By Mike Fuljenz –
My friend Gary Alexander interviewed former Federal Reserve Chairman Alan Greenspan at the recent New Orleans Investment Conference followed by a panel with Greenspan and others. In his closing question during the first one-on-one interview, Gary asked Mr. Greenspan where the price of gold would be a year from now. Greenspan’s answer, which was somewhat evasive, was, “I can’t say about one year, but five years from now it will be higher.” When probed about a specific number, he said he was skilled in making obscure predictions so he said gold would be “measurably” higher. However, when asked where interest rates will be five years from now, his adjective was stronger. He said interest rates will be “considerably higher.” That’s particularly important since he also believes that inflation is now like a pile of “kindling” awaiting a match.
Turning to inflation, Gary quoted from his 2007 book “Age of Turbulence,” in which Greenspan predicted that if the Fed wanted to keep inflation under 2% they “would have to temporarily drive up interest rates into the double digit range.” That didn’t happen. After the crisis of 2008, the Fed kept short-term rates super-low (zero to 0.25%) and CPI inflation has remained low, too.
Greenspan answered by saying that the $3.3 trillion in “quantitative easing” since 2008 has not been in circulation. The banks are holding onto the bulk of these dollars, earning 0.25%. Since banks think business loans are too risky, they’re holding tightly to this cash. But then Greenspan said, “We have this huge potential of an inflationary explosion kindling, but it has not been lit. … Ultimately, inflation will eventually rise. It has to rise, and I say that in my most recent book.”
That’s pretty dramatic testimony from a man noted for his “obscure” answers. Also, earlier in the interview, Mr. Greenspan gave Gary two interesting insights on the history of U.S. Gold holdings, one from his days as Chairman of the Council of Economic Advisors (1974-77) under President Gerald Ford and again under President Clinton, when central banks were selling gold.
In the first instance, he said, “There was a big debate during Gerald Ford’s administration about whether to sell ALL of the U.S. gold. In 1976, Treasury Secretary William Simon and Fed Chairman Arthur Burns met with me and President Gerald Ford to discuss Simon’s plan to sell off all 275 million ounces of gold and invest the proceeds in interest-bearing assets. Simon (with help from Milton Friedman) said gold serves no useful monetary purpose, but Burns and I carried the day with the argument that gold is a necessary ultimate crisis backstop to the dollar.”
That was a great call by Greenspan, since gold bottomed out at $104 per ounce in September 1976. If the U.S. had sold all its gold at those prices, it’s likely that our deficits would be much higher now. As for the 1990s, he said, “Other central banks were public sellers of gold in that era, and there was an agreement between those central bankers to set a limit on the amount of gold sold per year, to prevent a collapse in the price, but the United States abstained. We did not take part in those gold sales.” Then, he said, central banks started buying gold in 2010: “Nearly all central banks hold some gold. If gold is irrelevant, why would they be buying it? If gold is a ‘barbarous relic’ (Keynes’ term) and it earns no interest, why do so many central banks own it?”
His answer to his own question was this: “Gold is a currency. Gold, and to a lesser extent, silver are the only major currencies with intrinsic value, meaning that you don’t need a third party to authorize or guarantee its value. There is no logical reason why gold mesmerizes the human soul, but as far back in history as you care to look, gold has always been accepted without reference to any other guarantee. For example, Germany could not import any goods as World War II was winding down unless the Germans paid in gold. My suspicion is that China now wants to convert a good share of its $4 trillion in foreign exchange from dollars into gold.”
Those were some of the most bullish views on gold presented at the 2014 New Orleans conference. Back in the 1960s, Greenspan wrote a pro-gold position paper for Ayn Rand’s Objectivist organization. In the interview, he said he still believes what he wrote then, and that he never compromised on his views, but he had to abandon his gold standard battle for political reasons: “The problem is that, as you begin to expand the welfare state, it becomes impossible to fund payments out of gold-backed currency. Ideas matter, not economics. Values, culture, ideas and philosophy determine what economic policies are all about, and we have gravitated toward a culture of larger government,” even though “Reagan and Thatcher tried to change that culture.”