I wonder if, watching the clamorous melodrama in the United States Congress over the budget and the debt, the American public and world could miss the sound track--the theme song--playing in the background? Both sides in the clash were loudly strumming the same song, but singing different words. Don't try to decipher the words, listen to the music.
From different perspectives, I think, both sides foresee the coming perfect storm when exponentially ballooning spending; the Fed's hands-down, unprecedented, historical monetary inflation; and the debt that we as a nation have created simply cannot be sustained any longer on the life support of 1) the Federal Reserve's creating most of the money, now, to "buy" U.S. bonds--buying our own debt with new dollars we create, and, 2) the Fed pressing short-term interest rates near to zero so that interest on the gigantic U.S. debt burden is sustainable--for awhile.
The champions of government power and dominance (statists) in both parties over decades have put the U.S. economy, the financial balance sheet of government, and the country's credit in such a fantastically (literally "fantasy") dangerous and fragile position--aborting every free-market correction with the panacea of more borrowing and inflation--that today those who say that to put the country's credit in default, to halt the Fed's inflation, to rein-in government spending would lead to catastrophe are right. They are correct in a much deeper way than they understand.
By now, we are far, far too deep in the credit-expansion cycle to halt without precipitating a crash and deep depression. That is reality; we have bought and paid for it, and now see the battle between those who would begin to face it and those who would postpone facing it until it smashes down on us despite all interventions. The Tea Party might unleash at last the perfect storm that always is the end game of government-induced (and prolonged, and PROLONGED) boom. (Although the current drawn-out life-support for the economy is now as much "boom" as trillions in quantitative easing can achieve.) There will be bust and it will be horrendous, revealing the actual state of the economy and government's long overdue bankruptcy. I don't think that the Tea Party understands or intends to release that storm, which, inevitably, must strike. They want to halt the plunge deeper into the credit maelstrom. But, as we know from von Mises and others, there is no mere halting; not to continue to expand credit is to bring about the bust. Indeed, everything government has done in the past six years has acknowledged the fragility of the system.
Do you hear the theme song? Borrowed money, creating money to buy our own bonds, manipulating interest rates to leash the potentially explosive interest payments on burgeoning debt: borrow money, create money, juggle debt... Do you hear the theme song of the future? It is: phony money versus real money.
While Congress and President Obama, and the press, and world's bankers are cheering, booing, moaning about the U.S. phony money melodrama, who in the world wants real money? Who will hold the real money when the Great Credit and Borrowing and Bluffing Charade simply collapses--and with it the U.S. dollar?
Well, real money, for at least the past 5000 years, has been gold. Is that old hat? Well, central banks all over the globe have halted--stopped--selling their gold holdings and started saving and building them. Central banks. Real money.
And the price of gold since about 2001 has risen from about $250 an ounce to $1900 an ounce in 2011, without a single year in which the price failed to rise. Since 2011, it has corrected, falling to $1,300 an ounce--still about five times what it was a decade ago. Why has gold finally corrected, now, as the perfect storm brews? Because the Fed has deliberately, and by announcement, created a tsunami of newly created money to bolster the stock market and promote equities (risk), and this tsunami has gone on so long and so consistently that investors now think the stock market never will stop making new highs. And so money has flowed out of the huge gold-holding Exchange Traded Funds (ETFs) into the stock market. Gold is having a brief clearance sale because for now the Fed's unlimited power to create phony money has mesmerized investors.
Who has come to that sale to take advantage of the bargain? Who is buying gold? No country in the world comes CLOSE to matching the gold purchases that will be made this year alone by China. China, by the end of the year, adding in its purchases and its own mined gold (no mined gold leaves China), will have added 1700 tons of gold to its reserves. How much is 1700 tons in one year? Well, the total U.S. gold holdings in Fort Knox and elsewhere, accumulated over the American Republic's history, is 8033 tons.
In one year, China has purchased gold holdings equal to 21 percent of total U.S. gold holdings. And those purchases have not dented China's free foreign reserves of $1.3 trillion
As the U.S. Congress and President Obama are locked in farcical combat over phony money--debt, borrowing, inflation--China is quietly accumulating tons of the world's real money.
China wants a new world agreement; it has called for a new Bretton Woods agreement, which, after World War II, made the U.S. dollar the world's official reserve currency because it then was backed by gold. And now? If the U.S. sold its gold holdings, in total, at today's price, it would produce enough to meet U.S. government expenditures for one month. Right, one month.
[Hear More: Benn Steil: Author of "The Battle of Bretton Woods"]
China will accumulate enough gold to back its currency and, as all of economic history shows, will become an irresistible magnet for the world's savings, the world's credit, the world's fiduciary trust. The world's trade and bank reserves will be in the Yuan.
On our present course, this will not be long in coming. China watches our politicians and the Fed slipping into a deeply subjective and unreal world. It watches and prepares. To wait a decade or even two is nothing. The Dragon Throne has time.
