Friday, January 16, 2004

Alan Greenspan, Evil Mastermind?

Here's a bit of a guest column, Hank's response to the email with the review of Financial Reckoning Day, posted yesterday:

Just thought I'd give an update on my economy watching (and throw in an opinion about Alan Greenspan).

My crackpot theory about Alan Greenspan is that he is doing all of this quite deliberately. I think that he realized twenty years ago that the American financial situation was already intractable. He wanted to put the world back onto a sound financial footing, but realized that this could not be done without ruining the American economy. He realized, in a very Machiavelian turn of mind, that the extreme exploitation of the existing system, which he thoroughly despised, could simultaneously make America tremendously wealthy and precipitate a financial collapse that would stand in perpetuity as a warning against the excesses of fiat money. Thus Greenspan's primary virtue would be his ability to dramatize. He has convinced the American people that the final boom of the twentieth century was real; and he has convinced the IMF and the world's central banks that he is working to protect their interests, while quite obviously working to the contrary.

Thus we get to the point that we are at today. The world's central bankers have finally begun to put the question to the U.S.: "What the hell do you think you're doing?" On the surface they seem stern, but deep down they're terrified that they might already know the answer. The European Central Bank has finally expressed concern about the declining dollar. This expression of concern indicates a likelihood that the ECB will take action against the plummeting dollar, such as lowering European interest rates (already at the lowest rate since immediately after WWII: 2%). Of course this lowering of interest rates would not stop the dollar's actual fall, but merely pressure the Euro to fall with it.

While the ECB and the BoJ (which, having already established zero interest rates, must exchange Yen for Dollars in massive quantities [the cap on borrowing for this purpose has been increased dramatically for the coming year] in order to pull off their own intervention) scream for the U.S. to normalize its finances, and former treasury secretaries Paul O'Neil and Robert Rubin openly criticize our current economic policies, Greenspan and the current administration continue to laugh off their concern. Their levity is understandable. The White House can laugh because they're insulated enough to ignore the criticism, ignorant enough to fail to understand it if they listened, savvy enough to realize that responding to the criticism would be politically untenable even if they understood it, and wealthy enough to not suffer even if the criticism proves correct. Greenspan can laugh because he knows that Europe, Japan, and China are foolish enough to give us everything they own (via the mechanism of their "export driven economies") in a vain attempt to prevent the U.S. from defaulting on the debt (via inflation, a mechanism that prevents them from ever laying claim to the goods we bought from them with their own money, for technically we will pay the debts, with extremely debased money) which constitutes the entirety of their savings. The inconceivable response of these foreign powers to our debonair fiscal policy is to accelerate their lending.

Hence we see the wisdom of Greenspan's approach. Terminating this cycle would be a painful and shocking process, nothing is more onerous to the politician. As the status quo makes Americans more wealthy there is no reason for our politicians to bear the terrible burden of ending it. Instead we will simply exploit our position to the fullest until the time that foreign pols are able to overcome their shortsighted constituents and bring about the correction that would put them back on an even footing with the U.S. The only potential downside to this strategy is that after the system collapses America's credit with the world will be ruined; but by then there will be nothing left for us to borrow anyway, as they will have already given it all to us. The only alternative is to pay the debt off legitimately; this policy would be ruinous.

Anyway, the recent show of concern by the ECB with regard to the dollar's decline has brought that decline to a halt. The anticipation of European action has induced hesitation as to the Euro's future prospects. Currency speculators who had invested their money in gold as a hedge against the declining dollar have pulled out en mass bringing about a 15$ decline in the last two days. Of course this statement by the ECB changes U.S. economic prospects not at all. The dollar's decline against the Euro may slow but this does not mean that the dollar is strengthening, it simply indicates that the only major currency that had remained aloof from the devaluation has decided to participate. After all, the dollar isn't falling because the European interest rate is too high, but rather because the U.S. interest rate is to low. The result of any change in ECB monetary policy will merely be competitive currency devaluations, an environment that would enhance the value of holding
gold. Thus I would say that this current decline in gold should be a good buying opportunity (which should prove serendipitous for mom).

My mom mentioned in the email regarding the article, that she may start to take some action on Henry's gold buying advice..

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