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A fiat currency has allowed the policy makers to pursue an inflationary monetary policy and it has allowed the government to run large budget deficits for decades. This has resulted in epic deflationary forces that recently have been counteracted by increased inflation. This policy, over time has damaged the real goods producing economy while giving rise to a financial economy that consists of paper transactions, non-exportable services and asset price bubbles, which creates the allusion of economic strength and health. Until the 1970s, expansion in money and credit stimulated the real economy, resulting in technological breakthroughs and consistent increases in productivity and the overall standard of living for all Americans. In 2001 when the economy was early into a deep recession, the government and the Federal Reserve intervened strongly making money and credit abundant and cheap. Through debt consumption and deficit spending GDP has pushed higher, despite rising price inflation and limited capital investment from the business sector. This heavy stimulus has served to exacerbate the troubling imbalances as well as further tarnish the remains of the real economy. While the headlines have not stated it, the economy is in a recession and has been for much of this decade.[1] The underreporting of inflation has disguised, what has been a stagnant economy since 1990. Tax receipts, although growing, are severally lagging government spending. In turn, the national debt is skyrocketing each month. And because of the inflation of the past 30 years, American business is faltering behind the emerging economies of the world. Moreover, we soon must deal with the tens of trillions of dollars in unfunded liabilities (Medicare, military/government pensions, social security) that the government must pay. According to USAToday[2], these liabilities will come due very soon: “Big payments on the debt start coming due in 2008, when the first of 78 million baby boomers — the generation born from 1946 to 1964 — qualify at age 62 for early retirement benefits from Social Security. The costs start mushrooming in 2011, when the first boomers turn 65 and qualify for taxpayer-funded Medicare”. Current and future fiscal and monetary policy is quite clear. To avoid a deflationary depression, we will continue to create new money to monetize our debts and to keep economic activity from reaching a standstill. In the coming years, to meet the entitlement demands and the budget gap, monetary expansion will have to accelerate rapidly. All indications point to Fed Chairman Ben Bernanke following Alan Greenspan’s easy money policy and leading us to hyperinflation. The government and Federal Reserve have already spent the last 15 years laying the groundwork for an accelerated expansion in the money supply, while deceiving the public as to the real level of inflation. Since the early 1990’s the government and Fed have taken several steps to artificially lessen the outcome of the CPI (consumer price index). These steps include seasonal price adjustments, substitution of goods, geometric weighting of the index and hedonics. The result is shown below in a chart from W. John Williams’ “shadowstats.com” which shows today’s CPI against its outcome based on its original calculation.
Even more recently, the policy makers have taken two more steps to alter the public’s perception of inflation. With the CPI creeping up, they developed a “core CPI” index that essentially removes things that show inflation, such as food and energy. The media and Wall Street now refer to “core CPI” when judging inflation. Last and most important, the Fed did away with the reporting of M3, the broadest and most accurate gauge of money supply. Would there be any other reason why the Federal Reserve abandoned the reporting of M3, then to prepare for even higher rates of money creation? The coming hyperinflation will be so powerful and widespread that money will make its way into everything: Commodities, Stocks, Real Estate and consumer prices. We have already seen the start of this, as every asset class has risen handsomely since 2002. Folks, that is a powerful warning sign that hyperinflation has already begun. Ultimately, commodities will be the only investment that maintains “real” value. Don't be deceived by the rising market indices as they are falling dramatically against real money (gold and silver). The troughs in the Dow/Gold ratio occurred at the following prices and in the following years: 1.01 in 1896, 2.01 in 1932 and 1.04 in 1980. History mandates that this cycle will end when Gold’s price is at least 50% of the Dow. Considering that the Dow is at 14,000, one can understand the large scope of the American inflation and realize the extreme magnitude of the adjustments that lie ahead. Gold’s rise from $250/oz to over $700 is only a fraction of the rise that awaits us. Today’s Dow mark would put the next peak in gold at a minimum of $7,000/oz. That may sound extreme but not if you consider the array of driving forces. First, bull markets always run to the extreme. Second, the size of the gold market is currently miniscule relative to the size of the entire stock market. Third, despite over a 150% rise in the price of gold, gold mine supply is running woefully short of demand. South Africa, the top gold mining country, just reported that its gold output was at a 74 year low! Australia, the third largest, reported that it’s 2006 production was at a 13 year low! The bear market of the 80s and 90s decimated this industry in terms of resource development and talented people. Fourth, there is no indication that this market is anywhere close to being saturated in terms of investors or investor funds. Joe Sixpack has no idea what is going on and even most educated professionals are oblivious to gold’s bull market. Fifth, the price of gold increased 25.3 fold from 1971 to 1980. Using the bottom in 1999, that would put gold at over $6,000 an ounce. If there was ever a time and situation to be buying gold and silver with reckless abandon, now is it! The engine of the gold train is revving. Will you be aboard?
WHAT WILL BE THE AFTERMATH AND RAMIFICATIONS? That is up to all of us Americans. Today, our economy is a mixture of free market capitalism, socialism (welfare, entitlement spending) and fascism (central bank, big corporations in bed with the government). Which way will it drift? Contrary to what one might think, the gold bull market will go a long way in restoring a solid and constitutional economic foundation. Gold is pure. It is money, freedom and liberty. While all fiat currencies ultimately encounter the same fate, gold and silver as real money has stood the test of history. The most basic element of commerce is a stable medium of exchange. If an economy's form of money isn't sound what will happen to the economy? What would happen to airplanes if we built them with cardboard? It is true. We do not have free money nor do we have a free banking system. Rest assured, the flight from paper assets to hard assets will gradually expose both fiat currency and the Federal Reserve System for the frauds they are. In the process of hyperinflation, both the Fed and the government will destroy themselves in trying to prevent what they have made inevitable. I fully expect the dollar to be backed by some combination of gold and silver and the duty of handling the nation's money to be returned to Congress as was intended by the Constitution. These developments, among others, would help refurbish a previously defaced economic infrastructure and ultimately lay the foundation for 21st century economic success. Undoubtedly the path to economic reconstruction will be an extremely difficult and turbulent one. In the coming years, as more and more individuals move their money away from government paper to sound money, the government and Fed will be exposed for their excessive roles in a free market economy. Consequently, this will lead to an array of political and social problems. Unfortunately, the undereducated, misinformed, disadvantaged and underprivileged will become victims as they lack the means and resources to protect themselves from the massive economic and social displacement that is on the way. Furthermore, the voting public and the government are extremely deficient in their understanding of our economic problems. They are ill equipped to offer insight and the necessary solutions that will reform the system. When the crisis hits, it will be exacerbated and lengthened, as the public and government will misdiagnose the causes. Few understand money, gold and our current monetary system. Like the Great Depression, most will blame the problems on the free market, while not realizing that what once was a free market system has been considerably altered, tinkered with and corrupted since 1913. Is it a coincidence that since our monetary system has evolved, most facets of American society have declined in tandem with the purchasing power of the dollar? American education used to be the best in the world, now it is falling. 21% of our adult population is functionally illiterate. American culture used to be revered, now it has become a mindless charade, over obsessed with meaningless celebrity. Forty years ago the American family thrived as a single high school graduate’s income was enough to support the entire family. Foreigners once admired America as the beacon of liberty, freedom and free markets, though all have been gradually eroded in the wake of the American inflation. The American inflation has also produced a decline in the respect and civility towards our fellow man. This is even shockingly apparent in the financial industry. Peter Schiff of Euro Pacific capital is one of the very few outspoken individuals who appear regularly on the various programs. On CNBC, Schiff recently spoke with host Mark Haines. Haines’ behavior and treatment of Schiff (because of his bearish views) was appalling. This is not limited to CNBC. On a recent appearance on Fox News’ Bulls and Bears, Schiff was the lone bear. When he gave his case, everyone else on the panel laughed. I thought the name of the show was Bulls and Bears? Nevermind that Schiff’s views were absolutely correct on both accounts. The previous paragraphs illustrate how the ramifications of inflation extend well beyond the financial and economic sphere. Ironically, the word inflation engenders a thought of something growing, rising and getting bigger. In reality, inflation is about erosion in value. The value of the currency decreases and you are getting less than you did before. Consider the government. The “value” of the services it provides has declined considerably in tandem with the buying power of the dollar. Recent history is a powerful indication that government ineptitude is a consequence of inflation. Just think of the 2000 election, the Iraq War, Katrina and the poor treatment army veterans get. Need I say more? Ultimately, a devalued currency leads to devalued morals, values, behavior and a devalued society. Those that understand and prepare for the drastic changes headed our way will grow wealthy and prosper in more ways than one. Those that ignore the warning signs and rely on the status quo will do so at their own peril. While this editorial carries a negative tone, there are several important positive insights I can offer. As Doug Casey says, the longest running trend is the ascent of man. While there are always peaks and valleys, life and the standard of living usually improve from generation to generation. Secondly, the government is not the same thing as the country. Governments come and go but nations, states and peoples remain. Finally, after the coming Depression runs its course, American assets and factors of production will be cheap and a tremendous value given the right political climate. The majority of Americans who emerge from the coming crisis will have done so because of true American values such as sacrifice, self-reliance, responsibility and hard work. It will be the lasting values of such people that ensure America’s economy and monetary system are reshaped to reflect true free market principles. In closing, I would like to leave you with four quotes about inflation. These four quotes are all you need to remember concerning the dangers of inflation and why and how such dangers will be realized in the coming years. Read the first three and pause before you read the last quote which, I should add, is incredibly naďve, absurd, and outright dangerous. "The trifling economy of paper, as a cheaper medium, or its convenience for transmission, weighs nothing in opposition to the advantages of the precious metals... it is liable to be abused, has been, is, and forever will be abused, in every country in which it is permitted." -Thomas Jefferson "Lenin is said to have declared that the best way to destroy the Capitalistic System was to debauch the currency. . . Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million can diagnose." -John Maynard Keynes “In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the "hidden" confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.” -Former Fed Chairman Alan Greenspan in 1967 “But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.” -Current Fed Chairmen Ben Bernanke in 2002 Hyperinflation may only be a few years away…..
Special Thanks to the following sources for charts/data/cartoons: - John Williams, Shadowstats.com - Economagic.com - Michael Hodges, Grandfather Economic Report, http://mwhodges.home.att.net/product.htm - Cartoons by BlueWireStudio.com ~ THE END ~ Reference
“Trendsman” (aka Jordan Roy-Byrne) is an affiliate member of the Market Technicians Association (MTA) and is enrolled in their CMT Program, which certifies professionals in the field of technical analysis. He will be taking the final exam in Spring 07. Trendsman, with 12 years investing experience, focuses on technical analysis, but analyzes fundamentals and investor psychology in tandem with the charts. He credits his success to an immense love of the markets and an insatiable thirst for knowledge and profits. CONTACT
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