indeed all world governments. Their constant lies and
manipulations are rather obnoxious. However, they are trying to produce a
good result, without understanding how such a result is created.
I hope that a few people who read this will themselves learn what Greenspan
and Summers never learned: how to implement an effective gold standard
system. It's not very hard.
Then we would be spared all the nonsense and chaos that results when
knuckleheads are allowed to be in charge.
Let's remember the example of Britain. Britain remained pegged to gold for over
200 years. The Britain-centric gold standard of the 18th and 19th centuries
was not like Bretton Woods, which began to fall apart from its internal
contradictions only twenty years after it was created. The British gold
standard did not fail due to internal contradicitons, or running out of gold
to perform market interventions, but rather due to the outbreak of World War
I. Britain quickly put it back together in 1925, but the Great Depression,
the rise of Keynesianism, and World War II derailed Britain's long and
brilliant history of monetary leadership.
Britain never had very much gold, and never needed it. The Bank of England
did not sell tons and tons of gold in an effort to "suppess gold
prices." It didn't sell tungsten fakes, or have a futures market to
manipulate, or sell ETFs with no real bullion, or tell lies about the
inventory at Ft. Knox.
You just have to laugh at these clowns. It's so silly!
The result of Britain's expertise was government bond yields that make the
best efforts of Summers and Greenspan look like the pathetic childish games they
are. (I haven't even started on the JP Morgan interest rate swap story,
another aspect of the effort to hold down bond yields.)
This shows yields on British government debt over three centuries. During the
gold standard years, in the 18th and 19th centuries, yields regularly fell to
about 3.25% and stayed there for generations on end. This was not a ten year
bond. This was not a thirty-year bond. This was a bond of infinite
maturity. No government today can even issue such a thing. Nobody would
buy it.
That will be something to think about if U.S. Treasury bonds begin a long
bear market.
Nathan Lewis
Nathan Lewis was formerly the chief international
economist of a leading economic forecasting firm. He now works in asset
management. Lewis has written for the Financial Times, the Wall Street
Journal Asia, the Japan Times, Pravda, and other publications. He has appeared
on financial television in the United States, Japan, and the Middle East.
About the Book: Gold: The Once and Future Money (Wiley, 2007, ISBN:
978-0-470-04766-8, $27.95) is available at bookstores nationwide, from all
major online booksellers, and direct from the publisher at
www.wileyfinance.com or 800-225-5945. In Canada, call 800-567-4797.
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