S&P Downgrades US Sovereign Debt Outlook to Negative – Gold and Silver

Finally

The US government enjoys a AAA credit rating, something that it has had since 1917. That’s 94 consecutive years of a top credit rating.

During this time, the US government has spent like spoiled children who found both their parent’s liquor cabinet and safe unlocked. All is well as long as we give in to our sordid desires to spend and buy votes.

The credit rating outlook downgrade comes after the congress and president passed the “not so reducing” deficit reduction for the budget year 2011.

Equities

Dow and S&P500 declined sharply on the news, With the Dow ending down -140.25 to 12,201.59 and the S&P 500 down -29.27 to 1,305.14.

Gold and Silver Versus the US Dollar

As expected, gold and silver are continuing to act as sovereign money. People look at their prices and think they are expensive instead of looking at how much less the currency is buying.

The dollar should be measured in how many ounces of gold or silver it will buy. Today, the dollar sank to new lows, as it now only buys 1/1492th of an ounce of gold and only 1/43th of an ounce of silver. This is a record low for the dollar.

Gold and Silver Versus the Dow

When you think of pricing equities and the Dow you no doubt price them in dollars. But why not value them in how many ounces of gold or silver it takes to buy one share of the Dow.

The graphs below show the fiat currency (US Dollars) pricing of the Dow, then the pricing of the Dow in both gold and silver. The difference between these two is striking.

Here’s a graph of the Dow priced in US Dollars (Clearly the number US Dollars required to purchase a single share of the Dow has risen dramatically since its Mar 2009 lows.):

Here’s a graph of the Dow priced in troy ounces of gold (As is easily seen the Dow has risen from its Mar 2009 low of 7 ounces of gold to only 8.2 ounces of gold. The Fed’s QE1 program ended in April of 2010 and the Dow to gold ratio has been trending down ever since.):

Here’s a graph of the Dow priced in troy ounces of silver (As you can see the number of ounces of silver required to buy one share of the Dow has been rapidly declining and the RSI has dropped deep into the oversold range.):

 

The Devaluation of the US Dollar

Since the creation of the Federal Reserve Banking system in 1913 the US dollar has steadily been losing value through over issuing. The populous can see this in the ever increasing prices of goods and services. A gallon of milk in 1964 cost $0.25. Today is costs several dollars. In 1964 a gallon of gas cost $0.25, while today it costs close to $4. The same is true for labor. When I was a kid doing my first job I made $1.85 an hour. Today kids don’t work and earn nothing, but they are replaced by adults who earn $10 and have much less enthusiasm.

During the US Civil war a postmaster was so consumed by women coming in to see if news of their loved ones had arrived. Many of the notices received were of deaths and the post office filled with grieving wives and mothers.

The postmaster decided to hire boys to deliver the mail to solve the problem of the post office being consumed by grief. Today a mail delivery person earns $40-$70,000 a year, plus medical and retirement for doing a boy’s job.

When one is forced to pay 100 or 200 times the cost for no net increase in value the difference is the devaluation of the currency and overvaluation of the good or service being delivered. Over-valuing generates pressure for a correction, as can be seen by the backlash against overpaid government employees.

Is Oil going Up or Down?

West Texas Crude priced in ounces of gold:

While oil prices are running high in US Dollars and a gallon of gas is approaching $4, you can see that oil prices have been very steady when measured in gold since mid 2009.

Gold and Silver are Old Money

Historically, gold and silver are money. They’ve been money for thousands of years and are the only form of money described in the US Constitution.

Why?

The answer is simple, governments cannot create gold and silver out of thin air, whereas, today’s paper and digital currencies can be issued in unlimited quantity. As more and more of a currency is issued, each unit of that currency holds less and less value.

Prior to 1982, pennies were mostly made up of copper. Prior to 1965, dimes, quarters, half dollars and dollar coins consisted of 90% silver. Up until April of 1933 five, ten and twenty dollar coins were minted in gold. Nickels were minted in nickel up through 2010 and are now being minted mostly with steel. Pennies today are mostly made of zinc clad in copper.

How do those old coins translated into value today?

The copper in a pre-1982 penny is worth over three pennies. The nickel metal in a nickel coin made only last year is worth around $0.07 today. The silver in a 1964 quarter is worth more than $6.00. In 1964 that same quarter would buy you a gallon of full service gas. Today, when you have to pump it yourself, check your own oil and tire pressure, it’ll buy a little more than a gallon and a half.

As can be seen in the graphs above, to measure value in dollar terms is misleading. A 1964 US Dollar is worth more than 30 2011 US Dollars. Or, looking at it from the other direction, if one had kept that dollar in a US bank it would be worth 3% of it’s 1964 value in terms of buying power.

Simply by keeping possession of a 1964 dollar coin, one would have maintained the value of that dollar simply because of its silver content. If you doubt me check the price of a silver dollar minted before 1965.

We can do the same calculations for gold. A 1929 $5 half eagle gold coin contains 0.24187 troy ounces of gold and has a spot price value of $360.87. So we can see that a 1929 US dollar is worth 72.17 2011 US Dollars or 1.39% of its 1929 value.

Now if a person had left those $5 in their bank checking account, that $5 would be worth $5 2011 dollars. However, by retaining possession of the coin, it is worth $360.87 2011 dollars. That $5 gold coin contains the same gold that it contained in 1929, as it’s the same coin. However, the $ currency is not the same $ currency today as it was in 1929. Today it buys the milk supply for family for less than a week. In 1929 it bought all the groceries a family needed for a week, with change to spare.

These calculations are easy to do and provide the most compelling evidence that gold and silver are money and are certainly much better than storing one’s wealth in a bank account.

Year Notation for Currency Values

When we speak of a dollar we often consider only the current value of it. If I hire you to do some work for $100, then you will consider what it will purchase you today.

But what about its value tomorrow or next month or next year?

What about its value 10 years ago?

Due to the devaluation of currencies it has become almost vital that we place a notation next to the dollar which indicates the year we are referring to, e.g., $360₂₀₁₁ or $5₁₉₂₉. This is cumbersome, but it depicts a date to differentiate and more accurately describe the buying power meant.

Many contracts call for payments to be linked to the CPI (Consumer Price Index – The government statistic published to show rising prices) in an effort to preserve the value of the contract. Business leases are often written this way in that they allow for annual increases based on the published CPI.

But the government’s CPI figures ignore the costs of food and energy, and therefore do not preserve the value of the contract.

When we look into the past and see how we got to where we are today, we can then see the trends and the direction of things. It is not possible to operate with understanding if one only considers the present. One must be able to see the direction of things to know where one is going.

The US Government Debt and Deficit Show the Wrong Direction

The debt is the total public debt of the US government. It doesn’t not include promises made by politicians to citizens of the US, such as Social Security or Medicare payments.

The deficit is how much more the US government is adding to its debt during the year.

The deficit does not include maturing debt that the US government refinances.

The S&P downgrade of the US Government debt outlook and the published expectation that the credit rating of the US Government could be downgraded from AAA in 2013 tell many things.

The exact reason for waiting until 2013 to downgrade the US government’s credit rating can only be guessed at at this time, but if one fully expects to do the downgrade in 2013 why would one wait?

The US Government never pays its debts, it merely refinances them for more interest. Further, the US Government doesn’t even pay the interest on the debt, it simply borrows more money to pay the interest, thus  paying compounded interest.

A Balanced Budget

A balanced budget puts an end to the compounded interest payments, it doesn’t put an end to the endless refinancing activities.

Therefore, the only solution is to run a surplus. Eventually the government will have to run a surplus of US Dollars. But what will those dollars be worth? Most likely less since the dollar has been losing value for the last 100 years.

As the US borrows more and more, it pays more and more in compounded interest (interest on the interest).

A Question for Consideration

Given all of the above, what form of money do you want to keep? US dollars in a bank or gold and silver in your possession?

The US Mint and Artificial Bullion Coin Shorages

2010

In 2010 the US Mint experienced a number of coin shortages and these continue into 2011. This included a shortage of the 9999 1 oz gold Buffalo and fractional sizes of the gold American Eagle, both of which were discontinued for periods of 2010. The mint has completely stop producing fractional coins for the gold buffalo.

Minting of some silver bullion coins was also discontinued or delayed in 2010.

2011

The 2011 Silver American Eagles were being rationed to resellers in Jan even though record sales were being done.

Now Congressman Ron Paul, R-TX, head of the Domestic Monetary Policy Subcommittee, is holding hearings.

Here are some quotes from those hearings that I got from kitco.com.

“The problem is there is high demand, but a shortage of the coins,” summed up Rep.  Ron Paul, R-TX, the chairman of the subcommittee.

…

Ross Hansen, founder of the Northwest Territorial Mint, said more of such coins should be produced in the U.S.  “We can and want to,” said Hansen, whose operation is the largest private minting company in the U.S. “I’ve told the U.S. Director directly many times but he says it isn’t a priority.  The U.S. Mint needs a change in attitude.  Their attitude towards vendors and authorized purchases is often described as surly and arrogant.”

…

Raymond Nessim of Mantra, Tordella and Brookes, praised the Mint for protecting the U.S. public from potential price gouging in December 2010 when it issued new requirements for authorized purchasers. They included requiring authorized purchasers limit profit margins to no higher than 10 percent, and making all their allocations available for public sale.

Here we have an instance where the mint’s own policies of artificial scarcities causes prices to rise, then it violates free market principles once more by places artificial limits on profits.

When supply is artificially restricted then one can expect prices to rise. The mint actually creates artificial scarcities in a few different ways. These are:

1. Limiting who can purchase the coins from the mint and distribute them to the public. Why are there authorized purchasers at all? All that this does is ensures that the coins only go to a limited number of places. I, for example, cannot order a gold American Eagle from the mint. Why not?
2. The mint likes to create rarities so that the coins will have a higher value than the bullion they are made of. Of course, this is a form of gouging by the mint itself because the value of all bullion coins, regardless of rarity or age or condition, is the underlying bullion value. As the precious metal rises in dollar value, the coin rises in dollar value and vice versa. The rarer the coin the higher the premium over the metal value the coin goes, but it is the metal that determines the base value of any coin, not its rarity or condition. Who’s profiting from these rarities?
3. The mint no longer produces its own blanks, as it use to. But it limits who can supply these blanks and it isn’t guaranteeing minimum annual order quantities, which prevents suppliers from investing in the equipment necessary to create the coin blanks. It then claims a shortage of coin blanks.

If the mint simply sold bullion coins to anyone who wanted to buy from them, sold bulk orders to wholesalers and produced enough coins to meet the demand, there would be no price gouging or price run ups in bullion coins.

In other words, if the mint operated on basic business principles of supplying a demand there would have been no shortages. Instead there is this idea that rarities must exist for coins to have value, which is a falsehood.

That type of operating principle has led many a business into anti-trust suits, but, as usual, the government exempts itself from adhering to its own laws.

 

Are New Unemployment Claims going Up or Down?

The Media Headlines

If you just read the headlines or listen to news snippets you are probably under the impression that new unemployment claims have been declining, yes?

There is good reason for you to believe this, after all the Obama Administration has reported a decline in new unemployment claims for 5 of the last 6 weeks.

However, each new week come with a correction to the previous week’s number and for each of the past 6 weeks the correction is always higher, not lower.

New Unemployment Claims Reported

Here’s the last six weeks of new unemployment claims released each Thursday morning.

Feb 26 New claims reported at 368,000.

Mar 5 New claims rose 26,000 up to 397,000. Feb 26 adjusted up 368,000 to 371,000, + 3,000.

Mar 12 New claims fell 16,000 down to 385,000. Mar 5 adjusted up 397,000 to 401,000, +4,000.

Mar 19 New claims fell 5,000 down to 382,000. Mar 12 number adjusted up 385,000 to 387,000, +2,000.

Mar 25 New claims fell 6,000 down to 388,000. Mar 19 number adjusted up 382,000 to 394,000, +12,000.

Apr 2 New claims fell 10,000 down to 382,000. Mar 25 number adjusted up 388,000 to 392,000, +4,000.

For 5 out of 6 weeks we see declining new unemployment claims, yet the claims have actually risen from 368,000 to 382,000 per week, or +14,000.

Statistical Errors

Normally when one is talking about statistical data you also hear of a margin of error, such as +/- 1%.

However, if the above corrections were due to a margin of error, then the corrections would balance out over the long run where you would have roughly 50% of the correction being up and 50% of the corrections being down and the overall correction should net out to near zero.

Now this is only a sampling of 6 weeks, because I lost patience digging up older press releases to find out what the headlines were, which makes itself a limited sampling. Nonetheless, 7 weeks ago was no different.

Does a Margin of Error Apply to Counting?

Normally when one talks about margin of error it has to do with a survey of a sampling, which is much smaller than the total number. You see this applied to poll results where the pollsters don’t question all people, but rather a sampling of all the people or category of people.

Unemployment claims, however, are not a sampling. These are reported by states to the federal government and they are supposed to be actual counts.

Margin of error doesn’t apply to counting because you are sampling 100%, so there is no margin of error, unless the person doing the counting is unable to count correctly, which may actually be the case.

How can you have a margin of error when you have all of the raw data there in front of you. You count them all and each new unemployment application does actually exist. There are no “sorta” applications or “maybe” applications.

Can the Obama Administration Tell the Truth?

It doesn’t appear so, at least not when it comes to new unemployment claims. Or health care or the budget or anything else.

Hot Money, The Opium of the US Government and Wallstreet Bankers

Hot Money is money borrowed from the Fed (Federal Reserve Bank) at near zero interest. Wall street bankers borrow this cheap money and buy up stocks and commodities. The fact that they are buying and buying in large quantities is driving prices and the market up.

The government has to get into the act as well. 100% of newly issued US government ends up being purchased by the Federal Reserve or foreign central banks. The currency used to buy US government debt is newly issued digital currency. With the Fed’s QE 2 program 70% of US deficit spending is financed by newly issued US dollars and the remaining 30% is financed by foreign central banks, all of whom are issuing new quantities of their own currencies.

The stated purpose of the Fed’s actions is to lower market interest rates, which are determined by the value of bonds. The lower the value of the bond, the higher the interest rate.

This has enabled the government to borrow at very low interest rates.

QE2 Ending

Now, as we approach the end of QE2, what’s going to happen to the interest rates the government is forced to pay on its debt? These will rise and there is little doubt about that.

And, since the US government never pays off its debts, it only refinances the debts coming due by selling more debt, we are entering a period where the cost of the servicing the national debt is going to move up and move up significantly.

Deficit Spending

If you are one of those who believes the government should be spending more than it brings in, then do be aware that you whatever money the government spends by borrowing, the real cost of the spending is more than double what is borrowed.

Take a 30 treasury note sold in 2010 for $1 billion and at an interest rate of 3%. The government will need to pay 3% per year for 30 years. Then it needs to pay the $1 billion. Three percent  of $1 billion is $30 million per year. Multiply that $30 million times 30 years and you get interest payments totalling $0.9 tillion. This means that the $1.6 trillion deficits of the Obama administration for 2011 will cost the American people an additional $1.4 trillion over the next 30 years on top of the $1.6 trillion being borrowed.

Now, what happens when the interest rates rise to 5%? The cost of 2011′s $1.6 trillion deficit goes up to $2.4 trillion over next 30 years.

When Bush left office the national debt was around $9.6 trillion. Today, only 2 years and 3 months later, the debt is over $14.2 trillion.

The US Government Never Pays Off its Debts

That’s right! The US government never pays off its debts, it merely refinances those debts, on and on. It not only never pays off its debts, it borrows to pay the interest on the debt it already has. So as we pay interest on the old debt, we are borrowing more.

This results in compounded interest. Each year, as the government borrows to pay the interest, that newly borrowed money comes with interest payments of its own. This means that the $1.6 trillion in deficits from the 2011 budget will end up costing the American people $4.998 trillion over the next 30 years.

Is the government going to have an extra $4.998 trillion left over in the 2041 budget? Not likely, since that’s more than the entire 2011 annual budget.

If you are one of those people who believe deficit spending is good or that the budget should not be balanced, then just ask yourself how your children are going to be able to pay off that $4.998 trillion in 2041.

Inflation, the US Dollar and the Federal Reserve

The Faulty Principle – What is Currency?

If you ask a mathematician if one is equal to one, he or she will consider the question to have come from a moron. But mathematicians only deal in the world of the theoretical and, in fact, math is only an approximation of the physical universe, not an exactness. Mathematicians, and economists, who live only in the world of the theoretical will fail the people they serve.

There is an unwritten principle in modern schools of economics and with government politicians. This principle essentially states that “a dollar equals a dollar”.

Such a principle sounds not only probable, but factual. Yet it is entirely false.

Many people, including economists and government offices and the population in general consider that currency is money. This is another entirely false principle and it is this false principle which has led modern economies to the brink of collapse.

Currency by definition is: something that is used as a medium of exchange.

A currency can be backed by gold or silver. This is called hard currency.

A currency can be declared money with no backing by real things. This is called fiat currency.

All currencies in use today are fiat currencies and not backed by real things.

Money is a store of value or wealth. Sovereign money is gold.

A currency flows as it is transferred from one person to another during the exchange of goods and services.

Money, as a store of value or wealth, does not flow. It remains remarkably still.

What gives the dollar (a currency) value?

Confidence! Yes, it is confidence that a dollar will buy X amount of goods or services which give the dollar value.

The dollar itself is a piece of cotton paper with ink on it. It’s real value is very small, less than 8 cents.

The dollar can buy things. This is what gives it currency value.

If one is able to buy more and more with a dollar its perceived “confidence” value would go higher and higher.

If a dollar continues to buy less and less its perceived “confidence” value is dropping.

The currency supply goes up without a corresponding increase in production of goods and services then there is more currency than goods and the currency loses purchasing power and things begin to cost more in currency terms. This is called inflation.

The Banking House of Cards

How Currency is Created

Modern banking is built around debt. A home buyer takes out a loan to purchase a house. A mortgage of $90,000 is written. The bank much have $810,000 is customer deposits in order to make this loan. The bank creates $90,000 out of thin air and presents it to the buyer of the home, who gives it to the seller.

The bank is allowed to create 11.1111% of the currency it has on deposit and lend this out in the form of loans. This is how modern currency is created. It is created by debt.

It does not matter what bank creates the currency. The Federal Reserve Bank, a private bank, creates new currency in the same way. It issues new currency by digitally adding it, then buying things (generally government debt) with it.

Central banks, like the Federal Reserve, do not have to have currency on deposit to issue new currency, unlike other banks. It is allowed to create all the currency it wants and operates above government supervision.

How Currency is Destroyed

Let’s take our $90,000 mortgage example from above. That $90,000 is destroyed when it is paid back to the bank. The bank charges interest on this $90,000 so it ends up collecting well over $90,000. This is how banks make profits on loans.

But what it the person who took out the $90,000 mortgage defaults or goes bankrupt and doesn’t pay it back? In this case, the $90,000 must be destroyed upon foreclosure and that $90,000 is taken out of the bank’s profits.

As is easy to see millions and possibly billions of dollars are created and destroyed each day.

The House of Cards

The currency system currently in place is called fractional reserve banking. It works as follows:

A bank deposits $1,000,000 with a central bank. It is then allowed to create nine times that amount in currency, or $9,000,000, which is can lend out or do with as it pleases.

In addition to this, the bank has deposits from customers. It can lend out 1/9th of the money it has on deposit.

As the banking system is a closed system, except for cash held outside the system, that $9,000,000 in created money gets deposited back into the banking system.

The $9,000,000 newly issued currency is then re-deposited back into the banking system. This allows the banking system create another $1,000,000. That $1,000,000 gets deposited back into the system, allowing the system to create another $111,111.11, which will find its way back into the system as deposits. This $111,111.11 allows the banking system to create another $12,345.68. This continues giving us the following:

$9,000,000.00 + $1,000,000.00 + $111,111.11 + $12,345.68 + $1,371.74 + $152.42 + $16.94 + $1.88 = $10,124,999.77

This is how $1,000,000 becomes over $10,000,000 in currency. The banking system then collects interest on the $10M.

This $10M is backed by mortgages, loan agreements, etc. which are promises to pay back the currency.

Defaults

Defaults force banks destroy currency. When the currency supply drops, yet there is no corresponding drop in goods and services available, this is called deflation. Goods and service will eventually fall in currency price.

When the Federal Reserve Chairman Ben Bernanke says, “It is deflation we need to worry about” he is staying the defaults a concern. While this is technically correct, what he is failing to inform people of is that there has been a massive inflation of the currency issued.

What Brought Us the Housing Collapse?

From the 1990′s through 2006 housing prices rocketed up. This was because a huge amount of currency was directed to homes via government regulations, which manipulated the housing market. This government manipulation of the markets overrode free market forces which would have prevented so much money from going into a single type of asset.

Government manipulation is nothing new and has been going on for a very long time. We really arrived here because of the creation of the Federal Reserve Banking system to begin with, but that isn’t the point of this part of the article.

Homes did not become more valuable from the 1990′s through 2006. No, they just cost more in currency terms. This is price inflation.

But is there was all of this inflation why was the CPI so low? Why didn’t other things double, triple and quadruple in price?

The reason housing went up while other things only went up mildly was because of government intervention via Freddie Mac, Fannie Mae, the FHA (Federal Housing Authority) and government laws mandating community reinvestment by banks and lending to the poor.

The above directed more and more currency into housing causing the prices to rocket up.

When this because unsustainable and the poor who were given loans far in excess of their ability to repay, defaults became common placed (triple the norm), large quantities of currency began to be destroyed causing banks to turn in huge losses and over 300 banks have failed.

In fact, without cheap easy Federal Reserve money all US banks would have failed completely.

The government inflated the US currency in a huge way, which then began to collapse.

Issuing New Currency as the Answer

Ben Bernanke, Chairman of the Federal Reserve, saw that replacing the deflating currency as the answer to the problem.

However, what Ben Bernanke either fails to realize or is ignoring if he does realize it, is that the US currency (the dollar) had been inflated (devalued) so greatly with all of the dollars that were pumped into housing that maintain those currency levels would have dire consequences in the price of other items.

This newly created bunch of currency is not going back into the housing market to pump the housing values back up to the levels they were in 2005 and 2006. No, the currency being created is finding its way into everything else.

What we are seeing is what prices should have been if the government had not directed so much currency into housing, yet allowed that quantity of currency to be issued.

The Achilles’ Heal – The US Dollars Reserve Currency Status

There are trillions of US dollars held in reserve by foreign countries. These reserve funds are not in circulation.

As US dollars leave the housing sector through defaults and the Federal Reserve replaces those dollars with freshly issued new currency to fund the federal government deficits and keep the major banks afloat, the buying power of those dollars declines.

Foreign countries are watching their dollar reserves drop in value and are attempting to prop up the value of the dollar by buying up dollars and removing them from circulation.

It’s a losing battle for both sides. The Federal Reserve can issue all of the new dollars it wants and there is not limit to the amount of dollars it can issue.

As foreign governments buy up dollars with new currency of their own, they are devaluing their own currencies causing inflation in their countries. We see this effect all over the world.

At some point the desire to hold US dollars as a reserve currency is going to disappear. That day will come, but there is no saying when. When it does come and those dollars being held in reserve are released into circulation, the number of dollars circulating is going double, maybe triple.

The confidence in the dollar will disappear, plummeting its value.

Deflation as a Real Possibility

The Federal Reserve may, and this is a real possibility, all financial institutions to begin to fail. If this occurs, deflation will be a real threat as incomes will dry up making it very difficult for existing loans to be paid off and a chain of defaults will be started.

The way to protect from this is to hold real cash outside the banking system.

I consider this possibility to be low as it would doom the currency administration, which is already desperate for any good economic occurrence.

Sovereign Money

Sovereign money, such as gold and silver, will maintain their buying power in an inflationary environment.

There is no guarantee that the government will not try to steal your gold and silver. It has been done before by FDR. Obama has proven that he cares not about the law or honesty.

You can also hold foreign currencies outside the US, but do so legally.

Budget Deficits and Inflation

President Obama’s $3.7 trillion 2012 budget was presented to Congress recently, complete with $1.6T in deficits. To boot the last congress didn’t pass a full year’s budget for 2011. The original 2011 budget included some $1.5T in deficit spending.

What is a budget deficit?

A budget deficit is the spending minus revenues (income) of the government.

We can then see that the budget proposed by President Obama has $3.7T in spending, while he expects the government revenues to be approximately $2.1T. The $1.6T is the difference.

How does the government get the money to spend more than it takes in?

The government has a few options to obtain money when it isn’t taking in as much as it wants to spend. All of these options require the government to pay back the money at a later time, plus interest.

Here are some of the ways the US government has obtained money so that it can spend more than it bring in:

1. Sell bonds or treasuries. These are pieces of paper that says the government will repay the amount borrowed, plus interest. The interest is determined by how much the buyer of the bond offers for it.Say for example, the government wants to borrow $1 billion ($1,000,000,000). It will send bonds valued at $1B. Buyers will bid on the bonds. The highest bidder buys the bold.What if the highest bidder only offers $900 million? Then that buyer pays $900 million and will be paid back $1 billion when the bond matures, which could be anywhere from 1 to 30 years.The difference is what is costs the government to borrow the money.
2. Borrow from government agencies. During the Clinton administration the US government took the Social Security trust fund, established in the 1980′s under Ronald Reagan, and borrowed all of the money out it, replacing the money with IOU’s. This practice continued under George W Bush.Today there is no money in the Social Security Trust Fund, just a bunch of IOU’s. I am no familiar with Medicare funds, but it would not be surprising if those were spent as well.
3. The government has the power to increase taxes to obtain more revenues.

What happens when bond buyers don’t offer enough for the bonds?

This has been a problem for the government lately. To solve it, the Federal Reserve Bank (a private bank, with power to issue new US dollars) issues new money, then buys the US debt. Since April 2009, the Federal Reserve Bank has issued over $1.3T in new money. The Fed calls this Quantitative Easing. It use to be called “printing money” back before we used computerized accounts.

If we can just print or issue all the money we want, why don’t we?

An increasing money supply is called inflation. A decreasing money supply is called deflation. In fact, these are the traditional definitions of inflation and deflation.

In the 1960′s, then President Lyndon Johnson wanted to defeat communism in Vietnam. However, this cost money and there wasn’t enough. To solve this problem he began issuing new currency (US Dollars). But the US was on the gold standard at that time, which meant that foreign governments could bring their dollars to the US and receive gold in return.

The increasing money supply from the Johnson Administration placed more and more dollars in circulation and ultimately into the hands of foreign governments. France, along with some others, saw that there were more dollars in circulation than the value of the gold held by the US government, so in 1971 France sent a warship to New York to turn in the dollars it had and demanded US gold.

By this time President Nixon had replaced Lyndon Johnson and was faced with either giving out US gold or taking the us off the gold standard. He chose to take the us off the gold standard rather than give away so much gold. If he had not done this it is very likely that the US government would have lost all of its gold within a few months.

What followed was rapidly increasing prices of goods in the US. Since dollars could no longer be converted to gold they immediately became worth less. It therefore took more dollars to buy things.

This is when people began to believe that an increase in prices was inflation and today this is one of the biggest pieces of false information surrounding economics.

To prevent confusion let’s call an increasing money supply as monetary inflation and price increases caused by monetary inflation as price inflation.

When the Federal Reserve Bank issues new money it is inflation whether or not it results in price inflation immediately.

As can be seen from the 1960′s example, price inflation does not have to occur right away. In took until the early 1970′s for that excess money to cause price inflation.

Short Term Debt

Years ago the US government use to borrow by selling 30 year bonds, with no price inflation adjustments. Much more recently, the government began selling very short term debt, covering 1 and 2 years. There are also 10 year bonds adjusted for price inflation.

Some of the Obama 2009 debt is coming due already. To pay this debt the government sells new debt to pay off the old debt.

Interest Rates

Interest Rates are determined by the value of bonds. If the value of bonds falls, then the difference between the bond’s current value and what the government will pay when the bond comes due is higher. This is called the yield of a bond. Bond face value minus the market value of the bond is the yield.

Interest Rates and Monetary Inflation

In a truly free market, supply and demand alone determine prices. [NOTE: By free market I mean one free of manipulation and corruption. Today there are no truly free markets left in the world, except maybe in a barter system.]

At some point in time the Federal Reserve will stop buying US government debt. When that will be is hard to say. However, when that day comes the value of US bonds will drop because there will be fewer bidders, rising interest rates. Only currency issuing central banks can afford to bid whatever they want for bonds. Real people can’t do that.

The more debt the government sells the lower its value goes, if free market forces are allowed to operate.

This raises the cost of borrowing money and as the government has to borrow to pay off old debts it will be forced to pay more to borrow it.

With the US government’s public debt over $14T ($14,000,000,000), a 1% annual increase in interests translates to $140B a year more to service the debt. A 2% increase in interest rates translates to an increase of $280B per year cost.

We can compute it this way because the US government never pays down its debt. It always refinances its debt, plus adds more.

The Future

There is no crystal ball. The politicians in Washington DC may have a bout of honesty and courage and balance the budget, but I wouldn’t be holding my breath. The Democrats are having a bout of psychosis over a 1.6% trimming of Obama’s $3.7T 2012 budget. That 1.6% ($60B) is entirely insufficient to bring financial stability.

What is very predictable are the following:

1. The media and Democrats will claim any cuts in deficits is evil and destructive, although the entire reverse is true. There is not a single program in the federal government which deserves the amount of funds it is getting.
2. Whatever the government says the deficit will be, these will be higher when the time comes to count them.
3. The Republicans will hold true to form and not do enough to cut deficits.
4. The US Government’s financial position will continue to deteriorate as it has for some 50 years. The only exception to this was in the mid 1990′s when a Republican congress closed off Clinton’s spending, but by the end of that year, they ended up spending the surplus.
5. Interest rate will rise in the future.
6. Eventually, and it could be this year or in 50 years, the US government is going to default on its debt. It will either outright default and not pay or it will issue more and more currency to devalue the debt, which is default through inflation.

Ways to Protect Your Savings

Monetary inflation dilutes a currency. As more and more are issued each one has less value.

Sovereign Money

Sovereign money is gold and silver. These tend to hold their value in economic troubling times. There is a distinct possibility that the economy can be gotten going sufficiently for people to believe that the government’s debt crisis is over or has been pushed out into the future, that the demand for gold and silver will abate. This will send their price down and could cause a dollar value loss.

Therefore, buy gold and silver in amounts you can afford to lose and gradually build up a position in these. If gold and silver drop substantially, just continue to add gradually, without using credit or margins. Always take physical delivery. Consider these to be economic insurance that last a life time and you don’t have to pay them for them each year. Never sell your gold, leave it for you kids.

There is a possibility that the Obama Administration may try to confiscate gold and/or silver as a means to solving the financial crisis. This is stealing, but hey, since when did that matter to people like our politicians?

Foreign Currencies

Not all countries are riddled with debt. Governments will little public debt include China, Australia, Switzerland and Canada. Take a trip to Canada and exchange some currency. You can travel with less than $10,000 without having to declare it, I believe, but check for yourself. My wife is Canadian and we have Canadian bank accounts.

Foreign Currencies Dividend Paying Stocks

There are some high dividend paying stocks which pay in foreign currencies. Of course, you have to do you homework. A rising dollar can send your foreign stock down in dollar value.

Commodities

Commodities tend to hold their value when price inflation occurs. The government and media will blame people who buy commodities for their high prices, even while they are inflating the currency and there are new laws regarding this. Copper, nickel, oil, etc rise in price during inflationary periods.

Reduce Your Debt

There is the possibility of further economic collapse and some economists are predicting this. Their arguments have merit and are possible. Debt in a deflationary period is much more difficult to pay off.

Be Self-sufficient and Don’t Rely on the Government

If you rely on the government you are at risk of having nothing. Make your own money decisions. Remember, government officials get paid regardless of what they do with your money or how much debt they bind you to. To them it’s about getting reelected, not making the tough decisions.

If you are counting on Social Security, realize that it is broke and broken. The young today are being forced to pay more and more, which is promptly being handed out other people. If the tax burden gets too great for them, the most productive of them will leave the country for greener, more economically sound places. If you do believe that, then look at what collapsed economies has done to other countries.

The Cost of Inflation

Just over a year ago I wrote an article Inflation Beginning to Show its Ugliness where I gave three examples of inflation that was coming about back then. The three examples given were the costs of shipping boxes my company purchases to ship its software products, the cost of UPS Ground shipping of a DVD case and a local rate increase given to the local electric company where I live.

Back in Jan 2010 very few people were talking about inflation. In fact the Federal Reserve was nearing the completion of the $1 trillion Quantitative Easing (now known as QE 1) and the Federal Reserve Chairman, Ben Bernanke, was still fighting “deflation”.

Deflation or Inflation?

So what do we have, inflation or deflation? The answer is both.

One might wonder how we can have both deflation and inflation. The answer is rather simple, yet not so simply explained.

To understand this one must know what inflation and deflation are. Inflation is purely the expansion or inflation of the money supply compared purchaseable production producted by the nation. Deflation is purely the contraction or deflation of the money supply compared purchaseable production producted by the nation.

An increasing money supply going after the same quantity of goods results in price increases. Therefore, people tend to believe that increasing prices is inflation, yet it is not. Increasing prices are the result of inflation, not inflation itself.

If we rewind to the housing bubble you can see that more and more money was being added to the supply via mortgages to purchase homes. Thus we had increasing home prices. Home prices increase substantially and over increased. But this was the effect of more and more money being created for the purpose of purchasing homes.

The resulting correction, and mortgage defaults, is still underway. There are an estimated 2,000,000 more mortgage defaults coming over the next two years.

The result has been money leaving the home market in huge quantities (deflation) and the effect of this is lower home prices.

Ben Bernanke is a banker and banks are taking a beating from the declining home prices and mortgage defaults.

The Deflation

The deflation we are experiencing is the money leaving the home market and this is expected to continue into 2012. I read a survey today showing home ownership rates falling. The most notable reasons for this are the expectation that home prices will continue to fall and there is no longer the expectation that a home will appreciate in value as an investment for future resale.

Salaries are also decreasing from what I can tell. Certainly the buying power of the dollar has been declining, except where buying a home is concerned, which is a covert decrease in salaries.

The Inflation

With money leaving homes, it is finding its way just about everywhere else these days. The stock market has nearly doubled since its low in Feb/Mar 2009, yet unemployment is worse than it was when the stock market was at its low. The price of gold, silver, oil, gas, copper, wheat, cotton, nickel, coffee, beef, chicken, etc. have been increasing.

These price increases are not inflation, the inflation was the increasing quantity of money made available to go after these things. Remember that an increase in prices always comes after the increase in money supply, never before.

Price Expectation, Over and Under Priced

If you have traded stocks or commodities at all you are aware that there is an upside resistance where buyers will resist buying when a stock or item as its price approaches the resistance price. Conversely, on the downside there is a support level where the stock or item is bought up if prices drop to the support level.

These support and resistance levels are determined by the market, therefore, they change and you don’t know if they change until they change.

Resistance levels get broken through when the demand for an item is such that the volume of demand changes the perception of what is a high and a low price.

Support levels get broken through on the downside when money leaves an item and the downward pressure makes what was a support level look like a high price.

Consumers also seem to have prices where items appear cheap and expensive to them, but these don’t seem to change as readily as stocks and commodities do. Consumers will simply stop buying an item if it gets too expensive. Some examples of this are car pooling when  gas prices go too high, buying chicken instead of beef when beef runs up.

The perceptions of consumers can hold down prices and prevent them from breaking through upside resistance. And, since consumer perceptions about prices change more slowly than those of traders on the stock market floor, an item will experience downward pressure even if its price has broken through resistance levels.

Consumer income does not change as rapidly as that of a business and consumers compare prices to their spendable currency.

This slow to change perception of the consumer acts as a limiter to prices, even though there may be inflation of the money supply. This explains why it can take years for inflation to manifest itself in prices.

When the US was on a gold standard and was adhering to it inflation didn’t exist. Prices did fluctuate, but prices are not inflation or deflation, money supply is. A drought could cause a shortage, sending prices of food up, but that isn’t inflation. Inflation is an inflating of the money supply.

The US abandoned the gold standard long before it was acknowledged by Richard Nixon. Under Lyndon Johnson vast amounts of currency was added to pay for the Vietnam war. When France came for US gold in exchange for dollars, Nixon was forced to refuse them and officially take the US off the gold standard.

The Cost of Inflation

Inflation, an increase in the supply of money, makes each piece of currency that much less valuable. Given a constant level of production, an increase in the money supply means there is more currency representing the same amount of production. Thus, the buying power of each piece of currency is less.

Inflation is devaluation of buying power. People who consume less than they produce, in other words, savers, find that the buying power of their savings decreases as the money supply inflates. This is a hidden tax on people who save.

Even the least productive, who generally save nothing, are caught up in this hidden tax since their government hand outs purchase less and less. Hence we end up with “cost of living” increases to social security and welfare recipients. The Obama Administration placed these increases are on hold at least through 2011.

In addition to savings be devalued, so are earnings. In order for earnings to just keep their value those earning must increase in currency terms. This, however, increases one’s tax burden, as the government considers the a dollar equal to a dollar.

Then there are capital gains. If you buy an old car today for $10,000, then sell it in 10 years for $20,000, the government considers that you made a $10,000 profit and will demand taxes to be paid on it. However, this $10,000 increase is not profit, it merely maintains the buying power of the original $10,000. Therefore, when a person protects their savings from the inflation (devaluation) of the currency supply, they are subjected to a tax on zero real earnings.

The Inflation is Normal Lie

Today people believe that prices are suppose to go up gradually and believe this is normal. People also believe that they are entitled to an annual pay raise for the exact same work, which is an increase in the price of labor.

This price increase expectation allows for the gradual inflating of the money supply without drawing any attention whatsoever.

Rewind to pre-1970′s and you will find that most households survived decently on a single income. In 1960 a family with one blue collar working parent could afford a home, two cars and three children, plus annual vacations.

Today many single earner families are living off government subsides, own no property and are generally consider poor.

The price of inflation has been very, very high on the American culture. It takes two earners to achieve what only one could do 50 years ago. This has accelerated broken homes and caused much greater social damage to the young.

The Future

There is little doubt that inflation is upon us. It has been upon us for decades and the excessive inflation pushed into housing by the government and the Federal Reserve has set a sort of lower limit on the money supply.

While housing drops in price, that excess money is simply going elsewhere, causing price increases abroad.

If the Federal Reserve allows the mortgage defaults to deflate the money supply, more and more mortgages will go into default resulting in more and more deflation of the money supply. Thus, the Federal Reserve must inflate the money supply sufficiently to counter the defaulting mortgages or experience a sharp economic decline worse than we have experienced. If it does not, all debt in the US could eventually move into default.

The million dollar question is how much inflation will the Federal Reserve create around the world before it decides the deflation threat of defaulting mortgages has been countered?

Government deficits will likely play a role in this determination. The government’s $1.5T annual deficits are being monetized, and this is direct inflation of the money supply. This will show up in prices, eventually.

The sovereign debt of the US is a problem. The interest alone is massive and will only become bigger as interest rates increase.

Gold and Silver As Money, so is Food and Copper

Gold and silver have a historic precedent as sovereign money. Hold some physical gold and silver should now be consider essential.

If you are poor or cannot save at least some money each month to convert gold, then convert some to silver. Silver, at around $30 per ounce is affordable by almost anyone.

If $30 a week to buy an ounce of silver is too much for you, then save 2010 and earlier US nickels. These nickels currently have a melt value of around $0.07 and they will never be worth less than $0.05. Buy a few rolls of nickels ($2 per roll) each week from your bank and save them.

You can also buy extra of some goods which might become more expensive. Things like non-genetically engineered seeds, canned goods and cigarettes tend to hold their values.

If you are down right dirt poor, then you can just sort through pennies and save all of them from 1981 and earlier. These now have a melt value of over $0.03 and these will only cost you $0.01. If you are that poor, then you undoubtedly have some spare time on your hands.

Of course, the government passed laws making it illegal to melt coins, but that doesn’t mean someone will not pay you more for them if hyperinflation occurs. If those pennies become worth 5 or 10 cents, you can bet someone will be happy to pay you more than a penny for them.

I personally hold physical gold, silver, platinum, palladium, several hundred dollars of nickels, extra food, batteries, light bulbs, gas and a generator. I’ve gradually accumulated these items since the economy melted down. Buying a few extra canned goods each week builds up. Just rotate them to use up the oldest first. I buy things that I use so that nothing will be wasted.

Not all countries are in debt like the US. Canada isn’t. Neither is Australia, China or New Zealand. You can convert some US dollars to these currencies at most international airports and you can convert them back to dollars at those same airports in the future.

The US Dollar’s Future and How Inflation Can Come Home

Many Americans might feel that there aren’t enough dollars available. The Federal Reserve is adding billions to the money supply each business day and is using that money to buy government debt.

The above is true and would lead to one to believe that there is a shortage of money.

However, the US Dollar is used in much of the world’s international trade, including the buying of oil, gold, silver, copper and most commodities. These dollars are in circulation, just all over the world. So while there might be a perceived shortage of US Dollars inside the US, there is no shortage globally.

In addition to this most countries hold US Dollars as their reserves. These dollar reserves are not in circulation. Currently US Dollars account for approximately 66% of reserves held by countries around the world.

China currently holds $2,800B.

Japan holds over $1,000B.

Russia holds over $500B.

Taiwan holds over $350B.

Those are the 4 largest holders of US dollars.

The Burden

As the US dollar continues to buy less and less, the countries holding these dollars see their reserves (savings) going down in value.

What happens if there is a flight from the dollar? Please don’t say this will never happen, because it could happen.

If there is a flight from the dollar then those dollars will be returning home to the US looking for something to buy.

China, for example, is already using its reserves to buy up US assets. Earlier this week they made a deal with Chesapeake Energy Corp to purchase $1.267B in natural gas fields in northeast Colorado and southeast Wyoming.

That natural gas is going to China as it’s drilled and won’t be available to US customers. This is the second deal done with Chesapeake in the last 3 months.

If the roughly $6 trillion being held in reserve, plus all of the dollars being used for international trade, get sent back to the US, the available money inside the US will explode. If hyperinflation grips the US, then this is how it will happen.

If it does happen, then it will happen very rapidly. How fast can people rush to the exits? Amazingly fast!

How to Protect Your Wealth

The exact wrong thing to holding a lot of if hyperinflation comes is US Dollars. Holding other currencies, gold, silver, food, hard assets will be the things that hold their value. These things will hold their value because they are real. The US Dollar is a paper debt promise and is only backed by people’s confidence that it can be reused to purchase goods and services.

Will hyperinflation come? No one can say for sure, no one!

However, we are much closer to it happening than we have been in recent memory.

If you convert 5 or 10% of your dollar reserves to precious metals, food and other real things that hold their value through an inflationary period, then you will be that much better. If the hyperinflation doesn’t occur, then you still own the real things you converted your dollars to.

The New Economy and You!

The New Economy

If you haven’t noticed the economy is the not the same one you might remember from 2006 or 2003 or 2000 or 1996 or even 1980. Even if you are young and just entering the job market you probably have noticed that today’s economy is not what it was only a few years ago.

As with medical conditions or engineering problems an economy also has symptoms, generally noticed by many. What is little noticed, and rarely looked for, is the underlying malady which is producing the symptoms. This is because people seem to see the symptoms and believe the symptom is the cause.

Take much of today’s prescription medicines. They will, one for one, only talk about relieving symptoms. It is rare to hear of a medicine that “cures”. This is because modern medicine rarely cures, a sad testament to the quality of medicine in the world today.

An engineer, if he or she were to merely treat symptoms, would be declared incompetent. A bridge “gallops” wildly while under construction. This is a symptom that something is wrong with the design or the build, as bridges are not suppose to gallop up and down tossing construction workers all around. The underlying flaw in such a bridge should be located prior to completing it, one would think. If one were to address the symptoms only, then there is no certainty that the real cause has been addressed.

Unemployment

Is the high unemployment in the US a symptom or is it the cause of the current economy? The answer is very simple, unemployment is a symptom, for if it were the the cause then we could simply hiring the unemployed and the economy would be fixed. Alas, such is not the case.

What would we hire these people to do? What would they produce? What skills do they have?

Stripping Unemployment Back Further

If we pull back the unemployed in layers we find there are many categories of unemployed. There are the unskilled. There are those who have skills, but where these skills are not in sufficient demand to employee all those who have these skills. There are those who find it easier to collect unemployment or welfare rather than to work, a sure indication of a lack of self respect and pride in one’s own workmanship and production. There are those who live in an area where insufficient production is occurring to keep the population of the area employed. And there are probably many more categories one could divide the unemployed into.

The most basic of these is the lack of production being done to keep the population fully employed.

Pulling Back the Lack of Production

If the US, or any nation for that matter, were producing at a sufficient level to keep its population fully employed then there would be full employment. That is a rather obvious statement, yet have you ever heard anyone say it? Not likely!

So we now have some questions to answer:

1. How do we increase production?
2. What do we produce?
3. How do we measure the value of the production?
4. How do we best utilize the existing skills of the population?
5. How do we increase or change the skills of the population to better match what is needed to bring about sufficient production, which is efficient enough so that the production and flow of goods and services continues to build in such a way as to bring about full employment?
6. How do we manage all of this? How do we manage all of this at a net profit, not as a net loss? For a loss would be a decrease in production and lowered employment.

How You Can Use these Concepts for your Own Prosperity and Financial Security

I will not bring out answers to all of the above questions in this article, as it would result in a book. But here are some key points you need to know and use in your life.

Have you ever felt out-of-date? Technically antiquated? Have you felt your job passing you by? Do you learn just enough to “get by” on the job? Do you constantly study your field? Do stay up-to-date on what is happening in your chosen profession?

• Keep up-to-date. Study your field. Read articles on it. Learn how to do your job better, more efficient and with a higher quality result.

Is your field becoming less and less in demand? Are there a glut of people in your profession, yet not enough jobs?

• Learn another skill dis-related to your current profession. This can be done in a college at night, studying on your own, learning from another, as a friend or as an apprentice on a second job, or many other ways.

In order to learn another skill you need to decide what skill to learn. This could be a hobby that you already have that could be turned into a job or business related skill. It could be something that you’ve always wanted to learn how to do and never have. The major question you need to ask yourself is whether or not you can be “productive” with this skill and there is “demand” for this skill.

If you choose buggy whip making that may satisfy some old idea you had at one time, but there is little demand for such skills today.

Examine the world around you, what needs doing? What do people need help with? What skills are most advertised in the help wanted ads?

Myself as an Example

I’m an engineer by education. I understand things and how they work and have an appreciation for the cleverness the human race has exhibited from ancient times up to the present.

I’m very skilled in computer programming and this provides about 75% of my income. I must constantly read and study the subject to continuing being productive. If I were to stop studying I’d be out of work in only a few years.

As a second skill I can renovate houses and have completed two of them now, both of which produce monthly rental income. This was a skill I developed with the help of a friend. I offered computer programming skills in return.

A third skill I’m developing is writing. All skills require that one does the work in order to advance one’s skills. A computer programming student can go to school for 4 years and come out far less knowledgeable than a person who simply studied and did some programming on their own. After 4 years the one who learned and then did programming, will not only be more skilled than the 4 year college graduate, they’ll also be earning more money. The 4 year college graduate has no experience and really hasn’t learned any of the finer points that makes a good programmer a good programmer.

I have been applying this very principle to my writing. I study. I read. I write. I read little about how to write. Instead, I read other writers. Then I write and write more.

Once I master writing as much as I intend to, then I’ll learn a new skill.

While I’m much older than most working people these days I still find it necessary to advance my skills in new directions. The youth, with their vigor should be able to surpass my skills in far less time. For many years I was content at having one major skill. Now that I’m older I’ve found that I would rather have more skills and, therefore, many more options.

The New Economy

The New Economy has little room for those with little or no skills. The welfare recipient is likely going to find themselves doing manual labor to collect food stamps once the government can no longer borrow money. Opportunity exists, but it exists for those who can demonstrate skills that are in demand.

Gold, All is Not as it Seems

What many Americans don’t realize is that the globe does not revolve around the US. Only the flat earth people believe that anymore. I see people point to oil prices and low US demand, then claim “obvious manipulation”. Yet they neglect that the US population is less than 1/20th of the globe’s.

As communist countries come out of their self imposed dark ages, demand for all commodities is going to rise and continue to rise.

Those who preach the greatness of the US dollar because of its international reserve currency status ignore all of the warning signs that this status is coming to an end. The dollar has only three things going for it at the moment:

1. There’s a lot of dollars so they are readily available.
2. You can buy oil and other goods with it on the international markets.
3. There’s no viable alternative at this time.

2 and 3 are changing, while 1 is the achilles’ heal.

1. Those readily available dollars will come home some day.
2. Many countries have negotiated trade agreements which do not involve the dollar. So you don’t need dollars as much as you use to. Expect to see more and more of this.
3. China, India and many other countries are stocking up on gold in a big way. Gold is reasserting itself as the reserve currency of choice. If one were to look at history before 1971, then one would know that gold has played this role before. It’s a staple amongst the sovereigns.

Since 1964 when the US eliminated 90% silver coinage, the US dollar’s buying power has steeply declined losing around 95% of its value in under 50 years. Much of that decline came after 1971 when the gold standard was abandoned because the US had printed too many dollars.

You might wonder how this could go so unnoticed by so many. It goes unnoticed by disinformation and mis-education. Talk to any westerner and you will find that they expect annual inflation and believe this to be “normal”. They expect an annual raise for the same work and consider this “normal”. Western banks expect to be bailed out. Large western businesses expect to be kept afloat despite their horrible mismanagement, AIG, GM, Chrysler, BofA, Citi, Chase, JP Morgan, Goldman Sachs, et al. Unions expect “high pay for less work” and “giant unearned pension funds”. The lazy expect government issued money to arrive in the mail each month for no production in return and consider this “a right”. All of this is inflation or devaluation.

But remember, central banks and countries want gold and they don’t want it to go to $2000 or $3000 or $5000 an ounce before they’ve bought up enough of it. If gold goes up too fast, then the speed at which countries need to unload their US dollar reserves increases.

A sharp rise in gold alone could collapse the dollar. Now, gold isn’t the cause. The cause has been the US’s decades of devaluation and exportation of trillions and trillions of dollars. But because these dollars are held in reserve, they are not very inflationary. This has allowed the US to expand the number of dollars and build a gigantic debt, while not experiencing the really high inflation which normally accompanies such monetary expansion.

No, the cause is not gold, the cause has already occurred. Rocketing gold would simply be the trigger. And because of this, everything is done to keep gold as low as possible, for as long as possible. Witness today’s margin increases on gold and silver, despite the fact that gold is in the middle of a correction.

Central banks don’t want gold to go up too much until they have acquired what they need. Notice they don’t publish their purchases in advance, only their sales. If people knew how much gold central banks wanted to buy the price would immediately jump, making those purchases more difficult, if not impossible.

Why not require 100% margin on gold? The answer is simple. Margin increases, dragged out over time, extend how long margins can be used to control prices. If margins went to 100% it would only have a momentary effect, after which time margin increases would no longer be available as a price control tool. Simple.

It use to be that central banks sold gold to hold down prices. They did so with big fan fare and announced that the sales would be done over a long period of time. This acts as a lasting price reducer.

Witness the IMF’s sale of 400 metric tonnes of gold. It was announced that it would be done over time so as to not affect prices, which would lead people to believe that the sale of 400 metric tonnes is enough to affect prices. Well, here’s some news for you. More gold than that is traded every single day. Those 400 metric tonnes would be gobbled up in short order and the effect of the sale on prices would be momentary. In fact, when IMF gold sales to central banks were announced the price actually went up because the gold already had the sale priced in and sales to central banks removed the gold from the open market.

All is not as it seems. Gold is not “just a commodity” or “only jewelry”. It is sovereign money and that is why sovereigns are buying it.

It very well may be possible to kick the financial mess down the road sufficiently that the dollar survives, but this has been the standard operating procedure for the US for decades. Some day the headwinds will be so great that the can will go backwards when kicked.

There is no telling when this will happen. The forked tongues of our politicians make decyphering the truth difficult. Maybe we’ll get some honest politicians before that day, but I won’t be holding my breath, I’ll be holding gold.