The Value of a Dollar

I had lots of emails yesterday about my piece on ‘crunchiness’ and in particular my references to former US Federal Reserve Chairman Alan Greenspan.

As I am writing this, Gordon Brown (UK Prime Minister) is announcing new measures to nationalise the UK banking system and, once again, I turn my thoughts to Greenspan.

More than any other man, Greenspan should bear responsibility for the intensity of the current crisis. As Federal Reserve Chairman he renounced his earlier beliefs that the gold standard limited the expansion of government monetary policy to become the ‘master printer’ of fiat currency.

He fuelled the housing boom in the USA by lending money far below the inflation rate. It hit the economy like a shot of vodka on an empty stomach – leading to disastrous results.

He ignored the warnings of such investment luminaries as George Soros and Warren Buffett to become an advocate for the very derivatives that have shut down the global financial system.

But whatever the mistakes of Greenspan, the USA will pay its debts. After all, it can print as much money as it needs because all its debt is created in US dollars.

Of course, printing money to pay your debts is not a long-term recipe for success. Just ask Robert Mugabe and the people of Zimbabwe as they struggle with inflation exceeding two million per cent.

How long the world will accept debts in what will be an inevitably devalued currency will be the sixty-four dollar question.

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