Greenspan: US Economic Future “Discounted”, Gold Standard the Answer (Video)

The former Fed Chairman Alan Greenspan appeared on Bloomberg last week to discuss the state of the US economy. He noted some economic indicators like bond yield spreads, rising entitlement costs, and stagflation, which are sending the US economy over the tipping point. What worries Greenspan the most is an environment of uncertainty that’s taken hold.

For example, Greenspan noted the spread between the 5 and 30-year treasury bonds is at its “widest level in American history.”

Greenspan believes the bond spread is a symptom of faithlessness in the economy, which discounts the “far distant future.” He continues:

“As you move out on that spread, what you do is you create a definite bias towards producing and purchasing only those capital assets with short life expectancies. So what we’re seeing now is software is doing well; non-residential building isn’t doing well at all.”

In short, no one wants to bet on a long-term prospect. What’s valued is a quick turnaround. There’s no faith in the future. At the heart of this is the Fed’s failed monetary policy of low interest rates and quantitative easing. Printing more money (i.e. causing inflation) to stimulate the economy comes at a cost. In this case, the cost is under speculation in the future and less long term strategy.

Peter Schiff predicted such a bond crisis in The Little Book of Bull Moves:

“As inflation gets worse, financial assets denominated in the failing currency and the income they throw off become progressively less valuable. Ironically, in times this dire, cash and bonds, which are the time-honored safe havens during stock market crashes, become the worst assets to hold when the dollar is crashing. Bonds, which are really cash payments that are deferred, pay less and less in the current market.”

The situation is forcing investors and countries into a buying frenzy of gold. Unlike the dollar, it’s immune to the government’s fiat currency. It can’t be manipulated and artificially increased. Gold is the epitome of a steady, predictable, and faithful investment, and has been for thousands of years.

In June, Greenspan called for a return to the gold standard as a way to return to certainty:

“If we went back on the gold standard and we adhered to the actual structure of the gold standard as it existed prior to 1913, we’d be fine.  Remember that the period 1870 to 1913 was one of the most aggressive periods economically that we’ve had in the United States, and that was a golden period of the gold standard.  I’m known as a gold bug and everyone laughs at me, but why do central banks own gold now?”

That fact still doesn’t sway some economists and dovish Fed members who continue to throw bad money after good, continually hinting at a rate hike, only to deliver broken promises. Fiscal stimulus is promoted at the expense of the US investor, whose faith in the system is waning. Greenspan paints the realistic, yet dreary, reality about investing in such a monetary milieu.

“The solution to that is to basically remove the uncertainty, which is engendering the extraordinary discounting of the far distant future … If you’re a corporate executive right now, you don’t have any clue as to what the corporate tax rate is going to be twenty years from now. For an investment you make that, say, lasts thirty years, the present value of the income you’re expected to receive … is so heavily discounted in today’s environment that the present value is … close to zero.”

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