As Alan Greenspan and the other Fed clowns gathered at the annual circus
in Jackson Hole ponder insignificant economic data such as consumer confidence,
they will undoubtedly ignore the much more significant loss of confidence
so clearly evidenced by this weeks near $20 increase in the price of gold.
A nation’s fiat currency is only viable so long as the world’s savers
have confidence in its central bank’s willingness to limit its issuance.
Since Greenspan and other Fed officials have expressed a willingness to
print an unlimited quantity of dollars, and too keep interest rates low
“for a considerable period of time,” the world is losing confidence
in the dollar as a reliable store of value. Once confidence in a currency
is lost, it is nearly impossible to get it back. Just ask any Argentine.
There is a high possibility that before year’s end, a run on the dollar
and a surge in the price of gold will put Greenspan’s resolve and his
faltering credibility to yet another test. The market will, in effect,
be calling Greenspan’s bluff. Will he raise interest rates to defend the
dollar and restrain inflation, or will he stay true to his promise? Either
way, the Fed chairman is dammed if he does and damned if he doesn’t. If
he stays true to his promise, the fall of the dollar and rise in the price
of gold will accelerate, and even the government-manipulated CPI figures
will be unable to hide spiraling inflation. The fed’s inaction will only
exacerbate its loss of credibility, and confidence in the dollar will
continue to vanish. If, on the other hand, he raises interest rates, the
markets will smell blood. It will be obvious that Greenspan has his back
to the wall, and traders will pressure the dollar even lower and gold
higher to see just how much Greenspan is willing to tighten. Unfortunately,
the more he tightens, the weaker the U.S. economy will get, and the lower
the dollar will go. Ironically, raising interest rates to defend the dollar
will actually have the opposite effect. In other words, through his rhetoric,
Greenspan has painted himself, the stock and real estate markets, and
the American economy into a perilous cliff-side corner from which there
is no way out.