The Supply of Oxen at the Federal Reserve
Are the Fed and the Bank of Japan conspiring to protect
by propping up the American bond market?
Antal E. Fekete
Professor Emeritus, Memorial University of Newfoundland
"If fiat money... falters, we may have to go back
to oxen as our medium of exchange.
In that event, I trust, the Federal Reserve... will have an
adequate inventory of oxen."
-- Alan Greenspan, The History of Money
Hey, Mr. Chairman, in case you haven't noticed, the Federal Reserve
already has a goodly supply of oxen!
My father was fond of relating a story about a professor lecturing
on geography. A short fellow, he was extolling the agriculture of
Switzerland. "In our country oxen are not even as tall as I am. In
some countries you see oxen just as tall as myself. But, believe
it or not, on the fat pastures of Switzerland there are even greater
oxen than myself". For emphasis the good professor stood on his tiptoes
and stretched his hand upwards above his head. "We don't believe
so!" — shouted someone from the back benches of the lecture
The reason for my dusting off this (not at all funny) wisecrack
of the Chairman is that a conjecture of mine got published inadvertently.
Rather than recanting, I elaborate on it lest there be any misunderstanding
about what I mean. In a private letter I have conjectured that a
conspiracy may exist between the Federal Reserve and the Bank of
Japan. The latter is buying U.S. Treasury paper through the good
offices of the former, over and above the deficit America
is running in its trade accounts with Japan. These highly secret
transactions are reported nowhere, as they are on custodial account.
I am well aware that this conjecture can be neither proved nor disproved.
The conspiracy, if one exists, is part of the highly classified contingency
plan hatched out at the Fed. It calls for bribing (blackmailing?)
the Bank of Japan to get its cooperation in forestalling a run on
the dollar led by other foreign central banks. If such a run were
to take place, it would destroy the dollar as well as the international
monetary system, and drive the rate of interest to stratospheric
heights, rendering the Japanese hoard of American paper worthless.
The run is widely expected by many a knowledgeable observer, and
the bond market is girding itself for a rise in interest rates more
vicious than that 25 years ago. The obituary of the bull market in
bonds has in fact been written already by the world's foremost bond
trader, Pimco's Bill Gross. However the market, like Mark Twain reading
his own obituary, talked back saying: "the reports of my demise
are Grossly exaggerated". Chances are that this particular bull,
taunted by the oxen at the Fed, is getting ready for another run.
The conjecture is eminently plausible. Why, the Chairman of the
Fed is so well conditioned that, even while thinking the unthinkable,
the faltering of the irredeemable dollar, he will not think of gold.
He compulsively thinks of oxen as the obvious alternative for defunct
fiat money. Any contingency plan prepared under his watch must likewise
ignore gold. I hereby issue a challenge for anybody to come up with
a better contingency plan to save the moribund dollar (barring to
make it gold-redeemable) than conspiring with the Bank of Japan to
extend the bull-run in bonds in order to massacre the Cassandras,
on either side of the Pacific, who bet on the collapse of the American
The conspiracy may be to the liking of the Bank of Japan which has
a reputation of dealing most ruthlessly with speculators who oppose
its policy of a weak yen. It prints yens clandestinely at no cost
to itself. The Bank's acquisition of bonds is therefore a windfall.
Thrown in as a bonus is the appreciation of the Bank's inordinate
hoard of bonds in the wake of falling American interest rates. These
bonds were accumulated during earlier decades, in consequence of
the U.S. government twisting the Bank's arm not to buy gold with
unwanted dollars, which is what Charles De Gaulle would have done.
The Japanese know only too well that their hoard is so enormous that
the chances of getting rid of it in case of a dollar crisis are nil.
But isn't this conspiracy, if it exists, immoral? Yes, of course
it is! It is the epitome of the total depravity of the fiat
money regime. Printing yens to support productive enterprise is one
thing; printing yens to support bond speculators who have insider
knowledge is another. It must also be clear that, if such a conspiracy
exists, it is nothing but a rape of the American taxpayer who will
have to be skinned alive by the Treasury to pay the maturing coupons
on the bonds given away by the Fed.
I have said that the Bank of Japan in printing the yens was supporting
bond speculators with insider knowledge. That's right, there is a
huge speculative scheme afoot called the yen carry-trade. Speculators
borrow yens at 1.5%, sell them for dollars, and buy U.S. Treasury
bonds yielding up to 5%. Not only do they pocket the difference,
they are also the beneficiaries of the huge appreciation of bond
prices in the wake of the falling dollar rate of interest. That is
no conjecture. That is a fact. The conjecture is that speculators
are acting on insider information. The conspiracy of the Fed and
the Bank of Japan provides the favorable back-wind to their speculation
which, without it, would be nothing short of suicidal. But with the
back-wind, it is extremely profitable, especially in view of the
weak dollar which improves the terms of trade of yen sellers and
dollar buyers beyond their wildest dreams.
This takes us back to the supply of oxen at the Fed. If the conjecture
is correct, the Fed has engineered a scheme to push the rate of interest
lower in defiance of the falling dollar. Such a policy is bovine.
It spells disaster. It stokes the fires of deflation as I shall now
Let's define inflationary spiral under Kondratiev's long-wave cycle
as the decades-long rise of prices and interest rates, and
deflationary spiral as their similarly long fall. Interest rates
may lead and prices may lag, or the other way round. The important
thing is linkage. The long-term movements of prices and interest
rates are inevitably linked. Linkage epitomizes a huge oscillating
money-flow back-and-forth between the bond and the commodity markets.
When the money-tide begins to flow at the commodity market and ebb
at the bond market, we have the inflationary spiral. When it is reversed
and flows at the bond and ebbs at the commodity market, we have the
Chairman Greenspan in a speech on the History of Money, from which
I took the quotation above as well as the title of this article,
congratulates himself and his central banker colleagues in other
countries for "the success in containing inflation during the past
two decades and raising hopes that fiat money can be managed in a
responsible way." This is akin to the surfer on the beach boasting
that he has turned the flow of the tide back through skillful surfing.
What the Chairman calls "containing inflation" is nothing but the
receding money-tide from the commodity market that started in 1980,
now flowing at the bond market. The Chairman did not cause it but
could make it a lot worse and more devastating. In particular, if
such a conspiracy between the Fed and the Bank of Japan exists, the
receding money-tide could become a tsunami, repetition of the Great
Depression of the 1930's wiping out sound businesses and the life
savings of most people.
A bull market in bonds is the sine qua non of the deflationary
spiral. Deflation is greatly aggravated by central bank intervention
in putting more money in circulation through open market purchases
of bonds. The central bank hopes that the new money will flow to
the commodity market. Speculators forestall it buying the bonds first.
The new money, thus intercepted and diverted, flows to the bond market,
instead of the commodity market as hoped by the central bank. Interest
rates fall, and linkage makes prices to fall with them. Contra-cyclical
policy backfires. No wonder, its author, Keynes, was ignorant of
the linkage. If the conjecture about the conspiracy between the Fed
and the Bank of Japan is correct, there is an insatiable demand
for dollars, especially for falling ones, by bond speculators. The
Fed is the quartermaster general for the coming depression that may
make the Great Depression rather tame in comparison.
In 1980 the dollar had a close brush with sudden death. It was saved,
barely, by the shock-therapy of ultra-high interest rates, quite
openly administered by Chairman Volcker. The dollar now appears to
have another death-spell. Is it possible that there is a similarity
between the two episodes, except this time the attempt to save the
dollar will be through the shock-therapy of ultra-low interest rates,
clandestinely administered by Chairman Greenspan? If so, it won't
save the dollar, only prolong the agony.
In his History of Money speech Chairman Greenspan observes that "savers
have been in sufficient abundance since the beginning of the Industrial
Revolution to enable investment to further material well-being. Money,
as a store of value, was an early facilitator of savings and one
of the great inventions of mankind. The history of money is the history
of civilization or, more exactly, of some important civilizing values." We
may add that it was the savings of the people that has made America
great. In the nineteenth century the American people working hard
and saving hard created an economic and financial giant on the continent.
America was the world's greatest creditor nation. Now, America is
a financial and economic dwarf. It has dismantled its great industries
with the exception of the industry producing military hardware. Now
the capital, embodying the great savings of earlier generations,
is being dissipated. Now, thanks mainly to Chairman Greenspan's long
tenure, America is the world's greatest debtor nation. Now, savers
in America are no longer in abundant supply. In fact they are an
endangered species, at the verge of extinction. Now, the dollar is
no longer a store of value. It is a certificate of guaranteed confiscation
of value. The most recent history of money is a history of decline
of civilizing values.
In his speech Chairman Greenspan related a story. He had met a friend
and told him about the speech he was going to make on the history
of money. The friend's response was: "I know all about the history
of money. When I get some, it's soon history." He could have added: "And
if I save some, its value is soon history!" The Chairman called
his friend "spendthrift". He failed to mention that it was precisely
his policies at the Fed that had made his friend, and many millions
of others, spendthrift by turning the dollar into the peso of a banana-consuming
Chairman Greenspan said in his speech that "the early history of
the post-Bretton Woods system of generalized fiat money was plagued,
as we all remember, by excess money issuance." The cheek of the kettle
that dares to call the pot black! The excess money issuance under
all his predecessors combined is eclipsed by the excess money issuance
during this Chairman's tour of duty at the Fed! Nor can he have the
excuse that he was misled by the siren-song of the welfare state.
As his earlier article "Gold and Economic Freedom" will testify,
he is one of the precious few who understands the gold-freedom nexus.
The Chairman is traitor to the cause of sound money.
Alan Greenspan, Gold and Economic Freedom (1967)
Alan Greenspan, The History of Money (2002)
Antal E. Fekete, The Causes and Consequences of Kondratiev's
The Technical Analyst, January, 2005, London
Dr. Antal E. Fekete is an economist and monetary theorist, born
and raised in Hungary, who taught for many years in Canada. He also
worked in the Washington D.C. office of Congressman W.E. Dannemeyer
for five years on monetary and fiscal refom until 1990. Since 2001
he has been consulting professor at Sapientia University, Cluj-Napoca,
Romania. In 1996 Professor Fekete won the first prize in the International
Currency Essay contest sponsored by Bank Lips Ltd. of Switzerland.
He is the author of numerous scholarly articles and the widely read Monetary
Economics 101. His articles are archived at www.goldisfreedom.com.