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THE
ROCKET SCHOOL OF ECONOMICS


Central Bankers, Actors and 'We'
by Professor von Braun

July 31st, 2005

Recently in a Q & A with Congressman Ron Paul before the House Financial Affairs Committee Chairman Alan Greenspan responded to a question from Congressman Paul by not answering it directly, which is not surprising, but what he did say is, in and of itself, mind boggling.

The entire transcript can be found here.

In part Greenspan said the following:

"And, indeed, since the late '70s, central banker's generally have behaved as though we were on the gold standard.

And, indeed, the extent of liquidity contraction that has occurred as a consequence of the various different efforts on the part of the monetary authorities is a clear indication that we recognize that excessive creation of liquidity creates inflation which, in turn, undermines economic growth.

So that the question is: Would there be any advantage, at this particular stage, in going back to the gold standard?

And the answer is: I don't think so, because we're acting as though we were there."

These statements are patently absurd because how could a central banker act as if he was on a gold standard? The purpose of a gold standard is to limit the creation of credit, something now referred to as liquidity, and to not allow the confiscation of wealth that is the result of a fiat system. Having now confiscated the wealth of a once great nation, having seen the purchasing power of the dollar decline by over 96% since it went off the gold standard, Greenspan has the audacity to say 'we' are 'acting' as if 'we' are on a gold standard and have been since the late 1970's.

One has to wonder as to what sort of gold is required in this 'acting as if' scenario; what does it look like, is it assayable, does it need to be stored, can it be located or is it of the "let's pretend" variety? Acting, in a sense, is "let's pretend". What Greenspan is saying is that central bankers have been acting (playing let's pretend) as if they are on a gold standard when they are not. He also uses the royal 'we' implying that others are involved in this game of let's pretend, qualifies it with 'generally' and then says again "because we're acting as though we were there".

It's remarkable! Here we have the Chairman of the largest banking system in the world saying that 'we', central bankers, have been acting as if 'we' are on a gold standard, when they are as far removed from a gold standard as it is possible to be. So how do you, or can you, act as if you are on one, when you are not? What are the essential guidelines for this let's pretend game of acting as if, generally speaking?

Does this mean that manipulating the price of gold is one of the props that is used to facilitate this 'as if' scenario? Obviously, acting or otherwise, the 'as if' gold standard Greenspan refers to would have to have an 'as if' price attached to it otherwise it, the "let's pretend" game could not work. His other infamous statement made several years ago was that central bankers stand ready to mobilize gold reserves should the price rise, or words to that effect. How do you mobilize that which is immobile? Other than via the paper markets it too is a ludicrous statement, unless of course manipulation of the gold price was the game.

Obviously central bankers are aware that while they can fool all of the people some of the time, and some of the people all the time, gold is the medium that people return to when paper currencies fail. To this day there never has been a fiat currency system that has worked for any lengthy period of time, we know that and they know that. From the beginning of it's introduction a fiat money system itself is a game of let's pretend.

Perhaps Greenspan is telling us something that is extremely relevant to the gold market and the price action of gold since the late 1970's. Gold at $850 an ounce was not something they wanted to see and we have not seen that price again. I wonder why? This coincides with Greenspan's 'acting' time frame (i.e. from the late 1970's) and it sure sounds like these 'central bankers' have been using paper contracts (paper gold) to allow them to fool themselves into believing they are acting as if they are on a gold standard when they are not.

It is important to note that the period from 1971 through to early 1980 was the first time in nearly 300 years that gold traded freely and increased in price 24 fold. I suspect that Paul Volcker was the central banker that instituted the idea of controlling the gold price via a variety of means, but not necessarily limited to paper gold, forward sales from mining companies and paper contracts on the futures market.

More of Greenspan's remarks on 7/20/05:

"Remember, the gold price was $800 an ounce. We were dealing with extraordinary imbalances, interest rates were up sharply, the system looked to be highly unstable -- and we needed to do something.

Now, we did something. The United States -- Paul Volcker, as you may recall, in 1979 came into office and put a very severe clamp on the expansion of credit and that led to a long sequence of events here, which we are benefiting from up to this date.

So I think central banking, I believe, has learned the dangers of fiat money, and I think, as a consequence of that, we,ve behaved as though there are, indeed, real reserves underneath the system."

Now I would go so far as to say that what Greenspan is referring to is that central bankers have learned that the only danger (perhaps early warning signs would be a better phrase) to the fiat system is a rising gold price and have, since the late 1970's, been controlling the gold price ever since. They have, indirectly, perhaps even deviously gone back to a historical 'managed' gold price, without the need to redeem their paper currencies; and this management may be what Greenspan is referring to when he says central bankers have been acting as if we were (and are) on a gold standard. Once again, acting requires props, let's pretend requires props, and I am sure that for central bankers (implying more than one) to act as if they are on a gold standard requires a prop, an artificial price, obtained by manipulating the paper gold market, with settlement in the fiat currency of course.

The 'real reserves' he refers to are just as ephemeral or non existent as is the 'as if' gold standard central bankers have been acting 'as if' they had. Do you believe that central bankers have learned the dangers of a fiat currency system? Perhaps it is time to obtain some REAL 'real reserves' just in case the 'as if' game runs out of breath.


The Prof can be contacted by email at profvonb2@aol.com

Copyright by Professor von Braun. All Rights Reserved. Reprinted at USAGOLD by permission.

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The Rocket School of Economics -- The Lecture Series Index

  • 22 May 2009 -- An Often Overlooked Issue!
  • 28 Mar 2009 -- Problematic Banking Systems!
  • 14 Nov 2008 -- What Exactly is an Asset?
  • 23 Aug 2008 -- Through the Looking Glass?
  • 02 Aug 2008 -- Compounding to the Downside!
  • 26 May 2008 -- Back to Basics Again!
  • 31 Mar 2008 -- The Broken Watch -- Part 2.
  • 27 Mar 2008 -- The Broken Watch -- Part 1.
  • 06 Feb 2008 -- The Financial Equivalent of Faulty Towers.
  • 10 Dec 2007 -- Monetary Systems & Productive Assets.
  • 14 Feb 2007 -- Divorced from Reality
  • 06 Sep 2006 -- Gold, Bankers, the Trade Deficit and Unsettled Transactions
  • 19 Jun 2006 -- When is a Reserve Not a Reserve?
  • 31 May 2006 -- The significance of August 15, 1971.
  • 08 Apr 2006 -- Keep Your Eye on the Ball!
  • 30 Mar 2006 -- What came first?
  • 11 Mar 2006 -- An Unanswered Question.
  • 08 Jan 2006 -- Where have all the projects gone!
  • 11 Dec 2005 -- Gorillas, Rising Gold Prices and Depreciating Paper Currencies!
  • 23 Oct 2005 -- Custodial Risk.
  • 16 Sep 2005 -- An Inherent Flaw.
  • 08 Aug 2005 -- Central Banks and 'Reserves'.
  • 31 Jul 2005 -- Central Bankers, Actors and 'We'.
  • 17 Jul 2005 -- Unintended Consequences! -- Part 3.
  • 07 Jul 2005 -- Unintended Consequences! -- Part 2.
  • 25 Jun 2005 -- Unintended Consequences! -- Part 1.
  • 14 Jun 2005 -- The Two Greater Fools Theory.
  • 03 Jun 2005 -- Real Money, Funny Money and YOU -- Part 4.
  • 30 May 2005 -- Real Money, Funny Money and YOU -- Part 3.
  • 26 May 2005 -- Real Money, Funny Money and YOU -- Part 2.
  • 21 May 2005 -- Real Money, Funny Money and YOU -- Part 1.
  • 09 Nov 2002 -- Carrying a Big Stick.
  • 17 Sep 2002 -- Wishful Thinking!
  • 27 Jul 2002 -- Gold Bugs Beware -- part 2.
  • 10 Jun 2002 -- Gold Bugs Beware!
  • 06 Apr 2002 -- Currencies versus Gold.
  • 26 Jan 2002 -- Bear Market Strategies.
  • 01 Jan 2002 -- 2002 -- A Perspective.
  • 20 Oct 2001 -- The Storm Clouds are Gathering.
  • 30 Sep 2001 -- What to Say?
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  • 14 May 2001 -- The Coming Bull Market in Gold Stocks?
  • 24 Feb 2001 -- High Hopes, Wishful Thinking & The Absurd
  • 20 Feb 2001 -- Who Put the Holes in the Swiss Cheese?
  • 22 Jan 2001 -- US Dollar Admits Identity Crisis!
  • 16 Jan 2001 -- Dear George W.
  • 24 Nov 2000 -- The Bubble Has Burst
  • 11 Nov 2000 -- The Media, Bull Markets & the Gold Price
  • 02 Nov 2000 -- Gold Stocks
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  • 16 Oct 2000 -- A Peso Here ...and a Few Thousand Pesos There
  • 10 Oct 2000 -- The Unfolding
  • 30 Sep 2000 -- What's Wrong with THIS Picture?
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  • 23 Sep 2000 -- The Times, They Are a' Changing
  • 15 Sep 2000 -- Time WILL Tell!
  • 27 Aug 2000 -- SS "Paper Assets" Begins to Take on Water
  • 06 Aug 2000 -- The Indian Summer
  • 26 Jun 2000 -- A Yellow Brick Wall
  • 22 May 2000 -- The King IS Naked
  • 30 Apr 2000 -- Goodbye Yellow Brick Road
  • 18 Apr 2000 -- Beware the Ides of March, April and May
  • 08 Apr 2000 -- Really, Sir Aldot!
  • 25 Mar 2000 -- Where To From Here?
  • 18 Mar 2000 -- The Gnomes of Zurich
  • 12 Mar 2000 -- The "New" Economy??
  • 06 Mar 2000 -- Two Questions
  • 04 Mar 2000 -- Iceberg Dead Ahead!
  • 28 Feb 2000 -- The Wizard of Oz
  • 06 Feb 2000 -- Here We Go Again!!
  • 15 Jan 2000 -- Comments on the Gold Market
  • 29 Dec 1999 -- No Raw Ingredients Required
  • 28 Dec 1999 -- No Way Out
  • 14 Dec 1999 -- Ho, Ho, Ho!
  • 07 Dec 1999 -- Greenspan's Bubble
  • 03 Dec 1999 -- Early Warning Signs


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