Tuesday, November 4, 2008

If you don't believe me, how about Alan Greenspan?

Long before he became chairman of the Federal Reserve, Alan Greenspan wrote about gold and the need for gold-backed money. You can read his entire essay from 1966 at:


Below is what I think is the key excerpt:

...the opposition to the gold standard in any form-from a growing number of welfare-state advocates-was prompted by a much subtler insight: the realization that the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state). Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.

Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government's promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which-through a complex series of steps-the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy's books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.

This is from Alan Greenspan, people. He gets it. He decided, like many of us, to abandon his ideals so that he could hold the keys to the kingdom. I don't blame him for the current disaster, human nature being what it is. The point is that the "boom times" from 1980-2000 were real only if you managed to save the "paper profits" you booked and turn them into something real. Now that we are in the inevitable "bust" time frame, gold will maintain purchasing power and protect you against the attempted re-inflation of the money supply to "cure" the recession. It's not rocket science, it's common sense.

To keep pace with inflation, you need to be ready to shift between asset classes every 10-20 years or so. Stock are SO OVER for the next decade. If you understand this, it's no big deal. Simply change your investment strategy. "Buy and hold forever" is a TOTAL SCAM invented by the financial industry. It works during 10-20 year bull markets and fails completely during the subsequent 10-20 year bear market. If we started the bust in 2000, we're roughly halfway to the time when a new bull market can occur, but as recent events in the market have shown, the last half is going to be rougher than the first half.

In fact, the excesses of the past boom period were so bad that we may even need a paradigm shift in how we deal with the concept of money. Perhaps a return to the gold standard will occur, despite how crazy that may sound. Certainly, by the time this secular, long-term bear market is over, our ability to print money at will and make the rest of the world accept it at face value will also be over. Those who hold physical gold during this adjustment period as portfolio insurance will maintain wealth and purchasing power no matter what McObama and their pals decide to try next.

Wikinvest Wire