Greenspan, The Objectivist

“An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions,” wrote Ayn Rand’s disciple, Alan Greenspan, long before he became a statist himself.

Expressing himself in the Libertarian rag, The Objectivist, in 1996, the future-most celebrated central banker of all time continued: “They seem to sense – perhaps more clearly and subtly than many consistent defenders of laissez-faire – that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.”

“Gold and Economic Freedom” was Greenspan’s topic in ’66.

“In order to understand the source of their antagonism, it is necessary first to understand the specific role of gold in a free society,” he went on.

“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 or services, and can, therefore, be used as a standard of market value and as a store of value, i.e., 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, i.e., to save, neither long-range planning nor exchange would be possible.”

Then, after a long discussion of how money works, Mr. Greenspan, gave the objectivists the conclusion they wanted to hear. “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.”

We do not quote the Fed chairman at such length to quarrel with him. Au contraire, we found ourselves in agreement with Mr. Greenspan…up until, say, at least 10 years later. In 1974, Alan Greenspan, champion of the gold standard, left New York for Washington. That is, he left America’s heart of commerce take up residence in its gall bladder of politics.

More than that, in a matter of months he abandoned the free-market, gold-standard currents of the East River for the malignant political eddies and festering statist swamps of the Potomac. Why he did so is the subject of today’s letter. Yet even more advice to a young man…is its subtext.

“In 1974, as he [Greenspan] left New York to serve as the chairman of President Ford’s Council of Economic Advisers,” writes James Grant, “Ayn Rand spoke to a reporter from the New York Times. The objectivist philosopher and novelist claimed Greenspan as her disciple, as he claimed her as his teacher. What Rand told the Times was that neither she nor Alan underestimated the difficulty of refashioning the government of the United States on the basis of sound laissez-faire principles. However, she said, he was prepared to be patient.”

Over the next quarter of a century, and you may have observed this yourself, dear reader, the U.S. government has not exactly been refashioned. Instead, it is Mr. Greenspan who has changed his look. The scruffy libertarian has become the dignified head of the world’s most powerful central bank. The gold bug of ’66 remade himself into celebrated custodian of the world’s most- managed currency.

How did it happen? We do not know what conversations took place, in the privacy of his bath, between Greenspan the Libertarian and Greenspan the Statist-in- the-making. But we suspect that the dialogues have been moderated, for the last 36 years, by Greenspan the Objectivist.

“A free society needs the rule of gold,” said Greenspan the Libertarian in ’66.

“But I want to be the most famous and powerful central banker in history,” said the young Greenspan-on-the- make. “And there’s no way I can do that by insisting on the gold standard.”

“Alright,” suggested Greenspan the objectivist, “you have use your power of REASON! To figure our what’s right for you! Looking out for number one is what it is all about. You have to find the rules that work for you. Well, obviously, the rule of gold works for society as a whole, but it doesn’t work for a guy who wants to be a central banker. It won’t take you where you want to go…it would keep you from getting the post and then limit your power if you got it…so it has to go.”

And so it did.

Greenspan not only rejected the rule of gold but became the most inflationary Fed chairman in U.S. history. Though consumer prices did not go up alarmingly, in terms of the amount of new cash and credit made available to the capital markets, the Greenspan Fed has no peer.

But who complained? Savings disappeared. Debts increased. But instead of driving up consumer prices, the Fed’s new money worked its way into prices of stocks and real estate – where it was as welcome as a bottle of scotch in Salt Lake City.

Greenspan became ‘household’ – a name everybody knew. He also became a hero…for it was he who had presided over the biggest boom in U.S. history. Little did people realize that he had done so by breaking a rule that had protected generations of their forebears. Will there be a price to pay, we ask? Will Greenspan eventually get what he deserves, not what he expected?

“In terms of quantity of money and credit creation,” explains Dr. Kurt Richebacher, “the Fed’s easing has been a sweeping success. But in terms of its effects on GDP, national income and the financial markets, it is an outright disaster.”

It takes real brains to make an imbecile of yourself, we note often. On this day, the 23rd of May, 2002, Alan Greenspan is still widely regarded as a genius. If we are right, turning his back on the essential rules of honest money – which he described, himself, in 1966 – will one day catch up with him. And if it doesn’t…it ought to.

Your correspondent, sometimes right, sometimes wrong…and always in doubt…

Bill Bonner
May 24, 2002 — Paris, France

Wow! Gold rose again – $4.50 – taking it to its highest level in 2 and a half years. Two gold funds are the best performing mutual funds so far this year. How long will it be before the trend followers notice the trend?

The gold mining industry is tiny. It’s total capitalization is only about $80 billion – less than that of a single major tech company. And profits in the mining sector are extremely predictable and extremely volatile…when the price of gold rises above the cost of product, gold miners’ profits rise straight up. And when profits rise, P/E ratios fall – making the mining stocks cheaper!

All of which makes for an exciting situation in a real gold bull market. Pretty soon the patsies and yahoos begin to notice. The next thing you know, they’re buying gold mining stocks as they once bought dot.coms – that is, impetuously and recklessly. Even a little bit of this buying sends the stocks flying.

But we’re still a long way from there. The public has not yet caught on to gold, has no fear of falling stock prices, and no clue about he credit bubble or the history of managed currencies. As Eric mentions below, only 1% of mutual fund assets are in gold so far…and some gold stocks are still selling for little more than book value.

And now comes a UN report that Al Qaeda uses gold to protect its finances from tracking and seizures! If we had a conspiratorial bent, we’d worry that central banks might want to take gold out of circulation – not because it limits their power to inflate their money supplies, of course, but because it provides financing for terrorists and money launderers. After all, the Roosevelt Administration did it in the early ’30s….

Central bankers, terrorists, and Mr. Market himself….all are likely to have surprises for us….

Eric, what was Mr. Market up to yesterday?


Eric Fry in New York…

– The rally that can’t possibly happen keeps happening. Gold advanced again yesterday, for the seventh day in a row. Improbably, the increasingly precious metal jumped another $4.50 to $322.80 an ounce. And for you folks who still invest in stocks…the Dow gained 58 points to 10,216, while the Nasdaq popped 24 points to 1,697.

– The stock market may be sluggish these days, but the bars and restaurants in Manhattan seem to be hopping. Yesterday, I strolled past the Bryant Park Cafundefined on 42nd Street and people were lined up for about 100 feet to get into the place. The adjoining bar was packed as well. From the looks of things, consumers are continuing to put the pedal to the metal, consumption-wise.

– The following three headlines appeared in close succession yesterday on “Tommy Hilfiger Trounces Expectations”, “Krispy Kreme Beats Forecast” and “Sales Soar at Nvidia.” Apparently, almost everyone in the country is hanging around the house in their new jeans, eating donuts and playing video games…somehow, consumers keep spending even though businesses aren’t.

– Turning back to gold, how come the price of this stuff keeps going up? Don’t the buyers know that it is “overbought,” according to JP Morgan’s technical research analysts, and that “a substantial correction will soon be inevitable.”

– Apparently, the investors who are buying gold are not privileged to read Morgan’s research. Or maybe they do read it and don’t care, because they are more concerned about the next three years than they are about the next three days.

– Gold has always made its own rules. It soars to $800 per ounce if it feels like it and it takes a nap for 20 years if it feels like it. But after all is said and done, gold tends to hang on to its value better than most of the paper imitations. And that’s probably as good a reason as any to buy the stuff.

– Maybe gold is rallying because the average mutual fund manager – who is holding only about 1% of fund assets in gold mining shares – thinks it’s time to take a more courageous position, like, say, 1.5%.

– Or maybe gold is rallying because the Asian central banks that hold a mere 3% of their assets in gold are starting to think that 4% might be a more prudent allocation. Certainly, no one would blame the banks for lightening up a little on greenbacks. Or maybe (and this is my personal favorite) gold is climbing because all those swashbuckling short-sellers are starting to sweat a bit.

– We don’t know any more or less than JP Morgan’s technical analysts about where gold is heading next. We do know, however, that selling gold short is becoming much less fashionable among gold mining companies. In fact, “de-hedging” is the latest trend.

– This scramble to de-hedge is a source of potent demand that could propel the gold price higher. Earlier this year, for example, South Africa’s Anglogold said it would reduce its hedge book, and the miner is carrying out its promise.

– “We have, since July of 1999, said that we thought gold was oversold and underpriced, and we have been running our hedge down progressively,” Anglogold CEO Bobby Godsell said recently, “In the last quarter, we reduced the hedge by about 1.5 million ounces, about 120 percent of the gold we produced in that quarter. In current market circumstances, we intend to continue to run our hedge down.”

– 1.5 million ounces is no small potatoes. It exceeds Japan’s total gold imports during the first three months of the year. And Japan’s imports are growing by leaps and bounds.

– Clearly, gold and gold stocks are less contrary investment ideas today than they were in March of 2000. Still, it may be a while before investors rush to sell Microsoft in order to buy shares of Newmont Mining.


Back in Paris…

*** Our message boards are jibbing and jiving with comments on the extraordinary pitch from Jay McDaniel that appeared in this space a little more than a week ago. Jay – a nom de plume for the group of researchers over at Pirate Investor – thought they had found a big winner…and offered to reveal the details for $1,000.

*** Here at the Daily Reckoning we’re as inert to this kind of offer as an oak tree is to a jelly sandwich. But we’re not fool enough to pass judgment either. Porter Stansberry’s team at Pirate have had some big winners before. And if he were right – the recommendation would have been worth a lot more than $1,000.

*** Besides, you’ve got to pay the staff somehow. In the interests of full disclosure, at Agora, Inc., the company of which I am founder and president, all of our analysts, gurus, writers and mail-sorters are forbidden from “front-running” investments. We only make money from selling ideas, information, advice and recommendations.

*** Unlike the folks over at Merrill Lynch or Goldman Sachs…we have no investment banking business, we receive no money from any company we recommend, and we can’t even buy the stocks we like in advance of recommending them. Instead, we just try to call them as we see them…each member of the organization with his own views, sources and theories…sometimes right, sometimes wrong…and, at least speaking for us here at the DR, always in doubt.

*** As for the Pirates’ recommendation – it didn’t go up on Tuesday as it was s’posed to. Did the Pirates get the story wrong?

*** We don’t know. But a message today tells me the Russians and the U.S. apparently did come through with an arms agreement, as predicted…in fact, the lead article headline in today’s NYTimes reads “US and Russia Sign Nuclear Weapons Reduction Treaty”…and the Pirates still think the stock is going go up. Investors who took the advice and bought the stock are either up a little, down a little, or about even. The stock itself sounds like a decent one. Beyond that…we’re holding our breath, waiting to find out more…

*** Meanwhile and always…anyone who buys anything through advertisements in the Daily Reckoning should know that he can always get his money back if he is unsatisfied, for any reason, with the quality of the service. We never guarantee that our recommendations, advice or rants will make you money – but we always guarantee that they are, at the very least, honest efforts.

Stay tuned…

*** I went to meet Henry at the Gare de Lyon last night. The 11-year-old went with his class on a religious retreat. Almost the entire train was full of these youngsters…while parents waved and smiled from the platform. It was like greeting a trainload of kids who returned to London after the blitz.

“What did you do for the last 3 days,” I asked Henry.

“We prayed.”