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SPEAKING
FREELY
Fed's yen for bovine
policies
By Antal E Fekete
Speaking Freely is an Asia Times
Online feature that allows guest writers to have
their say. Please click here
if you are interested in
contributing.
"If fiat money
falters, we may have to go back to oxen as our
medium of exchange. In that event, I trust, the
Federal Reserve will have an adequate inventory of
oxen."
- Alan Greenspan, The History
of Money
Hey, Mr Chairman, in case you
haven't noticed, the Federal Reserve already has a
goodly supply of oxen!
My father was fond
of relating a story about a professor lecturing on
geography. A short fellow, he was extolling the
agriculture of Switzerland. "In our country oxen
are not even as tall as I am. In some countries
you see oxen just as tall as myself. But, believe
it or not, on the fat pastures of Switzerland
there are even greater oxen than myself." For
emphasis, the good professor stood on his tiptoes
and stretched his hand upward above his head. "We
don't believe so!" - shouted someone from the back
benches of the lecture theater.
The reason
for my dusting off this (not at all funny)
wisecrack of the chairman is that a conjecture of
mine got published inadvertently. Rather than
recanting, I elaborate on it lest there be any
misunderstanding about what I mean. In a private
letter I have conjectured that a conspiracy may
exist between the Federal Reserve and the Bank of
Japan. The latter is buying US Treasury paper
through the good offices of the former over and
above the deficit America is running in its trade
accounts with Japan. These highly secret
transactions are reported nowhere as they are on
custodial account.
I am well aware that
this conjecture can be neither proved nor
disproved. The conspiracy, if one exists, is part
of the highly classified contingency plan hatched
out at the Fed. It calls for bribing
(blackmailing?) the Bank of Japan to get its
cooperation in forestalling a run on the dollar
led by other foreign central banks. If such a run
were to take place, it would destroy the dollar as
well as the international monetary system, and
drive the rate of interest to stratospheric
heights, rendering the Japanese hoard of American
paper worthless.
The run is widely
expected by many a knowledgeable observer, and the
bond market is girding itself for a rise in
interest rates more vicious than that 25 years
ago. The obituary of the bull market in bonds has
in fact been written already by the world's
foremost bond trader, Pimco's Bill Gross. However,
the market, like Mark Twain reading his own
obituary, talked back saying: "The reports of my
demise are grossly exaggerated." Chances are that
this particular bull, taunted by the oxen at the
Fed, is getting ready for another run.
The
conjecture is eminently plausible. Why, the
chairman of the Fed is so well conditioned that,
even while thinking the unthinkable - the
faltering of the irredeemable dollar - he will not
think of gold. He compulsively thinks of oxen as
the obvious alternative for defunct fiat money.
Any contingency plan prepared under his watch must
likewise ignore gold. I hereby issue a challenge
for anybody to come up with a better contingency
plan to save the moribund dollar (barring to make
it gold-redeemable) than conspiring with the Bank
of Japan to extend the bull run in bonds in order
to massacre the Cassandras on either side of the
Pacific who bet on the collapse of the American
bond market.
The conspiracy may be to the
liking of the Bank of Japan, which has a
reputation of dealing most ruthlessly with
speculators who oppose its policy of a weak yen.
It prints yen clandestinely at no cost to itself.
The bank's acquisition of bonds is therefore a
windfall. These bonds were accumulated during
earlier decades, in consequence of the US
government twisting the bank's arm not to buy gold
with unwanted dollars, which is what Charles de
Gaulle would have done. The Japanese know only too
well that their hoard is so enormous that the
chances of getting rid of it in case of a dollar
crisis are nil.
But isn't this conspiracy,
if it exists, immoral? Yes, of course it is! It is
the epitome of the total depravity of the fiat
money regime. Printing yen to support productive
enterprise is one thing; printing yen to support
bond speculators who have insider knowledge is
another. It must also be clear that, if such a
conspiracy exists, it is nothing but a rape of the
American taxpayer, who will have to be skinned
alive by the Treasury to pay the maturing coupons
on the bonds given away by the Fed.
I have
said that the Bank of Japan in printing the yen
was supporting bond speculators with insider
knowledge. That's right, there is a huge
speculative scheme afoot called the yen
carry-trade. Speculators borrow yen at 1.5%, sell
them for dollars, and buy US Treasury bonds
yielding up to 5%. Not only do they pocket the
difference, they are also the beneficiaries of the
huge appreciation of bond prices in the wake of
the falling dollar rate of interest. That is no
conjecture. That is a fact. The conjecture is that
speculators are acting on insider information.
The conspiracy of the Fed and the Bank of
Japan provides the favorable backwind to their
speculation which, without it, would be nothing
short of suicidal. But with the backwind, it is
extremely profitable, especially in view of the
weak dollar, which improves the terms of trade of
yen sellers and dollar buyers beyond their wildest
dreams.
This takes us back to the supply
of oxen at the Fed. If the conjecture is correct,
the Fed has engineered a scheme to push the rate
of interest lower in defiance of the falling
dollar. Such a policy is bovine. It spells
disaster. It stokes the fires of deflation, as I
shall now explain.
Let's define
inflationary spiral under Kondratiev's long-wave
cycle as the decades-long rise of prices and
interest rates, and deflationary spiral as their
similarly long fall. Interest rates may lead and
prices may lag, or the other way round. The
important thing is linkage. The long-term
movements of prices and interest rates are
inevitably linked. Linkage epitomizes a huge
oscillating money flow back and forth between the
bond and the commodity markets. When the money
tide begins to flow at the commodity market and
ebb at the bond market, we have the inflationary
spiral. When it is reversed - flows at the bond
and ebbs at the commodity market, we have the
deflationary spiral.
Greenspan in a speech
on the History of Money, from which I took
the quotation above, congratulates himself and his
central banker colleagues in other countries for
"the success in containing inflation during the
past two decades and raising hopes that fiat money
can be managed in a responsible way". This is akin
to the surfer on the beach boasting that he has
turned the flow of the tide back through skillful
surfing. What the chairman calls "containing
inflation" is nothing but the receding money tide
from the commodity market that started in 1980,
now flowing at the bond market. The chairman did
not cause it, but could make it a lot worse and
more devastating. If such a conspiracy between the
Fed and the Bank of Japan exists, the receding
money tide could become a tsunami, a repetition of
the Great Depression of the 1930s, wiping out
sound businesses and the life's savings of most
people.
A bull market in bonds is the
sine qua non of the deflationary spiral.
Deflation is greatly aggravated by central bank
intervention in putting more money in circulation
through open market purchases of bonds. The
central bank hopes that the new money will flow to
the commodity market. Speculators forestall it by
buying the bonds first. The new money, thus
intercepted and diverted, flows to the bond market
instead of the commodity market as hoped by the
central bank. Interest rates fall, and linkage
makes prices to fall with them. Contra-cyclical
policy backfires. No wonder, its author, John
Maynard Keynes, was ignorant of the linkage. If
the conjecture about the conspiracy between the
Fed and the Bank of Japan is correct, there is an
insatiable demand for dollars, especially for
falling ones, by bond speculators. The Fed is the
quartermaster general for the coming depression
that may make the Great Depression rather tame in
comparison.
In 1980, the dollar had a
close brush with sudden death. It was saved,
barely, by the shock therapy of ultra-high
interest rates, quite openly administered by
chairman Paul Volcker. The dollar now appears to
be in the throes of another death spell. Is it
possible that there is a similarity between the
two episodes, except this time the attempt to save
the dollar will be through the shock therapy of
ultra-low interest rates, clandestinely
administered by Greenspan? If so, it won't save
the dollar, only prolong the agony.
In his
History of Money speech, Greenspan observes
that "savers have been in sufficient abundance
since the beginning of the industrial revolution
to enable investment to further material
well-being. Money, as a store of value, was an
early facilitator of savings and one of the great
inventions of mankind. The history of money is the
history of civilization or, more exactly, of some
important civilizing values".
We may add
that it was the savings of the people that has
made America great. In the 19th century, the
American people, working hard and saving hard,
created an economic and financial giant on the
continent. America was the world's greatest
creditor nation. Now, America is a financial and
economic dwarf. It has dismantled its great
industries with the exception of the industry
producing military hardware. Now the capital,
embodying the great savings of earlier
generations, is being dissipated. Now, thanks
mainly to Greenspan's long tenure, America is the
world's greatest debtor nation. Now, savers in
America are no longer in abundant supply. In fact
they are an endangered species, at the verge of
extinction. Now, the dollar is no longer a store
of value. It is a certificate of guaranteed
confiscation of value. The most recent history of
money is a history of decline of civilizing
values.
In his speech, Greenspan related a
story. He had met a friend and told him about the
speech he was going to make on the history of
money. The friend's response was: "I know all
about the history of money. When I get some, it's
soon history." He could have added: "And if I save
some, its value is soon history!" The chairman
called his friend "spendthrift". He failed to
mention that it was precisely his policies at the
Fed that had made his friend, and many millions of
others, spendthrift by turning the dollar into the
peso of a banana republic.
Greenspan said
in his speech that "the early history of the
post-Bretton Woods system of generalized fiat
money was plagued, as we all remember, by excess
money issuance". The cheek of the kettle that
dares to call the pot black! The excess money
issuance under all his predecessors combined is
eclipsed by the excess money issuance during this
chairman's tour of duty at the Fed. Nor can he
have the excuse that he was misled by the
siren-song of the welfare state. As his earlier
article "Gold and Economic Freedom" will testify,
he is one of the precious few who understands the
gold-freedom nexus.
The chairman is
traitor to the cause of sound money.
Antal E Fekete is Professor
Emeritus at the Memorial University of
Newfoundland
(Copyright Antal E
Fekete, 2005)
Speaking Freely is an
Asia Times Online feature that allows guest
writers to have their say. Please click here
if you are interested in
contributing. |
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