Let's File This Email About Greenspan and Replicating the Gold Standard Under 'Irony'

I found this little gem, and added it to my collection of reminders that Greenspan said that fiat money 'worked' because central bankers had learned to 'replicate' the gold standard through their policy actions.  I had said 'emulate' but perhaps that was a quirk of memory.

This is from a publicly published note by Jude Wanniski titled Savings Glut.

From: Jude Wanniski < jwanniski@polyconomics.com
To: Ben.S.Bernanke@ * * * * *.GOV
Subject: Fwd: Re: Savings glut
5:44 pm, 7/21/2005

"Greenspan was plain awful in his testimony this week. But members of Congress don't know any better, so they slobber all over him. He again said we don't need a gold standard, because he has demonstrated since he came to the Fed in 1987 that the central bank could 'replicate' the gold standard.

Take a look at the dollar/gold price from 1987 until today and you will see how terrific he has been in replicating the gold standard. I can't wait for him to leave, Ben, because he now has so much invested in his Fed legacy as a Maestro that he could never admit he screwed up almost all along the way."

Wanniski sent this to Bernanke, who was at that time either on the Fed Board of Governors, or on the Council of Economic Advisors to W Bush.  I can't recall the exact date of the transition.

The note is almost a howler, given the excesses in trickle down helicopter monetization and banking subsidies that Bernanke has engaged in since becoming the Chairman of the Fed, and the manner in which he has haplessly ravaged the quality of the Fed's Balance Sheet, while accomplishing little except extending the unsustainable status quo.  The Fed's performance as a major banking regulator has been almost pathological.

And I also like this note because it helps to dispel the myth that the Fed does not watch and worry about the price of gold, which we have known about for quite some time. It is tied to their aspirations on interest rates, through the management of market perception. Larry Summers wrote about this relationship in Gibson's Paradox.

Well, nothing has changed, the irresponsibles are still in charge, and they are being defended by their economic partisans while they degrade the national currency to support the looting of the system by their cronies from Wall Street and the Banks. 

The idea that stuffing the one percent's already swollen pockets with even more hot money will stimulate the economy would be funny if it was not having such tragic consequences, with even worse to come.

My only regret is that I wasted so much time trying to raise these concerns on economic chat sites with establishment economists who clearly did not wish to hear or see anything but the party line.  This is about when Brad DeLong, in explaining why he had to censor my concerns about Greenspan's monetary policy and the growing credit bubble said, "Greenspan never made a policy decision with which I disagreed."  Well Brad, how did that work out in retrospect? 

And as bad as the neo-Keynesians may be, the Chicago-Columbia austerity crowd are even worse.  Economics is a generally disgraced profession with only a few bright lights.

The stock, bond, and commodity markets are a joke. The Banking System resembles a control fraud.

The manipulation of the metals, equity, and credit markets is approaching a financial war crime, it is so contemptible. Although I am sure it will have its bureaucratic defenders.

At long last, they have no shame.

Another crisis is coming.  They know it is coming, and are attempting to cover it up while they make themselves and their patrons comfortable.  They are trying to stifle all alarms and indicators to the contrary.

The market is whatever we say it is, indeed.  And this time it will be worse.

I am sorry to speak so bluntly.  I keep trying to maintain some optimism, but these jokers are barking at the moon.  This disconnect between reality and the official story is becoming almost unbelievable.

The History of the Johnstown Flood: Audacious Oligarchy, Reckless Disregard

The history of the Johnstown Flood of 1889, at that time the worst natural disaster in the US as measured by loss of life, is little understood these days, but quite fascinating.

A group of about fifty wealthy 'robber barons' took over an old dam which had been used as a reservoir for a canal system,  and used it to create a lake resort for their private pleasure.  It served as a weekend retreat from the heat and noise of nearby Pittsburgh. 

Prior to selling the dam to them, the owner, a Congressman Reilly who had purchased the abandoned reservoir from the Commonwealth of Pennsylvania, removed the discharge pipes from the dam and sold them for scrap, thereby eliminating any emergency water relief measures, excepting the spillway.

They constructed buildings, and cottages, and formed the Southfork Fishing and Hunting Club.

They screened the spillway in order to preserve the fish with which they stocked the lake.  The screening tended to collect debris, and hamper the function of the spillway to relieve pressure on the dam caused by the occasional heavy rains.

Poorly maintained, the dam gave way, and wiped out the towns located down river. Having received no warning, many of the people who could have retreated to the nearby foothills were lost in the deluge.

The powerful members of the Club were never held to account because the law was interpreted to find no single member had been personally involved.

The Club itself was sold at auction to pay its mortgage to the banks.  The litigants received nothing.

It would have been even worse if the wealthy had bought insurance on the lives and property of the towns below, in order to further profit from the tragedy, and had cut telegraph wires and warning whistles to maximize the damage, loss of life, and their profit. 

And it would have been despicable if they had hired experts and newspapers to falsely lecture the public on the nature of dams, and how their concerns were misplaced and ridiculous. And if they had 'captured' the public officials and inspectors so that they would overlook and excuse the reckless disregard of the Club members for others.

I hope the lessons from this story from history are not lost on you.

When things don't make sense, that is often because there is deception involved.  How can there be widespread destruction and crime, but no one is held accountable? 

It is easy to underestimate the brazenness with which wealthy and powerful people will game the system for their personal profit, and then to cover up their wrongdoing.   That is because most people themselves would not lie and cheat to profit from the misery of others.  They find such behavior to be almost inhuman.

It is natural perhaps to blame the victims. They should have known, one might say. And how often can one be fooled before being blamed for their misfortune as a fool?

But most people, when faced with the uncertainty of conflicting stories, tend to accept the one that is put forward by the mainstream media, and backed by very important people. 

This is especially true if it seems like something they might do. Who could believe in such deceit? But they forget that they themselves are not heartless sociopaths.  And they are not well-practiced, almost pathologically proficient, con men who will say and do almost anything for money, without a twinge of conscience. Surely they may bend the truth a little, but never about anything so great.

The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustainable recovery.

Greenspan: Role Of Central Bankers Is to Try to Replicate the Stability of the Gold Standard

Greenspan said on any number of occasions that his model was that a 'fiat currency' works when it emulates the rigor of the gold standard.

I am using this post as a placemarker to gather a few citations along these lines. Sometimes people doubt these things, and it is not always easy to go back and find the actual idea in print.

I will place other example here as I find them but it is not a high priority because Alan Greenspan has never deviated from this point of view. One of the most poignant examples I have was when Ron Paul asked him if he still believed in what he wrote in his famous essay on Gold and Economic Freedom.

And Greenspan answered that he would not change a word.

I think the squaring up of what Greenspan believed, and what he did as Fed Chairman, is one of the more interesting conundrums that I hope that time will explicate. 

The other of course is why the flaming liberal and 'socialist' Obama is really closer to Richard Nixon in his performance and outlook than most would care to admit, on either the right or the left. 

This is from a 2007 Interview by National Public Radio with Alan Greenspan on Turbulence and Exuberance

Greenspan: Well actually, we were not fundamentally regulators [at the Fed]. The vast portion of our efforts were not involved in bank regulation.

NPR: No, but you were regulating interest rates, which have a profound effect on world economies.

Greenspan: You're raising really a very interesting question. I have always argued that the gold standard of the 19th century was a very effective stabilizer. It kept inflation essentially at zero, and I felt it was critical for the tremendous growth that occurred for the American economy in the latter part of the 19th century. When we went off the gold standard essentially in 1933, we then had to have what we call "fiat money" which is essentially money that is - it's printed paper money. Which unless we restrict the volume of, can be highly inflationary.

The type of interest rate regulation that I and indeed most central banks in the last 20 years have been involved in...has been to try to replicate the laws and rules that were governing the gold standard.

And so it is an odd situation where all the central bankers -- while none of them are advocating a return to the gold standard -- nonetheless try to replicate the various types of interest rate policies that the gold standard would have created. And it is an interesting question whether you call that regulation, or basically functioning of a central bank in stabilizing the economy."

I remember all such statements of Greenspan's vividly because they were one of the few times in which I felt that he was telling the truth, at least as he sees it.

I think that a fiat currency can 'work' if it emulates the rigor of an external standard. And exceptions that can be made to this rigor during times of exogenous shocks could be a quite useful tool for monetary policy.

The problem is that it NEVER seems to work out that way in the real world. It does not take long for financiers and politicians to discover the heady power and easy money to be had in manipulating the markets and the fiat currencies to their own advantage, the public and the real economy be damned. And then a pigfest ensues, and a nation's savings and civic virtue are consumed.

"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. So I think central banking, I believe, has learned the dangers of fiat money, and I think, as a consequence of that, we've behaved as though there are, indeed, real reserves underneath the system."

Greenspan, A., Hearing on Monetary Policy Report, US House Committee on Financial Services, 20 July 2005, Washington D.C.

From: Jude Wanniski < jwanniski@polyconomics.com
To: Ben.S.Bernanke@ * * * * *.GOV
Subject: Fwd: Re: Savings glut
5:44 pm, 7/21/2005

I thought you should see this. Greenspan was plain awful in his testimony this week. But members of Congress don't know any better, so they slobber all over him. He again said we don't need a gold standard, because he has demonstrated since he came to the Fed in 1987 that the central bank could "replicate" the gold standard.

Take a look at the dollar/gold price from 1987 until today and you will see how terrific he has been in replicating the gold standard. I can't wait for him to leave, Ben, because he now has so much invested in his Fed legacy as a Maestro that he could never admit he screwed up almost all along the way.

Famous 2005 Exchange Between Ron Paul and Alan Greenspan about the Gold Standard


Related: Why There Is Fear and Resentment of Gold's Ability to Reveal the True Value of Financial Assets

Gold Daily and Silver Weekly Charts - South Africa Imports $1 Billion In Gold Bullion From NYC?

The stories on the sidebar are interesting today. The last piece by Golem XIV about What Bankers Don't Know is a 'must read' in my opinion.

I was greatly amused to read that South Africa imported about a billion dollars in gold bullion from New York earlier this year, an amount large enough to turn their trade surplus into a deficit.

The reason given was that South Africa had problems in its mining sector because of union actions etc.

What is not stated is that it was cheaper for South Africa to ship gold all the way from New York to meet their delivery obligations than it was to acquire the bullion from their own region, or the regions where their customers reside, which are presumably in Asia.

Couple this with the news we had that bullion shortages in Hong Kong were being met by gold bullion imports from London and Switzerland.

Gold is flowing from west to east, and this is precipitated by price distortions in the paper markets of New York and London.

The pundits on Bloomberg TV met the comments from Putin about Russia's desire for a change in the reserve currency with contemptuous laughter and snide derision after the close today.

It reminded me of what Robert Johnson said about the attitude on Wall Street. 'Ok, you're mad. So what are you going to do about it?'

There are a number of May gold contracts at the Comex standing for delivery. I suspect they are wiseguys sniffing around for a premium on a cash settlement. I don't think the Comex would allow anyone to take delivery of that much of the real deal.

This is going to get interesting.

SP 500 and NDX Futures Daily Charts - Rally Tuesday

"Never have investors reached so high in price for so low a return. Never have investors stooped so low for so much risk."

Bill Gross, 14 May 2013

Today was rally Tuesday when the banks and funds decide to take stocks up.

Check out the results for the last few Tuesdays. This makes more sense for today's rally than anything else I have heard.

Be careful in challenging the technical when they are driven by hot money and abetted by lax regulation. We've been here before from 2004 to 2007.

The Bullish Case For Stocks (and a Commensurate 'Repricing of Risks' Caused By Fed Intervention)

Here is the 'bullish case for stocks' from Ralph Dillon at Global Financial Data, in quotes below.  The chart is also from their site.

Calculating the Equity Risk Premium Tutorial is here.

Those of us who stood by and watched the Fed blow asset bubbles in financial paper and the housing market from 2003 to 2007, after the bubble in tech stocks from 1998 to 2001, are understandably appalled that the Fed has seen fit to follow essentially the same game plan again, matched by a lack of reform in the financial system. 

Bernanke's policy failure is, in my humble opinion, going to cause another financial crisis if he continues on. There are much more effective ways of reflating and stimulating the economy than creating paper asset bubbles for Wall Street, and hoping that the Banks allow for a trickle down effect to the real economy.  Not a chance when gaming the markets can produce outsized profits and perfect trading records.  Where is the downside, where is the risk?   And where are the regulators?

I think I understand the rationale for leaving the TBTF Banks in place, and making them even bigger. It was two parts craven self-interest and one part backstop for the eventual unwinding of the Fed's Balance Sheet, when someone has to help them to absorb the trillions in mispriced paper.

In my opinion Bernanke is literally fighting a new kind financial crisis, of the Fed's own making, with the last war's tactics and weapons, in the manner of the French generals at the beginning of the Second World War. Therefore the next crisis could be quite impressive and pervasive, affecting sovereign debt and currencies to an even great degree than the last two or three bubble/crises, depending how one is keeping score.

The failure points, or limits if you will, are the valuation of the bonds and the US dollar. And Bernanke looks to be giving those limits, and the theories of risk and valuation therein, a rather rigorous stress test. 

"At 85 Billion a month, massive amounts of liquidity are driving the markets higher each day. While we are closely watching the FED for signs of an exit strategy, I heard a very interesting piece from David Tepper at Appaloosa Management this morning that put todays markets in a much better perspective. According to David, The FED will have a 368 Billion dollar surplus this year! That is 368 Billion in more liquidity that “has to go somewhere”.

With the Dow and the S&P 500 trading at or near all time highs and 10yr paper trading at historic lows, you would think that we have run our course and we may want to pull some money off the table. Think again? Do you fight the FED? Do you create the MOAS? (Mother of all shorts)….Or do you stay long?

In this chart, we look at the Equity Risk Premium Index versus the DJIA, S&P 500 and the US 10yr to 1885. The red line represents the Equity Risk Premium Index and by all accounts, looks like it is ready to breakout and make a move to new highs.

Provided that the FED follows through to 2014 with the QE program, one would have to assume that the respective equity indices will all move higher with the massive amounts of liquidity that are in the pipeline.

That has proven wise, as long as the FED stays your partner."

Currency Wars: Russia's Proposal for the Post-Bretton Woods II Global Financial System

"The great enemy of clear language is insincerity. When there is a gap between one's real and one's declared aims, one turns as it were instinctively to long words and exhausted idioms, like a cuttlefish spurting out ink.

In our age there is no such thing as 'keeping out of politics'. All issues are political issues, and politics itself is a mass of lies, evasions, folly, hatred, and schizophrenia.

When the general atmosphere is bad, language must suffer."

Eric Arthur Blair

The dollar reserve system has been struggling, if not failing, in stages for at least ten years now.

There have been a series of financial crises since the mid-1990's that are related to the strains of an unsustainable reserve currency system which is no longer able to 'emulate the gold standard,' as ex-Fed Chairman Greenspan described it. 

This situation is a macrocosm of the failings of the Eurocurrency zone as it is presently constituted.

I believe that the ultimate solution will be to migrate global trade to a super-currency, constituted of a basket of currencies and most likely a metal or two, gold and silver. I have been calling it the 'SDR' but that is only a representative description. It is unlikely that 'ownership' of such an important instrument will be given to the IMF unless its management is opened up to a broader representation of countries and their interests.

This relieves the 'owner' of the currency from the need to run trade deficits in order to support the expansion of global trade, and allows them great freedom in pursuing domestic monetary policy without risking the global markets. cf Triffin's Dilemma.

There is a strong push from the Anglo-American banking cartel to maintain the status quo, for what are surely selfish reasons. A strong dollar and the dollar as reserve currency is a powerful tool of financial and political policy, even though it may take a toll on some segments of their own domestic economy. The bankers benefit, and the politicians are somewhat captured by their well-funded lobby. And so we have a bifurcated economic structure in the financialized economies of the US and UK. And this suits the financial elite quite well, but hardly anyone else.

This has come to resemble a form of financial neo-colonialism.  And I hardly think that this is an overstatement of the situation, especially if one considers the meme of 'economic hitmen.'  But this involves more than just the currency.  It includes the interwoven apparatus of the World Bank, the IMF, the Federal Reserve and its clients, the dominance of multinational TBTF banks that enjoy strong government subsidies, the three major US credit ratings agencies, and the NY-London metals complex. And this Frankstein's monster is tottering badly, but seeking to sustain itself at all cost.

So let's see how this goes. Expect the fog of war to remain, and perhaps thicken.  I have rarely read more economic misinformation than I have read with regard to money and exchange rates and the current issues facing the world's economy today. Discourse has been polluted by self interest and corruption.

 But now that moe people are waking up to this, I would look forward to additional recognition and discussion of the ongoing currency war. But I doubt most of it will make much sense until there is another crisis and the day of reckoning arrives. To paraphrase a saying, those who are capable of an oligarchy are capable of the perjury to sustain it.

You might click on some of the category links at the bottom of this posting to obtain past articles on these subjects.

Russia's Plan For The BRICS To Dismantle The Dollar System
By Valentin Mândrăşescu, Editor of Reality Check @ The Voice of Russia
May 12, 2013 at 3:38PM

Former commodity trader, economist, journalist. Nomadic lifestyle. When not in Moscow, he can be found travelling across Eastern Europe. Areas of interest: world economy, East European politics, and the theory of propaganda.

The status of the US dollar as the world reserve currency gives the US a number of advantages over other countries. The world’s most important commodities are priced and traded in dollars, even if most of these commodities are not produced in the US. The fact that the world’s financial system is based on the dollar allows the Federal Reserve to export inflation to other countries, while the Federal Government runs a huge deficit with impunity.

So far, only China has been active in challenging the dollar supremacy. The internationalization of the yuan is an official priority of Chinese leaders. Currency swap agreements with major trade partners like Brazil, France, or Australia are small but important steps in the Chinese strategy. Changing the world financial system is not an easy task and certainly a very challenging undertaking for China. Now, it seems that Beijing has found an ally in the Kremlin. And there appears to be a consensus between the BRICS countries: the urgent necessity to dismantle the dollar system.

A week before the recent BRICS summit in Durban, the Kremlin administration has silently produced a document which describes the Russian strategy in the context of BRICS cooperation. The document makes for a fascinating read for anyone brave enough to plow through the dense Russian legalese. The strategy has been designed in the “inner circle” of Vladimir Putin’s team, so it is safe to assume that it represents the official view on the BRICS future...

Read the entire article here.