by Dr. Ron Paul
Holding gold is protection or insurance against government’s proclivity to debase its currency. The purchasing power of gold goes up not because it’s a so-called good investment; it goes up in value only because the paper currency goes down in value. In our current situation, that means the dollar.
One of the characteristics of commodity money – one that originated naturally in the marketplace – is that it must serve as a store of value. Gold and silver meet that test – paper does not. Because of this profound difference, the incentive and wisdom of holding emergency funds in the form of gold becomes attractive when the official currency is being devalued. It’s more attractive than trying to save wealth in the form of a fiat currency, even when earning some nominal interest. The lack of earned interest on gold is not a problem once people realize the purchasing power of their currency is declining faster than the interest rates they might earn. The purchasing power of gold can rise even faster than increases in the cost of living.
The point is that most who buy gold do so to protect against a depreciating currency rather than as an investment in the classical sense. Americans understand this less than citizens of other countries; some nations have suffered from severe monetary inflation that literally led to the destruction of their national currency. Though our inflation – i.e., the depreciation of the U.S. dollar – has been insidious, average Americans are unaware of how this occurs.
The response in time will drive the dollar down, while driving interest rates and commodity prices up. Already we see this trend developing, which surely will accelerate in the not too distant future. Part of this reaction will be from those who seek a haven to protect their wealth – not invest – by treating gold and silver as universal and historic money. This means holding fewer dollars that are decreasing in value while holding gold as it increases in value.
Historically, paper money never has lasted for long periods of time, while gold has survived thousands of years of attacks by political interests and big government. In time, the world once again will restore trust in the monetary system by making some currency as good as gold.
The economic harm done by a fiat monetary system is pervasive, dangerous, and unfair. Though runaway inflation is injurious to almost everyone, it is more insidious for certain groups. Once inflation is recognized as a tax, it becomes clear the tax is regressive: penalizing the poor and middle class more than the rich and politically privileged. Price inflation, a consequence of inflating the money supply by the central bank, hits poor and marginal workers first and foremost. It especially penalizes savers, retirees, those on fixed incomes, and anyone who trusts government promises. Small businesses and individual enterprises suffer more than the financial elite, who borrow large sums before the money loses value. Those who are on the receiving end of government contracts – especially in the military industrial complex during wartime – receive undeserved benefits.
It’s a mistake to blame high gasoline and oil prices on price gouging. If we impose new taxes or fix prices, while ignoring monetary inflation, corporate subsidies, and excessive regulations, shortages will result. The market is the only way to determine the best price for any commodity. The law of supply and demand cannot be repealed. The real problems arise when government planners give subsidies to energy companies and favor one form of energy over another.
Energy prices are rising for many reasons: Inflation; increased demand from China and India; decreased supply resulting from our invasion of Iraq; anticipated disruption of supply as we push regime change in Iran; regulatory restrictions on gasoline production; government interference in the free market development of alternative fuels; and subsidies to big oil such as free leases and grants for research and development.
Inflation, as exposed by high gold prices, transfers wealth from the middle class to the rich, as real wages decline while the salaries of CEOs, movie stars, and athletes skyrocket – along with the profits of the military industrial complex, the oil industry, and other special interests.
If we care about the financial system, the tax system, and the monumental debt we’re accumulating, we must start talking about the benefits and discipline that come only with a commodity standard of money – money the government and central banks absolutely cannot create out of thin air.
Wednesday, September 30, 2009
Friday, September 25, 2009
From Deflation to Inflation
by Martin D Weiss
The forces of deflation are temporarily receding; and in the meantime, the forces of inflation threaten to roar back with a vengeance.
They are everywhere. They could be overwhelming. They must NOT be ignored …
Inflationary Force #1 Never-Ending, Out-of-Control U.S. Federal Deficits
Through August, the federal deficit hit $1.38 trillion, or three times last year’s all-time record deficit of $454.8 billion. And in September alone, the administration expects another $200 billion in red ink, bringing the total for the year to $1.58 trillion.
The U.S. government’s official debt is now at an all-time high of $11.8 trillion, or over $100,000 for each and every household in America.
Both the administration and its opponents agree that, over the next 10 years, the cumulative federal deficit will be another $9 trillion, driving the burden per household up to $177,000.
The Federal Reserve is also in hock up to its eyeballs, with more than $2 trillion in liabilities on its balance sheet. That brings the total burden up to $194,000 per household.
Perhaps worst of all, the government’s unfunded obligations for Social Security, Medicare, and Federal pension payments are also ballooning higher and now stand at an estimated $104 trillion, or $886,000 per household.
Total burden per household: More than $1 million!
This is, by far, the largest federal deficit in U.S. history — in proportion to household income … in comparison to the nation’s population … or even as a percent of the total economy (other than during major World Wars).
It drives the Fed to print money without restraint. It pumps up demand for scarce goods. And in the months ahead, it’s bound to be the single most powerful pressure point on public policy, financial markets, the U.S. dollar and … inflation.
Inflationary Force #2 New Lows in the U.S. Dollar
Last week, the U.S. dollar sunk to a new, one-year low against a basket of major currencies.
It’s just five points away from its lowest level in history.
And, as Mike Larson detailed this past Friday, the U.S. dollar is now being driven lower by a new, unprecedented factor:
For the first time since 1933, it is now cheaper to borrow dollars than Japanese yen. Indeed, the three-month London Interbank Offered Rate (LIBOR) on the U.S. dollar has slumped to a meager 0.292 percent, while the equivalent rate on the Japanese yen is 0.352 percent.
This means that, instead of using Japanese yen to finance the carry trade — borrowing low-cost money to buy high-yielding investments — international investors will now start using U.S. dollars to finance the carry trade.
It means that, instead of the dollar being a magnet for frightened money, it is becoming precisely the opposite — a source of financing for the risk trade.
Most important, it means that, instead of buying dollars, they have every incentive to borrow dollars and promptly SELL them in order to purchase the higher yielding instruments.
End result: More momentum to the dollar’s decline.
Inflationary Force #3 U.S. Household Wealth Now Expanding Again
For nearly two years, U.S. households were continually losing wealth. They lost trillions in stocks, bonds, insurance policies, real estate. And these losses, in turn, emerged as a major deflationary force, driving consumer price inflation to zero or lower.
Now, however, in the second quarter of 2009, that trend has reversed.
According to the Fed’s Flow of Funds released just last week, in just the last three months, U.S. households have enjoyed wealth gains of
$1.1 trillion common and preferred stocks
$494 billion in mutual funds
$157 billion in real estate
These gains are still far from enough to recoup the peak asset levels of 2007. But the change in trend is enough to rekindle inflation, and that inflation is likely to take most economists by surprise.
Inflationary Force #4 Exploding U.S. Money Supply
Money pouring into the economy and chasing scarce goods is the classic cause of inflation.
But throughout 2007 and much of 2008, there was no growth whatsoever in U.S. money supply (M1).
During that period, despite the Fed’s efforts to shove interest rates down to practically zero, the total amount of money outstanding remained under $1.4 trillion — another deflationary force.
But first, I want to clear up a few basic points. Although we may sometimes disagree on the specific timing and magnitude of particular market moves, we are unanimous in our views about a few fundamental issues:
First, until and unless there is a dramatic change in these inflationary forces, it should be clear that the U.S. dollar’s decline will accelerate in the months ahead.
Second, despite its decline, the U.S. dollar will continue to be a viable, widely traded currency. It will not, as some seem to fear, simply disappear from the face of the earth.
Third, it is both impractical and unreasonable to abandon U.S. Treasury bills and other conservative dollar-denominated investments. They continue to provide U.S. citizens and residents the best safety and liquidity in the world today.
Fourth, the best way to protect yourself from a falling dollar is with contra-dollar investments such as precious metals, natural resources and assets tied to strong foreign currencies.
The forces of deflation are temporarily receding; and in the meantime, the forces of inflation threaten to roar back with a vengeance.
They are everywhere. They could be overwhelming. They must NOT be ignored …
Inflationary Force #1 Never-Ending, Out-of-Control U.S. Federal Deficits
Through August, the federal deficit hit $1.38 trillion, or three times last year’s all-time record deficit of $454.8 billion. And in September alone, the administration expects another $200 billion in red ink, bringing the total for the year to $1.58 trillion.
The U.S. government’s official debt is now at an all-time high of $11.8 trillion, or over $100,000 for each and every household in America.
Both the administration and its opponents agree that, over the next 10 years, the cumulative federal deficit will be another $9 trillion, driving the burden per household up to $177,000.
The Federal Reserve is also in hock up to its eyeballs, with more than $2 trillion in liabilities on its balance sheet. That brings the total burden up to $194,000 per household.
Perhaps worst of all, the government’s unfunded obligations for Social Security, Medicare, and Federal pension payments are also ballooning higher and now stand at an estimated $104 trillion, or $886,000 per household.
Total burden per household: More than $1 million!
This is, by far, the largest federal deficit in U.S. history — in proportion to household income … in comparison to the nation’s population … or even as a percent of the total economy (other than during major World Wars).
It drives the Fed to print money without restraint. It pumps up demand for scarce goods. And in the months ahead, it’s bound to be the single most powerful pressure point on public policy, financial markets, the U.S. dollar and … inflation.
Inflationary Force #2 New Lows in the U.S. Dollar
Last week, the U.S. dollar sunk to a new, one-year low against a basket of major currencies.
It’s just five points away from its lowest level in history.
And, as Mike Larson detailed this past Friday, the U.S. dollar is now being driven lower by a new, unprecedented factor:
For the first time since 1933, it is now cheaper to borrow dollars than Japanese yen. Indeed, the three-month London Interbank Offered Rate (LIBOR) on the U.S. dollar has slumped to a meager 0.292 percent, while the equivalent rate on the Japanese yen is 0.352 percent.
This means that, instead of using Japanese yen to finance the carry trade — borrowing low-cost money to buy high-yielding investments — international investors will now start using U.S. dollars to finance the carry trade.
It means that, instead of the dollar being a magnet for frightened money, it is becoming precisely the opposite — a source of financing for the risk trade.
Most important, it means that, instead of buying dollars, they have every incentive to borrow dollars and promptly SELL them in order to purchase the higher yielding instruments.
End result: More momentum to the dollar’s decline.
Inflationary Force #3 U.S. Household Wealth Now Expanding Again
For nearly two years, U.S. households were continually losing wealth. They lost trillions in stocks, bonds, insurance policies, real estate. And these losses, in turn, emerged as a major deflationary force, driving consumer price inflation to zero or lower.
Now, however, in the second quarter of 2009, that trend has reversed.
According to the Fed’s Flow of Funds released just last week, in just the last three months, U.S. households have enjoyed wealth gains of
$1.1 trillion common and preferred stocks
$494 billion in mutual funds
$157 billion in real estate
These gains are still far from enough to recoup the peak asset levels of 2007. But the change in trend is enough to rekindle inflation, and that inflation is likely to take most economists by surprise.
Inflationary Force #4 Exploding U.S. Money Supply
Money pouring into the economy and chasing scarce goods is the classic cause of inflation.
But throughout 2007 and much of 2008, there was no growth whatsoever in U.S. money supply (M1).
During that period, despite the Fed’s efforts to shove interest rates down to practically zero, the total amount of money outstanding remained under $1.4 trillion — another deflationary force.
But first, I want to clear up a few basic points. Although we may sometimes disagree on the specific timing and magnitude of particular market moves, we are unanimous in our views about a few fundamental issues:
First, until and unless there is a dramatic change in these inflationary forces, it should be clear that the U.S. dollar’s decline will accelerate in the months ahead.
Second, despite its decline, the U.S. dollar will continue to be a viable, widely traded currency. It will not, as some seem to fear, simply disappear from the face of the earth.
Third, it is both impractical and unreasonable to abandon U.S. Treasury bills and other conservative dollar-denominated investments. They continue to provide U.S. citizens and residents the best safety and liquidity in the world today.
Fourth, the best way to protect yourself from a falling dollar is with contra-dollar investments such as precious metals, natural resources and assets tied to strong foreign currencies.
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