Alan Greenspan: Gold Standard Not Possible In Welfare State

Alan Greenspan: Gold Standard Not Possible In Welfare State
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Alan Greenspan: Price of Gold Will Rise by Axel Merk, Merk Investments

Any doubts about why I own gold as an investment were dispelled last Saturday when I met the maestro himself: former Fed Chair Alan Greenspan. It’s not because Greenspan said he thinks the price of gold will rise – I don’t need his investment advice; it’s that he shed light on how the Fed works in ways no other former Fed Chair has ever dared to articulate. All investors should pay attention to this. Let me explain.

The setting: Greenspan participated on a panel at the New Orleans Investment Conference last Saturday. Below I provide a couple of his quotes and expand on what are the potential implications for investors.

Greenspan: “The Gold standard is not possible in a welfare state”

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The U.S. provides more welfare benefits nowadays than a decade ago, or back when a gold standard was in place. Greenspan did not explicitly say that the U.S. is a welfare state. However, it’s my interpretation that the sort of government he described was building up liabilities – “entitlements” – that can be very expensive. Similar challenges can arise when a lot of money is spent on other programs, such as military expenditures.

It boils down to the problem that a government in debt has an incentive to debase the value of its debt through currency devaluation or otherwise.

As such, it should not be shocking to learn that a gold standard is not compatible with such a world. But during the course of Greenspan’s comments, it became obvious that there was a much more profound implication.

Who finances social programs?

Marc Faber, who was also on the panel, expressed his view, and displeasure, that the Fed has been financing social programs. The comment earned Faber applause from the audience, but Greenspan shrugged off the criticism, saying: “you have it backwards.”

Greenspan argued that it’s the fiscal side that’s to blame. The Fed merely reacts. Doubling down on the notion, when asked how a 25-fold increase in the Consumer Price Index or a 60-fold increase in the price of gold since the inception of the Fed can be considered a success, he said the Fed does what Congress requires of it. He lamented that Fed policies are dictated by culture rather than economics.

So doesn’t this jeopardize the Fed’s independence? Independence of a central bank is important, for example, so that there isn’t reckless financing of government deficits.

Greenspan: “I never said the central bank is independent!”

I could not believe my ears. I have had off the record conversations with Fed officials that have made me realize that they don’t touch upon certain subjects in public debate – not because they are wrong – but because they would push the debate in a direction that would make it more difficult to conduct future policy. But I have never, ever, heard a Fed Chair be so blunt.

The maestro says the Fed merely does what it is mandated to do, merely playing along. If something doesn’t go right, it’s not the Fed’s fault. That credit bubble? Well, that was due to Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) (the government sponsored entities) disobeying some basic principles, not the Fed.

And what about QE? He made the following comments on the subject:

Greenspan: “The Fed’s balance sheet is a pile of tinder, but it hasn’t been lit … inflation will eventually have to rise.”

But fear not because he assured us:

Greenspan: “They (FOMC members) are very smart”

Trouble is, if no one has noticed, central bankers are always the smart ones. But being smart has not stopped them from making bad decisions in the past. Central bankers in the Weimar Republic were the smartest of their time. The Reichsbank members thought printing money to finance a war was ‘exogenous’ to the economy and wouldn’t be inflationary. Luckily we have learned from our mistakes and are so much smarter these days. Except, of course, as Greenspan points out it’s the politics that ultimately dictate what’s going to happen, not the intelligence of central bankers. And even if some concede central bankers may have above average IQs, not everyone is quite so sanguine about politicians.

Now if they are so smart, the following question were warranted and asked:

Q: Why do central banks (still) own gold?

Greenspan: “This is a fascinating question.”

He did not answer the question, but he did point out: “Gold has always been accepted without reference to any other guarantee.”

While Greenspan did not want to comment on current policy, he was willing to give a forecast on the price of gold, at least in a Greenspanesque way.

Greenspan: Price of Gold will rise

Q: “Where will the price of gold be in 5 years?”

Greenspan: “Higher.”

Q: “How much?”

Greenspan: “Measurably.”

When Greenspan was done talking, I gasped for air. I’ve talked to many current and former policy makers. But at best they say monetary policy is more difficult to conduct when fiscal policy is not prudent. It appears Greenspan has resigned himself to the fact that it was his role to facilitate government policies.

The reason this is most relevant is because many politicians think there’s unlimited money to spend. And, of course, if the Fed’s printing press is at the disposal of politicians, the temptation to use it is great. Not only is there the temptation, some politicians truly believe the Fed could and should help out any time. As Greenspan now acknowledges, these politicians have a point.

While we have argued for many years that there might not be such a thing anymore as a safe asset and investors may want to take a diversified approach to something as mundane as cash, Greenspan’s talk adds urgency to this message. The dollar has lost over 95% of its purchasing power in the first 100 years of the Fed’s existence.

We now have a “box of tinder” and an admission that the Fed is merely there to enable the government. We are not trying to scare anyone, but summarize what we heard. My own takeaway from Greenspan’s talk was that anyone who isn’t paranoid isn’t paying attention. Did I mention he said the promises made by the government cannot be kept? Mathematically, he said, it’s impossible.

As part of the panel discussion, the topic of Switzerland’s vote to force its central bank to hold 20% of its reserves in gold came up. We will have an in-depth discussion of this vote in an upcoming Merk Insight (to ensure you don’t miss it, register to receive our free newsletters). Marc Faber spoke from my heart when he argued that the only credible gold standard is one that an individual puts in place for oneself; one should never trust a government to adhere to a gold standard. On that note, please register for our upcoming Webinar on November 20, 2014, where we will discuss how investors can build their personal gold standard.

For more of Greenspan’s comments, please review my tweets at (please follow me to instant analysis of events affecting the dollar, gold and currencies).

Axel Merk

Axel Merk is President & CIO , Merk Investments

Manager of the Merk Funds

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  1. I just wish that the Federal Reserve Bank “printed” money. It doesn’t. It loans money to the United States Treasury which then puts this digital stuff into circulation. Only a very tiny fraction of the money is ever printed or coined. Nearly all of it is carried as a form of debt on the computers owned and operated by banksters. These debts are created out of vacuum. Someone sits down in front of a computer keyboard and makes an entry on a set of digital books and–Whala!–digital money that has no actual existence whatsoever.

    Of course, debt’s must be repaid with interest. This means that all currencies now in use are in a positive feedback loop. They must be generated at an ever increasing rate and an ever increasing volume. The more currency placed in circulation by this idiotic means the more must be paid back to the banks, which means that even more currency must be “generated” and placed into circulation. This system is now slinging itself into pieces, just as an over-revving engine would throw pieces of itself all over everywhere as the strength of its materials give out.

    John M. Keynes once said that in the long run, we are all dead. Well, he’s dead and now we are picking up the pieces of his short-sighted approach to economics. He is not here to suffer pain with us. As far as I am concerned, that is a real shame.

  2. You are all trapped in the Matrix! Please wake up! This credit and debt is a system of control! Look how many of you are adding your two cents. You all sound like arm chair quarterbacks. I like the Broncos! No you are wrong, the Steelers are better!!! THE FACT: Credit, Debt, Currency and the Markets are digital… Sure there are a few billion in real greenbacks floating around but the rest is a stroke of the keyboard. As simply as it was created, it can be deleted! … (I didn’t mention gold.. well there is more paper gold than will ever be real gold and I think the paper gold is the price control not the real value)

  3. Tarp money was a drop in the bucket. The ability to go to the discount window, the forgiveness of bad loans and collecting from the government on loans that were not insured but became insured by the government. We didn’t have trillions of dollars of debt added on just because of the recession, although that was caused by bank recklessness. How much do that banks owe back for causing a credit crisis? What dollar amount is that worth? Trillions upon trillions.

  4. I said the long view, meaning decades, 50 years, the 21st century.

    I have lived and worked in Asia for 35 years and can tell you the same trends and problems are well in place here. One of the forces behind the current demonstrations here in Hong Kong is that young people can’t find jobs and can see that is only going to get worse. The rest of China is the same, there are nowhere near enough jobs to employ the millions of university graduates being generated each year, and again it is only getting worse as more and more manufacturing leaves China seek cheaper sources.

    The forces of globalization and technology are non-political, and unstoppable. For the rest of this century you will need fewer and fewer people to generate the world’s goods and services, and the more advanced the society the bigger the problem will be. What are all the rest of the people going to do? Big change is coming. The people born today will die in a very different world.

  5. Expansion of goods and services depend on how much money is in float. If there is no money to buy the services then growth is dwarfed.

  6. I sell my Gold when Debt to GDP is at 150% (including gov and private debt) and when stock market to GDP is under 75%. The GDP has to triple in nominal dollars (inflated currency) in order to get there. At that point everyone will want Gold and nobody will want debt or stocks, that is when you will need to be in stocks and bonds…

  7. Yes basically correct, Henry Thornton in his books 1801 and 1810 calls that defalcation of the laboring and saving classes. That is temporary good for business but only temporarily. It is a wealth transfer… the mechanics are detailed by Thornton.

  8. Excessively lose monetary policy would increase internal price and penalize terms of trade. 1810 Henry Thornton. Classical economics is invaluable…

  9. Growth is the expansion of good and services, money, credit and currency are a mean of circulation. The creation of wealth is by expanding the amount of goods and services, it requires innovation primarily. The medium of circulation is just that: a mean of circulation. When prices fall, it benefits creditors and savers, when price rise it benefits debtors and indebted governements (because of add valorem taxes).

  10. Globalization and technology is creating tons of jobs in Asia and Germany still has tons of manufacturing jobs…. try another theory. I suggest Henry Thornton in 1810 who explains why excessively easy monetary policy destroys terms of trade….

  11. Gold is not an investment, it is a commodity, a store of value and a present good. Stocks and bonds are not investments they are financial assets or claims in the future on corporations or on consumption (MBS or Auto loans). Consumption financial assets have nothing to do with investments. Investment is the actual act of putting money to build a plant, spend money on R&D, build some inventory for your business ect…. The West has too many financial assets (claims) and not enough investment (capex).

  12. You obviously ignore that debt + Equities are at a all time high in relation to GDP (circulation of goods and services). Debt and Equities are bought today against the promises of cash flows in the future. The problem is that the GDP today is ridiculously small in relation to promises on future GDP (Equities + Debt)… compute… compute… compute…. ahah! Ratio Promises/ GDP is too high. You can wack the numerator (debt and equities , i.e. Cyprus) or you can push up the denominator in nominal terms (inflation). All governments who can print prefer option #2. The price of Godl is a direct function of how much you need to push up the denominator to restore the debt to GDP ratio… Now the components of the GDP (goods and services) are called present goods and have immediate consumption value, they do not depend on a stream of future cash flows like Financial assets. Buy the present goods (wheat, cigarettes packs, anything which is storable, but Gold and Silver are evidently a better option than storing grains and other present goods). In the ratio the undervalued part is the promises, it is the GDP (present goods).

  13. “Any doubts about why I own gold as an investment were dispelled last
    Saturday when I met the maestro himself: former Fed Chair Alan

    In other words, it takes just a few words, not research, to determine if owning gold is worthwhile? What a brilliant thing on which to base an article! And this is the same Greenspan who stabbed CFTC Chair Brookleys Born in the back in the late 90’s when Born foresaw what was going to happen with risky derivatives in 2008.

    Of course, maybe the purpose of this article isn’t about “determining” gold’s worth, maybe it’s about making gold look worthy! This is the kind of article we often saw in the early 80’s when people selling gold tried to pump the price up: distract the reader from the reality of what’s happening to gold by attracting attention to something marginally related – like Greenspan.

    If you bought an ounce of gold for $615 in 1981 it would be worth $1199.80 right now.
    If you bought $615 worth of an S&P 500 Index Fund in 1981 it would be worth over $10,000 right now.

    Gold is in the same situation right now as in 1981: a recent long-term economic turmoil with signs of good economic growth.

  14. Gold costs $1200/oz and it might skyrocket to $1500 when all is said and done.


    (a) If ANY investments are going up, is an investment that takes several years to rise by 25% a big deal?

    (b) If NO investments are going up, then why would the major gold buyers like China want to spend money on metal when they’re dealing with a depression?

  15. Greenspan the cold blooded bureaucrat who exported millions of American job to China in the name of his imagined inflation. He should move to Israel and nurture and love his beloved gold.

  16. Patience, child, patience! Be wise and use the time to protect yourself.
    The time is close when acquiring protection will no longer be an option.

  17. Just in case anyone has forgotten, Greenspan is one of the biggest criminals EVER! In fact, being a criminal is a prerequisite to being any high-ranking FED official. Bernanke. Greenspan and now Yellen should NOT escape from a life-long prison cell. They have destroyed (and ARE destroying) the lives of millions of people just so that they and their cronies can buy a bigger yacht, Lear jet and mansion.

  18. Taking the long view, globalization and technology have been and will
    continue to destroy tens/hundreds of millions of jobs, in America and
    elsewhere. Not everything is someone’s fault, sometimes it’s just the
    forces of history at work. Add to that the destruction of the
    environment by so many billions living better and better lives, and
    capitalism will have to evolve into something else, likely with a lot
    more sharing, as painful as that could be. Could be a violent
    transition, though.

  19. First, how can Alan Greenspan be considered serious. Second, the fed used to buy $75 dollars worth of bonds a month, due to his massive failure, so yeah “gold standard not possible in welfare state” the correction should be corporate welfare state.

    Besides, only lunatics like him want to go back to a gold standard, given that it only limits growth.

  20. It boils down to the problem that a government in debt has an incentive to debase the value of its debt through currency devaluation or otherwise…INFLATION good for the government and the banks making it OK to refinance with worthless new money. But the citizen tax payer and consumer gets screwed.

  21. “The Fed has been financing social programs” Is this a serious statement? It is more like the Fed has been financing the rich who are the ones who have primarily benefitted from Fed’s policies.

  22. While some corporations do get preferential tax treatments

    Except that not taking as much as some people would like is NOT the same as giving them something. You can’t “giving” someone something that is already theirs. These ignoramuses try to make an appeal to emotion by trying make it sound like businesses are being “given” something when they are in fact the ones doing the giving. They call “not taking as much as I think should be taken from them” welfare to make it sound like they’re being given something that isn’t already theirs to begin with.

    I don’t mind debate how much they ought to be taxed, what is disgusting is the blatant disingenuousness (aka lies) in their trying to make sound like something it simply is not. There is no debate with someone who can’t even talk about it without lying about it.

    As for subsidies, while that is at least actually giving something – well that’s still not welfare as it is (at least ostensibly) to promote some activity or behavior in promotion of some government agenda. Like giving subsidies for green energy efforts. That is, DO something for our agenda, and we’ll give you money for that. Unlike welfare that is just throwing out money with no expectations, demands, strings or accountability.

    So for those calling for ending subsidies – does that include ending subsidies for agendas you agree with or just the ones that are not on the list of ideologically approved agendas? Myself I’m for eliminating ALL subsidies regardless the agenda being promoted by them.

  23. I’m not sure how you think paying millions and billions in taxes is somehow “welfare”. They aren’t taking welfare, they’re the ones paying for yourwelfare.

  24. Nice thing about physical gold in your possession is that it has no account number on it, unlike a numbered account where banks can count it as an asset to make loans on it and report it to the politicians who will drool over it, and scheme of ways to promise it to buy votes.

  25. Our standard of living is declining because Americans willfully choose to spend every dime they earn during their working lifetimes only to find themselves lining up at government sponsored middle class welfare entitlement programs. Government deludes you into believing you paid for the benefits you receive which you have not paid anywhere near the benefits received and deficits go up as government continues to fund these false delusions.
    You want a higher standard of living? Work/save/invest and then instead of lining up at middle class welfare entitlement windows like social security and medicare take charge of your own life with what you have earned for yourself; not what your government hands out to you.

  26. I was middle class and am certainly not stupid. My personal philosophy in regards to the economic climate is : I refuse to participate. I am returning to middle class and the competition be dammed. But, anyone on the lower tiers who has not invested substantially in grain, sugar, socks, cases of toilet paper and tampons and every other product used on a daily basis is going to be in the same boat as the rich people who will, once again, lose their wealth.

    Banking cash in the form of household commodities serves in multiple ways. Most importantly, food will be available for table, the bottom will get wiped, and the toes will be warm. Secondly, household commodities are hard to spend on Saturday night out.

    Gold? What will holders of gold do with it? They will have to carry around a triple beam scale and shave off what the BMW dealer wants. Will the gardener know how many grams to charge?

    Does anyone who “owns” gold actually posses it, or is it something along the line of how Milo Minderbender passed out shares of the company that everyone owned?


  28. Greenspan is a fraud and is a small reason for the slow decline of the usa. The Federal reserve is a. illegal. b. not federal. c. Has a reserve of…NOTHING! The name is total BS

  29. only a portion of Glass Steagal was repealed. It was not the cause of the market crash from mortgage derivatives. The investment banks are the poster child of the excesses, but it was the deregulation of lending standards and policies that were put in place by the CRA that forced punitive measures on banks that didn’t offer subprime loans. Fannie and Freddie are the creators of the mortgage derivatives who then sold them to the banks. It’s ironic that deregulation created by Dems lead to this.

    Here’s some background on Glass Steagal, it’s a red herring to the market meltdown in 2008

  30. It’s more complex then that. While some corporations do get preferential tax treatments or subsidies, corporations are also the ones that send the tax money to the government in the first place; as well as private citizens. Corporations fund the government, and the US has among the highest taxes for corporations

  31. Right on the money, except the fact that corporate America is 90% of the welfare state. That is not fully brought out in the article.

  32. I worked as a mortgage broker from 1995-2005 and it was ridiculous. I had friends in about 15 different states writing loans and we used to call each other and laugh about the applications that the sub-prime lenders were approving.

    Ultimately the changes in the capital gains rates in TRA97 set off the housing bubble.

  33. “He lamented that Fed policies are dictated by culture rather than economics.” I’d like to have the wording to quote that elsewhere. If the big boys, and girls er, chairs at the Fed start being openly honest they will be in trouble.

  34. Greenspan promoted regulation free banking, claiming that the bankers own self interest would motivate them to manage financial institutions responsibly. He either forgot about the Great Depression, or he was eager to pander to banking executives. His betrayal of basic principles of modern financial principles is a good example of why Fed chairpersons should not be appointed to a second term. The Fed has become politicized, and it is bad for the country.

  35. Whats more expensive are the countless corporate tax loopholes nowhere to be mentioned in this article. Sure, welfare programs are not cheap. But its a drop in the bucket in comparison.

    That credit bubble? Well, that was due to Fannie Mae / Federal National
    Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan
    Mortgage Corp (OTCBB:FMCC) (the government sponsored entities)
    disobeying some basic principles, not the Fed., its the repeal of glass steagal and banks robo signing what people couldnt afford and then further bundling the debt into derivatives. But yeah, blame people and fannie mae for giving them mortgages. None of the commercial banks were unaffected and their pristine lending never contributed towards anything ever…

  36. It was not the decision of the Reichsbank to print money in 1921-23. It arose out of the fact of French occupation of the Ruhr and the mass strike by German workers who had to be paid or be forced back to work by the French. This is only one of many errors in this piece of nonsense.

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