Think 2008 Was Bad? You Ain’t Seen Nothing Yet

Dear Diary,

Not much action in stocks yesterday. Gold continues to fall – down $13 yesterday, to close below $1,300 an ounce.

Meanwhile, Alan “Bubbles” Greenspan is back in the news. At 88 years old, his mind is still sharp as a tack. He still sees his own interests clearly. And he is still clever enough to distort the facts to suit them.

Asked in an interview what he thought of Janet Yellen’s recent IMF speech, in which she maintained that bubbles should be addressed with more regulation, he replied:

Bubbles are functions of unchangeable human nature. The obvious question is how to manage them.

All bubbles expand, and they all collapse. 

You see, it wasn’t his fault that the largest bubble in half a century blew up a year after he left his post as Manipulator-in-Chief of the world’s largest economy. It was just human nature.

Do Bubbles Have a Life of Their Own?

Human nature is implicated in bubbles. But human nature is always with us. Bubbles are not.

So, when we talk of the “cause” of a bubble, we have to look deeper… to the specific conditions that cause prices to get out of control.

There was no bubble in the 1950s. Nor in the 1960s. There were some important price movements, but the first thing that would qualify as a bubble was the extremely gaseous price of gold in the 1970s.

Over the course of the decade, gold rose from $42 to $800 an ounce.

What caused that? Human nature?

Yes, in a sense. It was the natural cupidity and larceny on the part of US officials.

In February 1968, President Johnson asked Congress to end the requirement that dollars be backed by gold. A month later, Congress complied.

Then in August 1971, President Nixon cancelled the direct convertibility of the dollar to gold.

This – and the double-digit inflation rates that followed – so worried investors that they shifted their capital suddenly and emphatically into gold.