Alan Greenspan’s Advice for Brown

In Greenspan’s seminal essay in Capitalism : The Unknown Ideal he has some good advice for Brown about government borrowing;

“government bonds are not backed by tangible wealth, only by the government’s promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates… The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit… The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy’s books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion… The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves… This is the shabby secret of the welfare statists’ tirades against gold. 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. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.”

Gordon Brown initiated mass sales of gold by the Bank of England some years ago when gold was trading at some $300 an ounce. Baby Miss Fawkes got an ounce of gold this Christmas worth over $500 an ounce. The government’s debt (including pension liabilities) has now broken the trillion pound barrier. Gilt edged government debt is no longer backed by gold under the Bank of England, but by ever rising taxes. This is Gordon Brown’s shabby secret…



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