I am currently reading Bill Bonner’s Financial Reckoning Day. I just received it two days ago, am almost finished and can’t wait to start over again. Bill Bonner is a contrarian (a contrarian believes that money in Wall Street is not made by following the crowd). He is the publisher and CEO of The Daily Reckoning, a free email newsletter that should be in everyone’s inbox. On page 137 of his new novel, I found this little tidbit, quoting Alan Greenspan:
by Terry DeVries
“Money is the common denominator of all economic transactions. It is that commodity which serves as a medium of exchange, is universally acceptable to all participants in an exchange economy as payment for their goods and services, and can, therefore, be used as a standard of market value and as a store of value, that is, as a means of saving.
The existence of such a commodity is a precondition of a division of labor economy. If men did not have some commodity of objective value which was generally acceptable as money, they would have to resort to primitive barter or be forced to live on self-sufficient farms and forgo the inestimable advantages of specialization. If men had no means to store value, that is, to save, neither long-range planning nor exchange would be possible.
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.”
Whatever happened to that Alan Greenspan? I guess, as Bonner pointed out, “to get along [in Washington], you go along.”
And go along he did. It is interesting to see how people change and gradually begin to rationalize their changes. 1996 was the period of Greenspan’s irrational exuberance speech, where he acknowledged in FOMC minutes that he recognized that the Dow was in a bubble. In 1996, The Dow stood at 6000. With Dow at 11,700 all was well with the Chairman, insofar as he testified before congress that he was unable to recognize a bubble and was helpless to do anything about it regardless. One can only react afterwards to mitigate the damage — the reader should recognize this immediately as “The Greenspan Put”. He will protect inflated prices the only way he knows how. Cut rates and print money. After all, Milton Friedman criticized the government for being too tight after 1929, thus exacerbating the stock market bust and deepening the depression. The bust was certainly not to be blamed on excessive credit and speculation of the roaring 20’s.
And react he did, with credit. The most basic premise is that credit is inflationary. Excess money will find a home and drive up the price of something. Credit leads to over-investment or malinvestment, mal from French derivation “bad” or “sick” … and the excesses will be corrected in free markets. Credit was responsible for the stock market bubble; it is now responsible for the housing bubble and for Chinese over-investments. Greenspan can delay the correction through “accommodative policy,” but the market will remove the excesses in time. Excessive monetary stimulation, according to Austrian economics, will only deepen and prolong the eventual correction.
The world is unbalanced. We are in a worse position, by far, than we were in 2000. Fiscal and monetary policy is tapped. America is running unsustainable deficits with the rest of the world (Asia). China cannot continue indefinitely to fund American buying of their products, anymore than Americans can borrow indefinitely. In this “New Era” that economists speak of, global trade is going to collapse. That it will break down and bust is foreseeable. When it does so, is not.
Terry DeVries is a full-service broker with Friedberg Mercantile Group and writes a free regular market commentary. He may be reached at tdevries@friedberg.ca.
