The Fate For Gold And The U.S. Dollar Is Sealed
THE STATEMENTS OF GREENSPAN AND BERNANKE CONSTITUTE A WATERSHED EVENT
By Dr. Richard S. Appel
THE FATE FOR GOLD AND THE U.S. DOLLAR IS SEALED
Shortly after Alan Greenspan’s momentous statement regarding the methods that he would employ to overcome deflation in our country, Federal Reserve Governor Ben Benanke elaborated on a number of other possible means to achieve that end. I believe that the statements of both Greenspan and Bernanke have announced to the world the direction that the U.S. will follow should our economic decline worsen. If as I believe, a further deterioration of the U.S. economy is inevitable, the Federal Reserve’s future plans have sealed the fate for gold, silver and the dollar.
In mid-November, Greenspan stated that, "there’s virtually no meaningful limit to what we could inject into the system were that necessary". He commented that he would release unlimited dollars into our banking system by acquiring among other things, long term Treasuries if he deemed it advisable. About a week later, Governor Bernanke confirmed and reinforced Greenspan’s testimony. He stated that, "the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services." He went on to say that, "If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation".
Governor Bernanke continued and described the various methods that the Fed could utilize in order to inject liquidity in the banking system. Among these, in addition to acquiring Federal backed debt such as Ginnie Mae securities, they could purchase "foreign government debt, as well as domestic government debt". He continued with; "the Fed does have broad powers to lend to the private sector indirectly via the banks, through the discount window. Therefore a second policy option, complementary to operating in the markets for Treasury and agency debt, would be for the Fed to offer fixed-term loans to banks at low or zero interest, with a wide range of private assets (including, among others, corporate bonds, commercial paper, bank loans, and mortgages) deemed eligible for collateral".
Bernanke then turned to the government’s fiscal policy options that could complement those of the Federal Reserve. "Of course, in lieu of tax cuts or increases in transfers the government could increase spending on current goods and services or even acquire existing real or financial assets. If the Treasury issued debt to purchase private assets and the Fed then purchased an equal amount of Treasury debt with newly created money, the whole operation would be the economic equivalent of direct open-market operations in private assets."
These statements were meant to quell the mounting concern that had been seriously undermining both our economy and the stock market. I believe that they were intended to convince our citizens that the government was in control and would prevent a damaging economic downturn. And, for the average American, I believe their efforts were at least temporarily successful.
Had these statements not traveled beyond the boundaries of the United States, Greenspan and Bernanke would have achieved their end. However, given the existence of instantaneous, global communications, the eyes and ears of the world community immediately focused upon the U.S., and the threat to the value of their mountain of dollar and U.S.Treasury holdings.
Picture yourself as a foreign banker, fund manager, central banker, or any of a number of individuals controlling substantial wealth. Remember, the U.S. dollar is the reserve currency of all of the major nations, and our Treasury Paper is held as their major asset, representing upwards of 75% of their reserves. Further, an enormous amount of foreign wealth, the Arabs included, is invested in these U.S. Treasuries and dollar accounts. How would you react if you learned that the most powerful person in the U.S. was prepared to issue an unlimited amount of additional dollars? Wouldn’t you reason that these new dollars would cheapen those that you held and others that were already in existence? Wouldn’t you feel some level of fear that those dollars owed you, or owned by you, were destined to depreciate in value? Wouldn’t you feel betrayed by a nation in which you had invested so much of your hard earned money? Wouldn’t you be angered by the fact that the Federal Reserve was unconcerned about maintaining the integrity and value of the currency which they had convinced you, that they would forever protect?
I believe that numerous foreigners experienced the above observations and feelings! Further, I am certain that many of these individuals have already begun to protect themselves. And, their first actions were to begin liquidating dollars and to acquire gold.
For the past few decades our nation has benefitted from the generosity of the other nations of the world. Instead of demanding real payment, in the form of goods and services for sending us their products, they were convinced into accepting our Treasury Paper and dollars in return. As our balance of payments deficits soared, instead of acquiring our merchandise and services they were satisfied in receiving our IOU’s in the form of dollar credits or our government’s paper. Now, they are told that we are prepared to arbitrarily issue an unlimited amount of dollars, thereby reducing the value of those hard earned ones that they had toiled and sweated to acquire.
We have heard of various reasons why gold has finally broken above $330, after a five year period in which it traded below that price. We are told that it was because of the threatening war with Iraq. We hear and read that it was due to the declining dollar, or the great gold derivative short positions, or the rising price of oil. All of these factors have set the stage for gold’s rise, and would have contributed to it’s eventual penetration of $330, but they were not the triggering event.
Contrary to Greenspan’s likely belief that he could forever fool the world’s citizens, his and Bernanke’s statements have sent a powerful message. Within a few short weeks, the meaning of their announcements were quickly understood and acted upon! Foreign governments and individuals have begun the long process of reducing or eliminating their dollar or Treasury holdings. Despite statements of "our strong dollar policy" from our politicians, foreigners now recognize that the dollar is destined to decline in value. They have been irrefutably told by our central bankers that further declines in our economy or a derivative melt-down will be met with the wholesale creation of dollars. After all, our nation is poised to create new dollars at "virtually no cost" to us!
Many foreigners will hope, and some will pray, that the U.S. economy will recover and the derivative problem will go away, or at least be held off into the future. It is not certain that the Fed will perform as Greenspan and Bernanke have stated. Perhaps the economy will muddle through for quite some time without a serious recessionary threat or a derivative disaster. However, those who are the most astute will move into action before it is too late for them. They have already read the writing on the wall. They realize that they are at great risk and will sell their dollars and acquire gold, silver, various commodities, and other items of tangible worth. They will jettison their U.S. dollar holdings as if they were the plague! Later, an increasing number of people will follow in their footsteps. This will increase the magnitude of gold’s rise and the dollar’s decline as these events unfold. Greenspan and Bernanke have finally awakened the world to the fact that they are about to sustain serious dollar losses. And, the first of the world’s citizens have loudly heard their messages and have begun to protect themselves by acquiring gold.
I believe that the die has been cast for a substantial rise in the price of gold, silver and virtually all tangibles! Further, we are witnessing the early days of what will likely become the most severe dollar decline in the history of the United States. It is potentially destined to pale that which occurred during the decade of the 1970's.
Further, it is likely that the Fed is already intervening in the bond market. This is the reason that despite predictions to the contrary from the various bond experts, the bond market refuses to decline. If this is the case we will likely experience surprising, continuing bond strength. This will result despite a falling dollar, the further burgeoning of balance of payments deficits, a weakening stock market, and the unprecedented low interest rates which would normally precipitate a sell-off in bonds.
A few days ago, on December 19, Alan Greenspan mentioned gold in a speech before the Economic Club of New York. His comments portrayed gold in a light from which our nation’s politicians have shied for over a generation. He began his speech by stating that, "Although the gold standard could hardly be portrayed as having produced a period of price tranquility, it was the case that the price level in 1929 was not much different, on net, from that of 1800. But in the two decades following the abandonment of the gold standard in 1933, the Consumer Price Index in the United States was doubled. And, in the four decades after that, prices quadrupled. Monetary policy, unleashed from the constraint of domestic gold convertibility, had allowed a persistent over-issuance of money".
Greenspan continued by stating that, "But the adverse consequences of excessive money growth for financial stability and economic performance provoked a backlash. Central banks were finally pressed to rein in over-issuance of money even at the cost of considerable economic disruption. By 1979, the need for drastic measures had become painfully evident in the United States. The Federal Reserve under the leadership of Paul Volcker with the support of both the Carter and Reagan Administrations, dramatically slowed the growth of money. Initially, the economy fell into recession and inflation receded. However, most important, when activity staged a vigorous recovery, the progress made in reducing inflation was largely preserved. By the end of the 1980's, the inflation climate was being altered dramatically".
This was the first public statement form a high U.S. political official in decades, that recognizes the importance of gold as a stabilizing force for a monetary system. The fact that Greenspan opened his speech with these words indicates the magnitude of importance that he placed upon the world hearing these words. He chose to begin his comments with this topic. He could have buried it within the text knowing that most people would have been confused, glazed over, and dazzled by his rhetoric by the time that he uttered the statement. He wanted people to hear him!
This is a watershed event! Is Greenspan preparing us for an eventual reentry of gold into our monetary system? He is un-hedged in his comparison between 1800 and 1929 and the 60 years that followed. Under the gold standard prices were stable for 129 years, but rose eight-fold in the 6 decades after the discipline of gold was removed and the gold standard was abandoned. His later statement regarding the effects of the institution of monetary restraint after 1979 is also telling. His comments pertaining to the result that occurred, after the money growth slowed and the initial recession ended and the economy staged a vigorous recovery lead me to believe that he is tacitly recommending this action!
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Disclaimer: FINANCIAL INSIGHTS is written and published by Dr. Richard Appel and is made available to subscribers for informational purposes only. Dr. Appel pledges to disclose if he directly or indirectly has a position in any of the securities mentioned. He will make every effort to obtain information from sources believed to be reliable, but its accuracy and completeness cannot be guaranteed. Dr. Appel encourages your letters, but cannot respond personally. Be assured that all letters will be read and considered for response in future letters. Use of any information or recommendations is at the risk of the reader without responsibility on our part. © 2002 by Dr. Richard S. Appel. All rights are reserved. Parts of this newsletter may be reproduced in context, for inclusion in other publications if the publisher's name and address are also included for credit.