Greenspan's Big Blunders:
GREENSPAN'S BIG BLUNDERS
A] DOW JONES
Icarus burning its wings? How high can it fly? Precariously high! This is not the flight of the bumble-bee, rising to the level of the nectar, then safely touching base, a job well done.
Markets, so people, do not like to be reminded of losses – severe losses. The brain blots it out. That's good in the case of tragic human losses with Time to heal. Catastrophic financial losses may be entirely destructive, even of a permanent nature.
A1 Volatility and Prospects
The NYSE has reflected a very shaky pattern. On 19 October 1987 the Dow lost $500 billion. Then, after a rebound to drop back to 7600 in September 1989. On 6 December 1996 Alan Greenspan, Chairman of the Federal Reserve Board, Washington, uttered his by now famous warning of the markets having reached 'irrational exuberance'. Share prices fell sharply but then to continue the rising trend to 10700 subsequently to fall 2.2% to 10466 on 27 May 1999.
At the time of writing – mid-June – the 'yo-yo pattern' is gradually turning into a 'drunken M-pattern', which is ominous considering the forthcoming summer holidays in the Western world.
A2 Precarious position
Well, after the meltdown of the emerging markets and corresponding huge capital flight into the American Dollar and NYSE in October 1997, there should not have been any reason for the Fed to reduce the US interest rates by ¾% during October 1998, unless the Fed, taking everyone by surprise, had great anxiety about a market development, ie. short gold sales which has placed the Fed in a very precarious position – Greenspan even more, as can be gleaned under the sub-heading, Gold, The lowering of the interest rates in October 1998 was not only engineered to accommodate the banking sector, but foremost to facilitate additional huge lendings to a number of hedge funds which stood at a point of collapse.
Immediately the easing of the interest rates started fuelling the NYSE, rapidly reducing the yields to the very minimum, depleting retirement funds and nudging US citizens to move their savings onto the stock exchange as well as revelling in a spending spree. Large mergers took place pointing at conglomerates consolidating their position ahead of future dire circumstances. In all, the writing was on the wall.
A3 First Big Blunder
Greenspan's first big blunder was not to turn his earlier warning into deeds and rectify the position by raising the interest pattern to a safer level. His reasons were probably varied. Were the hedge funds not yet in the clear? Would a substantial drop on the Dow shock the nation too much? Let the Dow blossom during Clinton's sordid trial? Or let things run during his – Greenspan's – last 18 months in office, Clinton's as well?
Given the important role of the US Dollar, also performing the task of Reserve Currency (a daunting one), it is a grave matter that the Fed, the largest and most important Central Bank in the world, did not act in a prudent and responsible way.
B] US DOLLAR
Throughout the ages mankind has been seeking power by force, domination and/or financial influence. The turn of the USA commenced at Bretton Woods in 1944, whereafter they did well. Quite rightly so. It is, however, unfortunate that in these much faster-moving times and communication, the power of the US Dollar is now already about to decline after a mere 56 years in contrast to the much slower-moving periods of time when former world powers were wielding their domination for much longer periods.
B1 Greed
In pursuance of an ever-growing demand for higher turnovers, larger profits, wider markets, the financial sectors in particular have been most inventive in creating additional derivative markets, paper on paper, extending these way beyond their fundamental values and delivery. These derivatives have as such provided the additional resources on the one hand, but inflicted a severe virus onto the financial systems in the form of a hidden inflation factor.
B2 Intervention
Incumbent on the task of a Central Banker is to intervene in the markets where basic fundamentals have been exerted or common ratios have simply been ignored. By not acting, was Greenspan's second big blunder. Huge short positions were not foiled but, in actual fact, encouraged. Aiding the financial markets with cheap finance, colossal short positions in emerging markets and currencies produced excessive profits and meltdown of many smaller economies in the much advocated free global village. Whilst imposing stringent conditions to IMF bail-outs, former hostile powers and basic commodity producing economies, ie Japan and respectively Russia, Indonesia and South Africa, were decimated, benefiting the USA. All is fair in love and war!
B3 Deficits
The magnitude of the Dollar strength provided the US with huge capital resources and a boost to the expansion of foremost the US electronic industry. Borrowings now total $6 trillion, of which $2 trillion mostly short-term hot money owned by foreign parties, the very danger of a Reserve Currency. Still running short of funds in putting out fires the printing machine was in full swing. NAB (New Arrangements to Borrow) joined the ranks of the SDR and CCL (Contingency Credit Lines) – a new invention of the IMF, dictated by Washington.
A turn of events in sustaining the strong position of the US Dollar seems to be close. Doubling of the oil price, imminent fall of the NYSE, cautious revival of the emerging markets as well as Japan, the desperate efforts to destroy the world's confidence in Gold, this disciplinary numeraire for the past 6000 years in which shadow the short-lived paper Dollar pales into oblivion.
B4 Prophet
Though Alan Greenspan could be hailed as the 'Dollar Prophet', having brought the US so much prosperity on borrowed money, the sudden departure of his 'High Priest', Robert Rubin, however, speaks volumes, leaving Greenspan riding the tiger he cannot dismount.
Whilst the financial world, and in particular Europe, were keen to look at new approaches towards a transition of the IMF format in assisting the rest of the world more adequately, it was Bob Rubin who preferred to solve case by case, which he did well, realising that new IMF features would inevitably clash with Greenspan's creative bookkeeping.
C] GOLD
When originally appointed as a Director on the Board of the Federal Reserve, Alan Greenspan was known to be a Goldbug. The same accounts for Robert Rubin, when as President of Goldman Sachs, these investment Bankers published four bullish reports on Gold during 1993 and1994.
Being appointed to the position of Chairman of the Federal Reserve Board or Secretary of the US Treasury, one will uphold the finest principles and commence with upright and inspiring qualities.
Greenspan was the first victim when taking over from Paul Volcker in the early eighties when he had to combat a weak Dollar and high rates of interest. In watering down the wine, gone were the noble intentions. The danger of not being able to uphold the strength of the Dollar against gold and knowing to have been sucked into the printing machine, it is recorded that in his testimony before the House Banking Committee on 30 July 1998, he declared that 'if he had to downplay the risk that some derivative forward contracts might force short sales, he would do so.' He already knew then, of course, to have engaged himself in such deplorable schemes with a number of hedge funds directly or indirectly through nominees.
C1 Caught redhanded
By the end of September 1998 Greenspan was caught with blood on his hands when one of the 4,000 hedge funds, mediocre Long Term Capital Management (LTCM) was about to go bankrupt in running short 13 million ounces of gold, having misjudged its price resistance at $294 as against the anticipated bearer price of $270. In carrying a debt load 100 times as great as its net assets, Greenspan rushed to its aid by twisting the arm of 16 large banks in providing $3.5 billion rescue package. It is easy to work out that the Fed, in order to depress the gold price at $300 less 10% equals $270, corresponding to 5% times the Fed's gold holding of 261 million ounces equals 13 million ounces, times $270 totals $3.5 billion, represented the Fed's bearer transaction with LTCM in line with the policy statement made by Greenspan on 30 July 1998.
It demonstrates that the Fed had no scruples to engage itself in such large bearer transaction with the undercapitalised LTCM, an outright risky deal which should not have been entertained by a Central Bank at all. A most deceptive leasing transaction, unworthy in the books of any banker, certainly a Central Bank looked upon to protect the reserves of the nation. In the process the Union Bank of Switzerland lost $700 million, and fired its President, Cabiollovetta.
It is pretty obvious that the Fed, in having arranged such a lifeboat for the LTCM, guarantees must have been given to the 16 large banks and other hedge funds engaged in gold-bearer sales to make good the large R3.5 billion assistance by providing more large bearer gold lease contracts to depress the price further, and compensate those 16 banks whilst facilitating other hedge funds in their bearer gold transactions.
It is clear that this bearer policy over and above the large amount of ordinary forward sales contracts exacerbated entirely the actual market shortage of some 1,700 tonnes, i.e. demand of 4,200 tonnes, minus supply of 2,500 tonnes.
Under the so-called motto of wishing to see the gold holdings of Central Banks privatized, it is amazing that the Fed succeeded in bringing about such pressure on other large gold-holding Central Banks to give strong indications as to their intended gold sales. The Swiss, already under duress concerning the contributions to the holocaust victims, besides being pushed by Paul Volcker, their so-called adviser, to sell 1,300 tonnes over 10 years, the IMF to sell 310 tonnes – 10 million ounces – the Bank of England to sell 410 tonnes, so in total 2,020 tonnes exceeding the above market shortfall of 1,700 tonnes. Quad erat demonstrandum! Future market intentions again outweighing the true spot position.
C2 Anomaly
The anomaly comes into play when the Fed, possessive of 261 million ounces of gold – 8,118 tonnes – valued at $42.22 per oz aggregating $11 billion, the largest gold-holding in the world, is pushing the privatization of other gold holdings to no end whilst no sales are contemplated from its own gold reserves!
D] DANGER
Unnatural market conditions are always bound to fail. Hence extremists' actions will always create reactions. Same with forced gold sales. Forward sale contracts will dry up, spot gold deliveries held back, and even gold mines be closed down. Production loans will falter.
Under these circumstances low prices will induce the Asian bloc to come in as purchasers in particular when the NYSE will lose its momentum and reflect a strong downtrend striking the dollar and set off large capital outflows to safer places, even into the Euro – the next Reserve Currency – at the expense of a somewhat lower but safer return.
The undercapitalised hedge funds presently engaged in a second gold bearer run as well as speculative reported Yen positions versus US Treasury Bonds, will get themselves into deeper trouble. The weaker ones will not be able to push forward the delivery dates of gold-bearer sales indefinitely, due to the market resistance enumerated above. Already the Bank of England has now indicated to fix a floor price for its intended gold sales!
When markets are falling, hedge funds are failing and lenders are running, then Greenspan will have no choice but to try and avoid a complete collapse of the economic system as forecast by Kondratiev 100 years ago.
E] CONCLUSION
To extricate the world from this inverted paper pyramid, a turnaround of the gold-bearer sales would remedy the position with a revaluation of gold holdings to the level of $440 - $500 for a start.
It may well be that then Greenspan's largest blunder will surface by not having declared the true position of the nation's gold reserves, having undermined its strength by huge lease contracts to mediocre and undercapitalised hedge funds directly or indirectly through nominees.
It is truly hoped that other details of the Fed's position are in order like its total gold holdings spread over various branch offices of the Fed located in different cities. It is recalled that the French, maintaining that never a simultaneous audit had been conducted as to the Fed's total gold holdings, forced the US to pay its debts in goldbars until Nixon slammed the deliveries shut in 1971.
Let us pray that the US and the financial world powers will come to their senses and that we all are not falling prey to a card-house financial religion.
Senior International Banker
July 1999
Due to the controversial and sensitive nature of this report, we cannot divulge the author's name, since his position as an international banker might be compromised. Nonetheless, all commentaries sent to GOLD-EAGLE will be forwarded to the him.
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