Greenspan on Gold

In the February 2017 edition of Gold Investor, published by the World Gold Council, former Federal Reserve Chairman Alan Greenspan provided his views on gold.

In his interview for Gold Investor magazine, Greenspan makes several very important observations about the economy and the role of gold. First, the risk of inflation is beginning to rise in the United States. The combination of a tightening labor market, rising demand, and accelerating wages is stoking inflationary pressures.

Second, significant increases in inflation are likely to push up the price of gold. “Investment in gold now is insurance. It’s not for short-term gain, but for long-term protection,” said the former chairman.

Third, even though full gold standards are generally rare in the world, the metal plays an important role in the global financial system. “I view gold as the primary global currency,” Greenspan says.

Fourth, he has deep concerns about other major economies around the world. “The eurozone is not working,” he states. While concerns over rising inflationary pressures in the U.S. could lead to accelerating inflation or stagflation, the situation in Europe is worse. “Northern Europe has, in effect, been funding the deficits of the South; that cannot continue indefinitely.” In addition, there’s heightened uncertainty surrounding Brexit, and both Japan and China are struggling with financial and economic issues as well.

Fifth, echoing the sentiment in the closing paragraph of my blog on March 15, 2017 following the decision by the Federal Reserve to raise interest rates, he believes that sound fiscal policy is more fundamental than monetary policy, and that sound fiscal policy would make implementing monetary policy easier. He also believes higher capital requirements for banks and other financial intermediaries would help prevent financial crises from impacting the non-financial part of the economy.

Unfortunately, currently fiscal policy is unsustainable and is destabilizing the financial system.