Greenspeak: Confirms Monetary System Stresses, Deflation; Supernova in Progress

September 17, 1998 05:23 GMT -- Fed Chairman Alan Greenspan's testimony before the House Banking Committee Wednesday confirmed something we have been forecasting for the end of the 1990s: a deflationary global debt collapse and what we call a "Supernova" of the monetary system. Well, Mr. Greenspan didn't exactly confirm all of that, but he came close, acknowledging a very stressed global monetary system and that deflation is on its way to the U.S. Clearly, the Fed Chairman agrees these are the toughest time for the global economy in decades.

So, what exactly is happening? Our introductory commentary in the September Issue Of The Global Market Strategist®, just published this week, discussed the big picture and what is happening to the global financial markets. An excerpt from this issue:

Some saw it coming. Most did not. Many say it is over-dramatizing the situation to say the global monetary system is dying. Whatever the perception, though, our monetary system as we know is, in fact, in a state of Supernova, and the repercussions across the globe are phenomenal.

Not to say that investors must now become pessimists because of these times of the worst global fundamentals since the 1930s. In fact, it seems that whenever we publish analysis that appears "negative" (is realism negative?), we must reiterate our philosophy regarding the fact that we are, in fact, eternally optimistic that humankind will be able to learn from current events and put into play a system that does, in fact, work. It is not being pessimistic to observe the fact that, for most of the globe, the monetary system in force since the gold exchange standard was dropped in 1971 does not work. Neither does it take a pessimist to observe a death in progress. It merely takes an observer willing to take off the blinders.

Yet, global investors this decade once again decided that they would, in fact, trade with their blinders on, and trillions of dollars of wealth have been wiped out in the ensuing financial market collapse. Fed Chairman Alan Greenspan had warned that investors were too optimistic and that-to capsulize-they were investing with their blinders on. He had, in fact, warned beginning in December 1996 that investors were "irrationally exuberant," and that the were overly optimistic about corporate earnings.

The simple fact is, the monetary experiment launched in 1971 when the globe dropped the gold exchange standard (and the Bretton Woods agreement of 1944) did not work. As discussed in intricate detail in our report, Gold In A Deflationary Economy, this experiment has been one which allows all central bankers of the world to attempt to manually tweak currency exchange rates and monetary policy instead of having the gold standard do it for them. What that actually meant, in reality, is that the central banks of the world, regardless of political orientation, suddenly had great discretion to create or destroy credit at will. The operative word here is "discretion." Give too much discretion to humankind, though, and sometimes grave consequences must be paid.

Those consequences, in fact, are now being paid. Yet, the resounding realization that the experiment did not work will be wonderful information, if accepted and put to immediate use. So, it didn't work-no big deal. Just get back to business and recreate a monetary system that works for all (not just the country that prints the world reserve currency, in this case, the United States). If it were possible to create a system in which the different governments of the global economy could have discretion, then go for it. However, we see by the resulting global financial market collapse what discretion can do. So, why not go back to the gold standard, as we advocate, and as Fed Chairman Greenspan-a central banker who has discretion-has always advocated? Well, because, as Mr. Greenspan also realizes, there is just too much political advantage to the countries who dominate world economics. To give up that discretion is to give up the competitive edge in a competitive global (and political) economy. So, don't count on the gold standard any time soon (although Russia and some other countries are making noises to that effect. What choice to they have?).

The real question for investors, in the meantime, involves what to do during the time the void between the old monetary system and the new exists. As a whole, regions of the globe will likely spend years in this void, and as a result today's investor must do something different with investment capital than he or she has been doing in the recent past.

Information on how to continue reading this, and other analyses, in the September issue of The Global Market Strategist®.