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<THE STATEMENTS OF GREENSPAN AND BERNANKE CONSTITUTE A WATERSHED EVENT
By Dr. Richard S. Appel
Dec 23 2002
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.
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