Former Federal Reserve Chair Alan Greenspan made some very interesting comments this week following a speech to the Council on Foreign Relations (CFR). Greenspan, who was the instigator of many bubbles throughout his tenure, touched upon a variety of central bank and market-related topics, according to the Wall Street Journal.
Federal Reserve ends QE?
Fed Chair Janet Yellen announced that the United States central bank has exited from the market as the third round of quantitative easing has come to an end. This means the Fed, which currently has more than $4 trillion on its balance sheet, will no longer be purchasing Treasury securities and bonds each month.
Although some market experts championed the Fed and lauded its monetary action, Greenspan took a (surprisingly) different approach. He stated that he doesn’t think it’s possible for the Fed to end its cheap and easy money policies because the markets tend to react irrationally and unpredictably to adjustments in central bank policy.
This isn’t entirely difficult to surmise because the markets have already reacted in a rollercoaster demeanor with certain elements dropping and then gaining those losses back. The Fed’s slow exit could create immense volatility moving forward and perhaps great losses.
Interest rate hikes coming soon…
Polls show that most economists are in agreement that the Fed will raise interest rates by the middle of next year, something that they’ve been saying for years now. Even if the Fed does hike rates, Greenspan believes that the same type of reaction would be likely because, again, it’s a change in central bank policies.
Here is an excerpt from the WSJ‘s article:
“He said the Fed may not even have that much power over the timing of interest-rate increases. The problem as he sees it is an interest rate the Fed pays on the money banks park at the central bank, called reserves. Fed officials plan to use this tool as their primary lever for raising interest rates when the time comes. If bankers decide to put this money to work, creating inflation risks, the Fed may be forced to raise rates, even if the economy isn’t ready for it, he warned.”
In other words, the Fed can’t control how the market would react to a boost in rates. The result would likely be a substantial spike in price inflation.
Gold is the answer
Greenspan, who was a former advocate of gold prior to entering the Temple, suggested that investors purchase the yellow metal because of its value outside of the realm of current monetary policy.
This is what Greenspan wrote in Ayn Rand’s “Objectivist” newsletter in 1966 and later republished in her 1967 book “Capitalism: An Unknown Ideal”:
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.
Gold has been trading modestly this year as it started off strong but has slowly fizzled out. The price is currently trading at just over $1,200, while silver has descended to around the $16 mark.
Economic Policy Journal‘s Robert Wenzel opined that Greenspan’s endorsement of gold is a subtle attack against his successors, Ben Bernanke and Yellen, as he may believe that their policies are incompetent.
“If you are a former Fed chair and you are advising that gold be bought, you are not suggesting that monetary policy is being handled in a competent manner.
“Overall, this is the most sound analysis I have seem from the former Fed chairman. Murray Rothbard was right, they only speak truth once they are out of power.”
Photo by the Financial Times via Flickr.
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