Greenspan pledges allegiance to gold, warns of surprise inflation surge

To those who know Alan Greenspan only from his 1987-2006 tenure as chief of the Federal Reserve, his early years as a gold advocate and an acolyte of Objectivist philosopher Ayn Rand often come as a surprise.

His 1966 essay Gold and Economic Freedom, which appeared in some Rand publications, is still widely cited today. In it, Greenspan wrote a couple of zingers that carry huge weight in the modern economic landscape. 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, he noted. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights.

Fed chief embracing gold again: However, Greenspans subsequent legacy as Fed chief has drawn sharp criticism from some quarters. His alleged mismanagement of interest rates and other policy errors are blamed for disasters such as the dot-com bubble and the real-estate crash of 2007.

Nowadays, though, in a seeming effort to repair his legacy, the nonagenarian Greenspan seems to be on a perpetual reformation tour in which he publically re-embraces his pro-gold stance of the 1960s. His comments to the Council on Foreign Relations in 2014 turned heads: Gold is a currency, he confirmed. It is still, by all evidence, a premier currency. No fiat currency, including the dollar, can match it.”

And now he has issued similar sentiments during a lengthy interview with the Bloomberg news agency in which he commented on issues ranging from the United Kingdoms Brexit from the European Union (a terrible outcome) to falling U.S. productivity and the governments growing entitlements burden.

Gold standard for a golden age: If we went back on the gold standard and we adhered to the actual structure of the gold standard as it exited prior to 1913, we’d be fine, he said.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?

On the state of the current U.S. economy, Greenspan said he sees no sign of a recession (Where have we heard that before? Think Ben Bernanke and Janet Yellen.) but rather stagnation, a term that evokes former Treasury Secretary Larry Summers theory that the global economy is now stuck in a low-growth trap of secular stagnation.

Greenspan also issued a surprising warning that should serve as a wakeup call for gold skeptics. The money supply, M2, which has always been a critical indicator of inflation, is for the first time, is going up remarkably steadily, 6-7%, almost a straight line, he noted. Its tilted up in the last several months; its added a percentage point or two. The thing that we should be worrying about now which we have actually given no thought to whatsoever is that this type of economic environment ends with inflation. Historically, fiat money has always ended up that way.

Human history full of surprise inflation: Although inflation hasnt reared its ugly head enough to register definitively on the standard price gauges such as CPI, PPI, and PCE, Greenspan reminds that thats exactly how inflation works: by stealth and surprise. I dont know when its coming. I know if you look at human history, there are times and times again when we thought that there was no inflation and everything was just going fine, and I just basically say, Wait, this is not the way this thing ordinarily turns out. I dont know; I cannot say I see it on the immediate horizon. In fact, commodity prices are soggy. The oil price has had a terrific impact on global inflation. Its not about to emerge quickly, but I would not be surprised to see the next unexpected move to be on the inflation side. You dont have inflation now, and you dont have it until it happens.

Whether you view Greenspan as The Maestro or a mook, his warning on inflation is a stark wakeup call for those who have dismissed the unprecedented waves of relentless money printing launched by the worlds central banks in the wake of the financial crisis. At least one school of economic thought tells us that inflation is inevitable, and given the massive expansion of central-bank balance sheets, it might not be mild in severity. The recent uptick in oil prices could provide the incipient spark that ignites the inflation Greenspan is anticipating. Gold is the go-to investment hedge against inflation, and it just got a major endorsement from one of the most widely followed figures in modern economics.