Thursday, February 23, 2017

Gold and Greenspan

Updated June 2016

In a recent edition of Gold Investor, the World Gold Council included a rather interesting missive from this man:

In case you've completely blocked him out of your memory, Alan Greenspan was the second longest serving Chairman of the Federal Reserve Board, serving in that capacity from August 11th, 1987 to January 31st, 2006.  Before we look at his musings, let's look at what happened during his time at the helm of the world's most influential central bank.

During his tenure, here's what happened to the Federal Funds Rate:

The rate varied from a high of 9.85 percent in March 1989 and a low of 0.98 percent in December 2003.  Remember how low interest rates seemed at the time?

Here's what happened to the interest rate on ten-year Treasuries:

Ten-year Treasury yields hit a peak of 10.15 percent in October 1987 and fell to a low of 3.13 percent in June 2003.

Here's what happened to Money Zero Maturity or MZM (a measure of all of the liquid money supply within the U.S. economy) during Greenspan's tenure:

MZM grew from $2.008 trillion in August 1987 to $6.882 trillion in January 2006, an increase of 242.7 percent.

Here's what happened to the federal debt during Greenspan's tenure:

The federal debt grew from $2.432 trillion in the fourth quarter of 1987 to $8.371 trillion in the first quarter of 2006, an increase of 244.2 percent.

Here's what happened to mortgage debt during Greenspan's tenure:

Mortgage debt mushroomed from $1.829 trillion in the fourth quarter of 1987 to $9.206 trillion in the first quarter of 2006, an increase of 403.3 percent.

Lastly, here's what happened to consumer debt during Greenspan's tenure:

Consumer debt grew from $698.6 billion in the fourth quarter of 1987 to $2.386 trillion in the first quarter of 2006, an increase of 244.7 percent.

Now that we have all of that background, let's look at a few excerpts from his recent missive in the February 2017 edition of Gold Investor.  

When asked "As inflation pressures grow, do you anticipate a renewed interest in gold?", he answered:

"Investment in gold now is insurance. It’s not for short-term gain, but for long-term protection.  I view gold as the primary global currency. It is the only currency, along with silver, that does not require a counter- party signature. Gold, however, has always been far more valuable per ounce than silver. No one refuses gold as payment to discharge an obligation. Credit instruments and at currency depend on the credit worthiness of a counter- party. Gold, along with silver, is one of the only currencies that has an intrinsic value. It has always been that way. No one questions its value, and it has always been a valuable commodity, first coined in Asia Minor in 600 BC." (my bold)

When asked "...what role do you think gold should play in the new geopolitical environment?", after explaining a history of the failure of the previous gold standard, he answered:

"Today, going back on to the gold standard would be perceived as an act of desperation. But if the gold standard were in place today we would not have reached the situation in which we now find ourselves. We cannot afford to spend on infrastructure in the way that we should. The US sorely needs it, and it would pay for itself eventually in the form of a better economic environment (infrastructure). But few of such benefits would be reflected in private cash ow to repay debt. Much such infrastructure would have to be funded with government debt. We are already in danger of seeing the ratio of federal debt to GDP edging toward triple digits. We would never have reached this position of extreme indebtedness were we on the gold standard, because the gold standard is a way of ensuring that fiscal policy never gets out of line." (my bold)

When asked "...what role does gold play as a reserve asset (for central banks)?", he responded:

"When I was Chair of the Federal Reserve I used to testify before US Congressman Ron Paul, who was a very strong advocate of gold. We had some interesting discussions.  I told him that US monetary policy tried to follow signals that a gold standard would have created. That is sound monetary policy even with a fiat currency. In that regard,  I told him that even if we had gone back to the gold standard, policy would not have changed all that much." (my bold)

Mr. Greenspan also notes that "...the very worst situation for a central banker is an unstable fiscal system, such as we are experiencing today."

Given the data that I showed you at the beginning of this posting, I would suggest that Mr. Greenspan's comment that his "...monetary policies followed the signals that a gold standard would have created..." is utter hogwash given that the supply of money as measured by Money Zero Maturity (MZM) expanded by nearly 250 percent over his tenure as Chair of the Federal Reserve.  It was this massive increase in the supply of money and Mr. Greenspan's ultra-low interest rate policies of the early and mid-2000s that led to the unsustainable growth in debt of all type, moves which laid the foundations for the Great Recession.

In closing, I have one question; I wonder if Mr. Greenspan was paid for his musings with fiat currency or gold?


  1. The ECB and other central banks often claim deflation drives or allows their QE policy to remain and is central to their ability to stimulate. The moment inflation begins to take root or becomes apparent much of their flexibility in policy is lost. The 2% inflation target central banks have deemed optimum is not valid.

    In the past I have put forth the idea that inflation could rule the day even if central banks are unable to keep the wheels on the bus and the economy collapses. This powerful force also known as stagflation can devastate those improperly invested. The article below explores the basis of this theory.

  2. More debate please! The American financial situation has become criminally destructive. It cannot continue.