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Greenspan: the Golden rule. Why Beijing is buying gold
Material posted: Publication date: 07-10-2014

If China will pay in gold a relatively small part of its foreign exchange reserves comprising $ 4 trillion, the currency of the country will acquire an unexpected significance in the modern international financial system. Of course, trying to spend some of the reserves to an adequate amount of gold bullion to displace the United States from first place in the world reserves of monetary gold (at the spring 2014 American gold reserve amounted to 328 billion dollars), would be risky. However, the cost of failure — loss of profit plus the cost of storage — looks quite reasonable. The rest of the world, gold prices could certainly rise, but only for the period of accumulation. When China reaches its goal, they will have to fall.

About more radical changes — such as the return to the gold standard to any form — until it is not. This idea few supporters — now almost all in favour of Fiat money and floating exchange rates. However, gold has some special properties that no other currency, except, perhaps, silver. More than two millennia, it was almost a certain means of payment. It never required the credit guarantee of a third party. When gold or gold receipts to pay off the bonds, no questions. Suffice it to say that it was the only form of payment that exporters to Germany took toward the end of the Second world war. Now Fiat money — currency not backed up with independent asset value, accept the loan guarantees of sovereign countries having the right to collect taxes. In the conditions of crisis such guarantees are not always able to compete with the universally accepted gold.

If the dollar or any other Fiat currency currency is accepted everywhere and always, the Central banks would keep the gold. However they do it, so, Fiat money has not become a universal equivalent. Out of 30 developed countries that provide the International monetary Fund, only four do not have a gold reserve. As at 31 December 2013, the price of gold on the balance sheets of the Central banks of developed countries amounted to $ 762 billion translated into market price, which was equal to 10.3% of their total reserves. At the disposal of IMF gold was still at 117 billion dollars. If gold was "a relic of barbarism", as did the British economist John Maynard Keynes (John Maynard Keynes), Central banks around the world did not collect such quantity of the asset, the yield of which is based on the cost of storage in the negative.

Policy on several occasions offered to sell part of its gold reserve. For example, in 1976, I — as Chairman of the Council of economic advisers participated in the debate, during which the Secretary of the Treasury William Simon (William Simon) and the head of the Board of governors of the Federal reserve Arthur burns (Arthur Burns) had discussed with President Gerald Ford the idea of Simon's to sell 275 million ounces of gold and invest the proceeds in profitable assets. Simon, in accordance with the views that was expressed by the economist Milton Friedman, argued that gold no longer has monetary value, and burns believed that it can support the dollar in the event of a crisis. The common language of the party was never found. In the end, Ford decided to do nothing. The U.S. gold reserve since then almost not changed — now it is 261 million ounces.

I again faced this issue in the 1990-ies, when he headed the Board of governors of the fed. At that time the price of gold fell below $ 300 per ounce. One of the periodic meetings of heads of Central banks "the Big ten" was devoted to the desire of European countries to reduce gold reserves. The participants understood that if they start vying with each other to sell gold, it will drop even more. In the end, they agreed on who, how much and when to sell. Washington abstained from participation in the process. In 2014, the agreement was updated. While saying this, the European Central Bank said: "gold remains an important part of global monetary reserves".

Meanwhile, Beijing has never been ideological biases against gold. From 1980 to 2002, the Chinese authorities had 13 million ounces of gold. In December 2002, they brought their holdings to 19 million ounces, and in April 2009 to 34 million ounces. At the end of 2013, China took fifth place among the countries of the world on a gold standard. Now, it is second only to the United States (261 million ounces), Germany (109 million ounces), Italy (79 million ounces) and France (78 million ounces). Another 90 million ounces is from the IMF.

But however much gold nor saved China, it will not allow key issues: whether free, unregulated capital markets can coexist with an authoritarian state. Since the early initiatives of Deng Xiaoping (Deng Xiaoping), China has come a long way. He approaches the seemingly unimaginable goal — to catch up with the United States GDP, even if converted at purchasing power parity. However, in the perspective of the giant achievements of recent years will most likely be harder to maintain.

Thus, it is unlikely that in the coming years, China will be able to technologically overtake the US — rather, for political reasons than economic. Culture, characterized by extreme political conformism, the leaves little space for alternative thinking. Meanwhile, innovation by definition requires going beyond generally accepted that it is always difficult to do in a society that restricts freedom of speech and action.

While Chinese society overall viable and politically stable because political constraints a one-party state are balanced by the ability of the authorities to ensure economic growth and material well-being. However, in the coming years this situation may change: the rate of growth of the Chinese economy is slowing and its competitive advantages decrease.

Alan Greenspan


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