Greenspan and the new form of 'money'

Aug 3, 2015

- By Bill Bonner

Bill Bonner
Paris, France

Dear Diary,

Today, help comes from an unexpected direction - Alan Greenspan!

After so many year of mumbly dumbly gobbledygook and credit-pumping folderol (much of the blame for the credit crisis of '08-'09 can be sent to his in-box) we had forgotten about Greenspan's earlier oeuvre. Yes, before he became a public servant he might have passed for an honest man. And his essay from the '60s, "Gold and Economic Freedom," is a classic (thanks to Pater Tenebrarum at ContraCorner for reminding us). It helps explain how this credit bubble finally ends.

We are sitting a sidewalk cafe in Paris. It is August, so it is quiet in this part of the city (the 16th arrondissement). Families have decamped for the country. At this hour of the morning, there would normally be children going to school with satchels on their backs. The streets would be clogged with commuters. And the cafes would be crowded with all manner of people. But the children are gone. Along with their parents. All that is left are a few fathers, wondering how to get into trouble with their families gone, old people, tourists and mental defectives, dragging behind them their worldly goods in rolling caddies.

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We are not sure which category we fit into.

At one table sit a pair of elderly women enjoying a morning coffee. At another, are a man and woman. Both attractive. Forty-something. They are talking about real estate. Probably planning an affair. At another table is a man of our age. He drinks his coffee. He might otherwise read the paper, but the news kiosk is closed for the summer. There are no papers to be had - not in this neighborhood. So, he just stares out onto the street, looking at nothing in particular. Two workmen - their clothes spattered with white splotches - sit at another table. They are rough-looking sorts in T-shirts, taking a morning coffee break. Buses go by. A few cars. Passers-by, none moving very ambitiously. It's going to be a warm summer day.

The Dow off a little bit on Friday. Shanghai stocks off too. And oil.

But gold was up $6.

So let's return to gold.

An avant propos...

Poverty is better than wealth in one crucial way: you still have the illusion that money can make you happy. People with money already know better. But they are reluctant to say anything for fear that the admiration they get for being wealthy would turn to contempt.

"You mean...you've got all that moolah and you're no happier than we are?"

"That's right, man."

"You poor S.O.B."

We bring this up because it is at the heart of government's scam - the idea that it can make poor people happier. In the simplest form it says to the masses: 'hey, we'll take away the rich guys' money and give it to you." This has two major benefits (from an electoral point of view). First, the obvious one, it offers money for votes. Second, it offers something more important: status.

After you have food, shelter, clothing and few necessities, everything else is status, vanity, and power. Extra money helps us feel good about ourselves and attract mates. It's not just the money that matters, in other words, it's the relative position in society. From this point of view, it does as much good to take away a rich person's money as it does to give money to a poor person. Either way, the gap closes.

Never, since the beginning of time up to 2015, has government ever added to wealth. It has no way to do so. And no intention of doing so. All it can do is to increase the power, wealth or status of some people - at others' expense.

In itself, that is a perfectly satisfactory outcome for most people, at least in the short-term. But the more this tool is used - that is, the more some people's power, status and wealth is taken away - the more the wealth of all of them declines. The trouble with socialism, as Maggie Thatcher remarked, is that you run out of other peoples' money.

You run out because there is only so much old wealth available, and wealth redistribution distorts the signals and incentives needed to create new wealth. This means that the group gets poorer - relative to other societies that are not stealing from one group to give to another. And after a while, the difference becomes a problem. The meddlers see that they are falling behind and change their policies to try to get back in the race (this is more or less what happened in Britain and China in the '70s, and the Soviet Union in the '80s) or the poorer society is conquered by the richer one (which has more money to spend on weapons).

There is one other wrinkle worth mentioning. While it is true that "leveling" may have a pleasing aspect to the masses (bringing the rich down so there is less difference between the two groups) it is also true that leveling is just what powerful groups do not want to happen. Even when the elite go after 'the rich' with taxes, confiscations and levies, they tend to look out for themselves in other ways. They allow themselves special rations, special medical care, special pensions, parking places, drivers, valets and assistants. One study found that there was actually more difference between the way communist party members and the masses lived in the Soviet Union than there was between the rich and poor in America.

All of this brings us to here and now. And to gold. Gold is traditionally a form of money. Money, of course, has no value on its own. It is given value by the economy. The more an economy can produce the more each unit of money is worth. It doesn't matter whether it is gold, or paper.

But just as the common man is deceived by money (he thinks more of it will make him happier) so are policy makers. Their belief is a little more sophisticated. They know that it is the economy that creates wealth, not money itself. But they believe that adding money (demand) will make the economy function better...and actually make people wealthier. And given the money system as it is today, they don't add 'money' -- even in paper form; they add 'credit.'

This new form of 'money' takes the scam to a whole new level. We have been trying to understand (and explain) how the system works and why it is doomed to failure. But Alan Greenspan - bless his corrupted little heart - was on the case even before the credit bubble began:

    "Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government's promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit."
More tomorrow...

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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1 Responses to "Greenspan and the new form of 'money'"

kalpit shah

Aug 3, 2015

If this article would have been written with inference made to four class of people that exists on this globe, it would have been more lucrative.

four class of people are: Employers, Employees, self-employed and investors.

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