Let me make a secret confession right here. For years, the producer of my radio talk show and I would draw straws each January to see who would “have the high privilege and distinct honor” of watching the president’s State of the Union address.

Do I have to clarify that the loser had to watch?

In case the president said something important – which almost never happened – I felt an obligation to play some audio clips and talk about it on the show the next morning. But, personally, watching Republican and Democrat presidents recite their laundry list of promised giveaways for the year ahead was more than I could bear.

I learned early on that I could avoid all of the ovations and applause, save time, and still capture what substance there might have been in a written paragraph or two. Soon, I’ll give you such a written account, a perennial synopsis that will allow you to watch something else – like American Idol – and still have a handle on what the president says.

And you might even have time left over to keep an eye on the real news.

While We Were Watching…

The State of the Union is treated with utmost seriousness by the dominant news media. All four major TV networks and the cable news channels carry the event. My local newspaper devoted most of the front page and big chunks of the inside pages to its coverage: photos, accounts, sidebars, response, and analysis.

But it’s actually a spectacle that crowds out the real news. News about the impact American diplomacy is having on our future standard of living. News about the U.S. dollar’s reserve status winding down.

On the day of the State of the Union address, news flashed around the world – but not on your favorite network or in your morning paper – that India and Iran have agreed to end-run the U.S.-imposed sanctions on Iran.

They will use gold to do so.

Those [U.S.] sanctions, which have now been agreed to by the European Union as well, will ratchet up in July. Their enforcement means that banks and financial institutions involved in oil transactions with Iran will be barred from doing any business with financial institutions in the United States and Europe.

According DEBKAfile, a news source based in Israel, Iran has taken steps to bypass American and European banks and their currency desks altogether, agreeing instead to sell its oil to India for gold. China is expected to soon agree to use gold in buying oil from Iran as well. It’s a move that would leave the long-standing global dollar pricing of petroleum in tatters.

The gold-for-oil agreement means a three things:

1. It hastens the unwinding of the U.S. dollar’s global reserve currency status.

The rest of the world is actively developing alternatives to the U.S. dollar. Although it will mean a falling standard of living for the American people, U.S. policies and secretaries of state, like Condoleezza Rice and Hillary Clinton, have spurred what will become a stampede away from the dollar. DEBKAfile also reports that both China and Russia have secret mechanisms already in place to pay Iran in non-dollar currencies for its oil. And only a month ago, China and Japan, the world’s second- and third-largest economies, agreed to develop direct yen/yuan trading, forgoing the dollar as the reserve currency intermediary.

2. It accelerates the global monetization of gold.

Both China and India have been aggressively adding to their gold reserves. Other countries are following suit. The Keynesians, who have been in charge of American monetary policy, having destroyed the value of the dollar and enabled our ruinous debt, may actually believe that gold is a “barbarous relic.” But it is clear that their opinions have little functional value in the real world. The world is turning to gold more and more as U.S. debt continues to mount. Indeed, is there a better alternative monetary unit to be found? Certainly, it’s not the euro. Jim Grant of Grant’s Interest Rate Observer says gold is the only answer to the question, “if not the dollar, then what?”

3. It reveals the growing global impotence of the U.S.

Long able to enforce reluctant countries to adhere in its missions and embargoes around the world, the U.S. is finding its will frustrated. Nations that once had to weigh the favor of the U.S. against their own commercial and domestic political interests are increasingly ignoring the global dictates of the U.S. State Department. In 2003, Turkey, where the prospect of a U.S. invasion of Iraq was wildly unpopular, refused even bribes to allow the U.S. to stage the invasion from its soil. Today, the threat of a U.S. or Israeli strike on Iran is meeting with growing disapproval, especially from countries like China and India which rely heavily on Iranian oil.

Routine. Tired. Repetitive.

It may be that the State of the Union’s falling ratings – Obama’s speech the other night was down 12 percent from the year before, and was down 21 percent from 2010 – are a sign that people in large numbers have discovered there are better sources of important news than network television and Washington’s lapdog press.

Or, even better, maybe they’ve had about enough of the Washington party.

Or, maybe it’s simply because it’s all so routine, so tired, so repetitive. Even American Idol, entering its 11th season, has more surprises than the State of the Union. Consider:

Obama, who clearly doesn’t understand anything about markets, offered to have the government interfere with the real estate market in brand new ways in 2012. What could be more predictable than some president announcing a scheme to screw up the real estate market again in the new year?

It’s so routine. So tired. So repetitive.

And while the contestants on American Idol are fresh every year, the promises that make up the State of the Union are just reruns, season after season.

Now, if you’d like to be free to pay attention to the real news that actually affects your freedom and prosperity, let me provide you the following short, beginning-to-end account of this year’s State of the Union. You’ll be able to refer to it year after year, so that while you’ll still be informed about the president’s address, you can skip the show and save yourself time.

Time to follow the real news. Or to watch American Idol.

“Thank you so much. Thank you very much. Thank you. Thank you.”

The president agreed to do something for (to?) homeowners. He also has decided to help teachers. And students. And women. Workers, too. The president wants to help workers, for sure. And jobs galore. The president is all about creating jobs in 2012. And more jobs in energy. Oh, they’ll be clean ones for sure!

Plus, he’s going to reform regulations so that regulators will be able to regulate better. And he wants to get a handle on the bureaucracy. And he wants to reform education. And both make government more effective and still grow the economy. Did he forget men and women in uniform? The president most certainly did not!

“Thank you, God bless you, and may God bless the United States of America.”

Regards,

Charles Goyette

Source

The State of the Union, Just Another Reality Show was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

The U.S. government holds it and reports it on their balance sheets. The International Monetary Fund, the European Central Bank, China, Germany, Russia, India — they all hold gold. Turkey bought about 41.3 tons of gold for official reserves in November. Goldman Sachs is expecting central banks to buy 600 tons this year. Look at the combined official holdings to date: 30,744 tons.

Why?

Contrary to public mythology, gold has no statutory role in the monetary system at all. The paper standard has ruled since 1973, though most people are still slow to figure that out. Sure, it is an asset but so are many things that governments and central banks own: computers, land, buildings, mortgage-back securities however toxic, and many other things. There is no special reason why gold should be reported, listed, touted, purchased in scary times, but not these other assets.

The truth is that gold does have a huge and continuing role to play. And it is more than purely psychological. It is deeply embedded in the history of money itself and in the development of the world economy as we know it. Governments destroyed the gold standard long ago but they know better than anyone that there is no surer means of financial security, proven over nearly all times and all places.

But here is an interesting question. What precisely are governments and central banks seeking to protect with their gold holdings and acquisitions? It is not you and me. It is about their system and their interests. As much as they love foisting the paper stuff on the population, risking even the destruction of the means by which we earn, save, and provide for ourselves, when it comes to government and central bank finance, gold serves serves them well. They deny it publicly but their actions speak more loudly than their press conferences.

This is one reason among a million that you can’t trust government to manage or even make the money that runs the economy. This should and could be the job of the private sector. The first time that I heard Murray Rothbard make this claim, I was amazed. Doesn’t everyone know that this is a primary function of government? But he was not only correct about this; fantastic research his book on this topic came out (What Has Government Done to Our Money?) has reinforced the point.

The leading historian of private coinage is George Selgin. His book Good Money is one of the most fascinating books on monetary history ever written. The country is England and the time is the Industrial Revolution. The official Mint was cranking out only large denomination coins suitable for old-world trade by large companies, but this was a time when the bourgeoisie was being born. Small manufacturers all over the country needed small denominations to pay their workers. They didn’t wait for the government to make the stuff. Button makers jumped at the chance to mint small denomination coins for factories to pay their workers.

What emerged from this event was a highly developed and extremely sophisticated system of private coinage at the very heart of England’s birth into the modern world. Selgin’s book tells the entire story in remarkable detail, and the publisher went all out with this book to provide a large section of beautiful color images of many of the private coins of the period, with even a comparison to the government’s unimaginative and often ugly coins. The free market picked up where government left off!

You can guess what happened. The result was the same as today when private traders have come up with digital currencies to compete with the government: the state shut them down. Don’t mint your own money; the government hates the competition! Selgin’s book covers the drama with energy and wit, revealing a slice of history that is hardly known by anyone.

Laissez-Faire Books is the only source for the hardbound version of this fascinating book, and there is a limited number still available. And this format is precisely what you want in a book of this importance: the format alone turns treatise to treasure. Never let anyone tell you that the private sector can’t be wholly in charge of the monetary system. Selgin has demonstrated otherwise.

This is the history but what about the future? In 1982, the Reagan administration pushed through a bill that created a U.S. Gold Commission to look into the question. It was the great missed opportunity, because — no surprise — the fix was in on what the commission would decide. Ron Paul and Lewis Lehrman were both on the committee, and they dissented from the majority opinion.

The dissenting opinion wasn’t just an opinion paper; it was a wonderful book on the past, present, and future of gold as a monetary unit. It ends with a detailed plan for restoring sound money and liberating us from the tyranny of paper. The book is out in a special edition of Laissez-Faire Books: The Case for Gold.

Can gold really be the money of the future? Nathan Lewis thinks so and he makes the case in Gold: The Once and Future Money. He points out that without a gold standard, with money that is sound and tied down to strict limits on production, the whole theoretical apparatus of government finance stops making any sense. What does it matter how much debt you run up if you can just print the money to pay for it? Perhaps this might have something to do with why government can’t seem to control its spending. And how can we even have a rational discussion of tax policy and its likely affect on revenue streams and the government deficit so long as any revenue shortfall can be made up for through the magical powers of the central bank?

The absence of gold, Lewis argues, has introduce irrationality and fiscal chaos into government finance. Nor has it served the population well. It is directly responsible for the creation of the boom and bust cycle — paper gives the central bank massive power to manipulate interest rates — as well as the relentless declines in the value of the dollar. The system has failed, he says, and if governments don’t repair the money, the private sector will respond, just as it did in the early years of the industrial revolution.

Growing economies are about change. Industries are born and industries die. Business come and go, and even seeming Goliaths are often slayed by start ups. The jobs we do change. The types of production that nations specialize in are constantly in motion. All this global enterprise changes the face of the earth every half century or so. Thanks goodness for change: without it, there would be no supporting the 7 billion people who inhabit this place.

There are very few things in this world that do not change, but one of them is the perception and reality that sound money is rooted in the gold standard. Powerful presidents could not kill it, though more than a dozen have tried. Elite economists have tried to wish its place in the world away but couldn’t do so. It is the ultimate immovable object in the world of economics. That gold as a monetary unit will outlive us all is one of history’s few sure bets.

Regards,

Jeffrey Tucker

The Monetary Metal That Won’t Die was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Addison,

I am not given to hyperbole. This is the most important message I have ever sent. I urge you to read it and to share it with others.

Earlier this week, I attended the Utah Monetary Summit in Salt Lake City, Utah. As you may know, the state of Utah passed a Legal Tender Act earlier this year authorizing the use of federally minted gold and silver coins as money in the state of Utah. Now legislators in other states, many of whom attended the Monetary Summit, are evaluating similar legislation.

Among other things, this means the United States is approaching a constitutional crisis because states are beginning to financially break away from the federal government. This is no less serious than the American War of Independence or the War Between the States. The Utah Monetary Declaration (below) is a financial declaration of independence whereby states are beginning to opt out of the Federal Reserve System. A major confrontation seems inevitable.

The issues underlying this historic development include:

1. The unsound condition of large U.S. banks, which have inaccurate and crumbling balance sheets along with $250 trillion in high-risk OTC derivatives contracts.

2. The unstable nature of the U.S. and world financial systems, characterized by unworkable levels of sovereign debt and private debt and by over $600 trillion in OTC derivatives liabilities.

3. The excessive levels of federal government debt and unfunded liabilities combined with falling federal tax revenues prior to the start of the double-dip recession that began in the second half of 2011.

4. The radically inflationary monetary policies of the federal government and of the Federal Reserve, which promise high inflation or hyperinflation in the future.

5. The worsening condition of the real U.S. economy outside of large banks, multinational corporations and Wall Street firms, where federal government bailouts and Federal Reserve monetary easing (money printing) transfer wealth from proverbial Main Street to literal Wall Street.

6. The rapidly escalating polarization of the distribution of wealth, which threatens not only the economic stability of the United States, but also its social and political stability.

7. That the current highly inflationary monetary system is plainly unfair and fundamentally immoral.

As a consequence of these grave, ongoing and growing problems, which are being largely ignored by the mainstream news media, state governments must take immediate action to ensure the functioning of local economies and of state governments, should the federal government/Federal Reserve System break down. Specifically, there is an urgent requirement for an alternative currency to the privately issued Federal Reserve Note, which is erroneously referred to as the “U.S. dollar.”

Replacing a stable form of money with ever expanding debt and inflation undermines capitalism and destroys jobs. The monopolistic monetary system of the United States today is inherently inflationary because it must continually expand in order to prevent a deflationary collapse. The underlying structure and root cause of the monetary system’s inherent and inescapable inflationary bias is the legal construction of money as debt with no direct link to real economic activity. Debt levels in the economy and bank profits are simply out of line with reality.

In addition to the unsustainable and unstable nature of such a system, an inherently inflationary monetary system destroys savings by devaluing the currency. Savings, which are the result of excess production, precisely define the term “capital.” Replacing capital with debt, while highly beneficial for banks that create money out of thin air (through lending), is a deeply flawed concept responsible for the systematic and ongoing breakdown of capitalism in America. This deep structural problem is the absolute root cause of chronic, irremediable unemployment. As a consequence, there will be no genuine economic recovery in the U.S. and jobs will not return unless and until the monetary system is fundamentally reformed.

An ultimately more important issue is also garnering attention among state legislators, prominent (non-Keynesian) economists, religious leaders, political activists and voters. Inflation, particularly if it is systematically understated by the federal government or Federal Reserve, robs savers of the proceeds of past labor and robs workers of the spending power of their wages, living standards and financial futures. Inflation robs the elderly of their retirement and robs investors of their capital by facilitating taxes on alleged gains created solely by currency debasement. Legal tender, created as debt, results in ever larger debt burdens thrust upon innocent future generations that will experience progressively lower living standards and reduced economic opportunity. Generations to come will be born into debt bondage. Thus, the monetary system is at the center of a profound moral crisis.

The morally and literally bankrupt nature of the current U.S. financial system is transforming America into a dog-eat-dog society where every person seeks to live at the expense of someone else, rather than by producing wealth, because production is systematically stolen by the federal government and by banks through the clever device of an inflationary monetary system. The monetary system operates by exchanging fictitious “wealth” (debt-based money created out of thin air by private banks) for the real wealth of borrowers, i.e., the proceeds of their labor. In effect, the monetary system is a massive scam purported to be legal but lacking any demonstrable legal authority. Specifically, there is no constitutional or other legal basis upon which the federal government can force a private monetary monopoly on the states. In fact, the Constitution of the United States explicitly establishes the exact opposite.

The oversized banking system and federal government have grown in an unholy alliance in lock step and now consume so much of the U.S. economy that, together, they not only pillage the real economy, but threaten to kill, once and for all, what is left of the free country founded by the Declaration of Independence. The moral precedent and example set at the highest levels of the federal government and of the banking cartel is that profit, fame, success and wealth are (either directly or indirectly) rewards for immoral acts, rather than for honesty in business. Moral corruption at the top — embedded in the very structure of the monetary system — has slowly spread its gangrenous effect, undermining totally the founding principles of the United States of America, enshrined in the Constitution of the United States and in the Bill of Rights. Rather than liberty, America’s legacy is fast becoming one of moral turpitude enshrined in financial injustice and oppression.

The challenge before our nation today — our moment in history — is not merely a financial or economic or political or legal/constitutional crisis. It is also, and primarily, a moral crisis that could literally destroy theUnited States of America and all that it has stood for in more than two centuries. A stable society requires sound principles. A moral society requires sound money. Today, the United States of America has neither.

This message is a call to action. In the words of poet Dylan Thomas, let us say for America, “Do not go gentle into that good night / Rage, rage against the dying of the light.”

I am personally asking you to read the Utah Monetary Declaration (below), which I, among many others, signed on Monday evening, Sept. 26, 2011, in the Post Chapel on the University of Utah campus at Salt Lake City, and to forward it to all, especially to your state officials. Time is of the essence. Although its duration and pace are as yet unclear, the crisis is already upon us. Please act now and do not delay.

Ron

Utah Monetary Declaration

WHEREAS, money, as a medium of exchange, a store of value and a unit of measure promotes economic activity, growth and productivity by facilitating specialization and trade, the accumulation of wealth and its long-term investment, as well as accountability in setting prices, tracking progress, and settling accounts;

WHEREAS, natural money — precious metal coin — by virtue of its inherent qualities of recognizability, measurability, uniformity, divisibility, durability, portability and scarcity has reliably retained its purchasing power, notwithstanding periodic fluctuations, over the centuries and millennia of human history, serving as an effective medium of exchange and store of value often without any governmental declaration to require, legitimize or perpetuate its adoption and operation as such;

WHEREAS, sound money, by retaining stable purchasing power over time, best serves societal needs by substantially reducing the uncertainty of inflation risk for creditors and deflation risk for debtors as well as encouraging saving and investment among the general populace and benefiting the economic zone in which it circulates by stimulating the economy and by attracting foreign capital and commerce to the region;

WHEREAS, history attests that monopolistic monetary systems frequently engender currency debasement, resulting in serious consequences such as lost purchasing power, inequitable wealth redistributions, misallocation of productive resources and chronic unemployment, and that, as the cornerstone of a free market and society, the right to choose, whether between suppliers of goods and services, political parties and candidates, or between alternative media of exchange, effectively promotes the general welfare;

WHEREAS, for the equal protection of all people, rich and poor, the open circulation of complementary and competing currencies should be fostered and promoted by every sovereign state, including those of the United States of America pursuant to their monetary powers (expressly reserved in article 1, § 10 and in the 10th Amendment of the United States Constitution) to monetize gold and silver coin as an alternative, voluntary medium of exchange, and as an effective check and balance against debasement of the national currency by the national government which is constitutionally precluded from demonetizing state legal tender, through disparate tax treatment, discriminatory regulation, the threat of suppression and seizure or otherwise;

NOW THEREFORE, we the undersigned hereby declare and affirm that:

1. As an essential element of true liberty and of the pursuit of happiness in a free society, all people enjoy the inherent and unalienable right to lawfully acquire, hold and use as a medium of exchange whatever form or forms of money they may prefer, including especially gold and silver coin.

2. All free and sovereign states bear the moral, political and legal obligation not only to refrain from debasing their own currencies (except under the most exigent circumstances) and from erecting barriers to the unfettered circulation of monies issued under the authority of their sovereign trading partners, but also to affirmatively defend and protect against fraud, counterfeiting, uttering, passing off, embezzlement, theft or neglect by requiring full transparency and accountability of all state-chartered financial institutions.

3. No tax liability nor any regulatory scheme promoting one form of money over another should apply to: (a) the holding of any form of money, in a financial institution or otherwise; (b) the exchange of one form of money for any other; or (c) the actual or imputed increase in the purchasing power of one form of money as compared to another.

4. Except in the case of governmentally assessed taxes, fees, duties, imposts, excises, dues, fines or penalties, the authority of government should never be used to compel payment of any obligation, contract or private debt in any specific form of money inconsistent with the parties’ written, verbal or implied agreement, or to frustrate the intent of contracting parties or impair contractual obligations by invalidating the application of a discount or surcharge agreed to be dependent upon the particular medium of exchange or method of payment employed.

5. The extent and composition of a person’s monetary holdings, including those on deposit with any financial institution, should not be subject to disclosure, search or seizure except upon adherence to due process safeguards such as requiring an adequate showing of probable cause to support the issuance by a court of competent jurisdiction of a lawful warrant or writ executed by legally authorized law enforcement officers.

We hereby urge business leaders, educators, members of the media, legislators, government officials as well as judicial and law enforcement officers to use their best combined efforts to reinstate and promote the legal and commercial framework necessary to establishing and maintaining well-functioning, sound monetary systems based on choice in currency.

The signatories hereto concur in the general principles expressed in the foregoing declaration notwithstanding specific reservations some may have as to how such principles should be interpreted and applied in practice.

Next week, the folks over at the Heritage Foundation are putting on their own request for a stable currency… They want a good old debate, to see if there’s anything one can do to stabilize the U.S. dollar.

We’re sending three of our best from the Baltimore office down to Pentagon City next week for Heritage’s two-day event. Expect commentary and coverage from Addison Wiggin, Doug Hill and Samantha Buker.

They’ll let us know what prescriptions are on the table. After all, the dollar is one sick puppy, as Detlev and Ron Hera know. Heritage advertises plenty of hope by calling it the Conference on a Stable Dollar: Why We Need It and How to Achieve It.

All good Whiskey patrons know why a sound currency is great, but do we think it’s gonna happen before all hell breaks loose? That’s the question that the likes of an ex-Fed Reserve president, a Wall Street Journal reporter, a whole slew of university economists and longtime investor and “interest rate observer” Jim Grant will address.

Case for Gold co-author Louis Lerhman and billionaire publisher Steve Forbes will take center stage. We think we know what they’ll argue for, but stay tuned next week, Shooters!

Regards,

Gary Gibson

Notes From the Utah Monetary Summit was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Mr. Wolf correctly identifies the problem: Most sovereign states are bust and so are the banks, which are today a protectorate of the state and have repaid the generosity of their protectors by lending excessively to them. Mr. Wolf is too skilled and sophisticated a writer to put it this bluntly, but if you read his article, that is what it boils down to:

“The emergence of doubt about the ability of sovereigns to manage their debt undermines the perceived soundness of the banks, both directly, because the latter hold much of the debt of the former, and indirectly, via the dwindling value of the sovereign insurance.”

And why are we in this mess? Because some time ago we adopted a system of limitless and constantly expanding fiat money. In such a system, the privileged money producers — the state and the banks — apparently never have to shrink and can conduct their financial affairs in the comforting knowledge of unlimited access to the printing press.

No credit contraction, no bank failures, no sovereign defaults. Whenever the money runs out, we simply lower interest rates, create more bank reserves out of nothing and off we go again. This has worked for 40 years.

Alas, no more.

The present problems, the unsustainable bank balance sheets, the out-of-control budget deficits and the mind-boggling levels of public debt, are inconceivable without a system of constant fiat money creation and extended periods of artificially low interest rates courtesy of the central banks.

Or to put it the other way ’round, a monetary system like ours, in which interest rates can be set administratively to encourage bank lending and to underwrite the constant growth of state and banks, must ultimately lead to a bloated public sector and a bloated banking industry. The fiat money system is feeding its own disintegration.

[Ed. note: Savers in the U.S. have seen the results of QE on their savings with rates less than 1%. And now it's a global money printing party... And investors and savers are stuck footing the bill.

The scam governments are perpetrating on their citizens seems to have no boundaries.

Chris Mayer has a report for you today that exposes their scam and shows you the simple steps you can take to plan for the coming tidal wave of cash. Click to get the story from Chris, here.]

Bail Me out Again, Sam

Mr. Wolf offers two solutions. Both are dangerously misguided, which means that both stand an excellent chance of becoming policy.

Apparently, Mr. Wolf does not want to deprive the banks and the states of their special status. They lent too much and they borrowed too much, but the laws of economics, the laws of gravity and the laws of logic are still not supposed to apply to them. They should be saved again.

Wolf says the banks should be “recapitalized.”

Wait a minute. These are failed corporations. They lent billions to corrupt Greek politicians. They put their chips on red and black came. They lost.

For capitalism to work it requires that the market be cleansed of failed corporations, not that these corporations get “recapitalized.” We are simply perpetuating the bad habits of our fundamentally flawed and anti-capitalist monetary system by shielding the banking industry from its mistakes and never allowing market forces to shrink it. This is not only a mistake for reasons of “moral hazard.” That is the least of it.

After a 40-year fiat money binge, the banking industry is too big. It is now sized for a never-ending credit boom when we have entered the credit bust. We should not be relying for our economic future on an ever more bizarrely propped-up banking sector.

But this “solution” begs another question: Who is going to pay for this? We just learned that the state is bust, too.

Well, while he is at it, Mr. Wolf also wants to save the state. How? Via a super-sized EFSF (European Financial Stability Facility) — a mega bailout fund. Mr. Wolf joins his buddy, Tim Geithner, in recommending “shock and awe” — not that this term conjures many positive memories.

In short, more money is needed. Much more.

“Given the funding needs of banks and sovereigns, this translates into well more than €1,000 billion, and, quite plausibly, several times that number.”

Bring Your bazooka

Several trillion? — Methinks that Mr. Wolf has been hanging out it in Washington too much. I am convinced that in the macho atmosphere of IMF and World Bank power banquets, you are now looked down upon as a policymaking lightweight if you are still content with assigning only billion-dollar price tags to your pathetic policy initiatives. “Trillion” is the new denomination for the grown-ups in the policy elite. Hey, Europeans, if you want to be players, you better add a few zeros!

But again, where does the money come from?

Here is Wolf again, warming to the military theme:

“The eurozone needs a much bigger bazooka. Apparently, five different plans are under discussion. These involve leveraging up the EFSF’s money, by issuing guarantees rather than loans, or borrowing from the European Central Bank or by borrowing in the markets. But if action needs to be immediate, as it does, the only entity able to supply the needed funds is the central bank.”

Ah, here we are. The central bank. Finally.

After all the elegant prose, the bureaucracy worship and the habitual name-dropping, the bottom-line is this: Turn on the printing press! Print more money! Print! Print!

This is madness, so I do think it is precisely what will happen. Mr. Wolf will get his way. Because the policy elite thinks just like he does. Default is not an option. Banks cannot be allowed to fail. States — at least if they are not called Greece, for which this comes too late — cannot be allowed to fail, either. We rather try to print our way out of this. Everybody gets bailed out — via the printing press.

Believe me, it will not work. It will lead to complete disaster. But it will be tried.

Mr. Wolf looks at it in hope. I look at it in horror. Once this gets implemented and the market realizes what is going on, it will dump government bonds, real yields will shoot up and confidence in state paper money will evaporate. What will the central banks do then? Print money faster, as the overstretched system cannot cope with higher real yields.

So what should you do to protect yourself? Well, I don’t want to give investment advice, so please treat this carefully — I could be wrong, so this may not work, but I think it wouldn’t be unreasonable to ditch government bonds, and while you are at it, ALL bonds, and man the lifeboats, which consist of gold and silver.

As my good friend, the Swiss-based bon vivant and intellectual, Tristan Geschex said to me, there are a couple of explanations for the drop in gold:

First, while gold remains, first and foremost, eternal money and is always the monetary asset of choice when paper money dies, it is also still an industrial commodity. I suspect that only a small portion of its present market value reflects compensation for industrial use, but when industrial commodities get hammered because of a weak economic outlook, that element of the gold price — even if it is a minor element — will get “adjusted,” as well.

Second, there are market dynamics. Gold is held alongside other assets in the diverse portfolios of hedge funds and other institutional investors. When those take a hit in some markets, they may also reduce positions in other markets, in particular those where they can still realize a profit, and investors most certainly could still take profits last week on their long gold positions.

Sharp sell-offs in equity markets initiate balance-sheet reductions and traditional derisking (i.e., returns to the paper dollar base) at financial firms and leveraged funds. These also tend to affect gold, at least in the short term. In the second half of 2008, gold famously took a big dive, although it then rallied sharply when the market woke up to what the policy response would be.

Third, the rehabilitation of paper money as a result of the Fed’s reluctance to print more money. This is the most serious threat to anybody who is holding gold as a monetary asset, as the ultimate self-defence in an economy characterized by weak banks, overburdened sovereigns and excessive debt loads, in which the printing press is already being used to postpone the inevitable.

Is the Fed now finally becoming reluctant to print more money? Sadly, I don’t think so. I think they should stop the printing press, but I don’t think they will.

Gold Wins — in Inflation and Deflation

There is no indication whatsoever that Bernanke and other central bankers have stopped believing in the power of monetary stimulus or in the need to avoid asset price corrections, slowdowns in money growth or deflation. There is no sign whatsoever that they now believe that the market should finally be allowed to set interest rates, determine asset prices and cleanse the system of never-to-be-repaid debt. After all, they still consider themselves to be the Lords of Finance.

[Ed note: They may consider themselves to be Lords of Finance, but we think "scam artists" is more accurate.

To see what the scam is, click here for this special report.

You can also learn what else you'll need to do besides stocking up on gold and silver. To find out what, just click here.]

But even if that were to happen and the printing presses were finally turned off, I would still see no reason to ditch gold. Given the size of present imbalances, this would unleash a massive deflationary correction. As Mr. Wolf has so elegantly explained in his article, this would mean banks and states would face default. The paper dollars and the paper euros in your pockets would then no longer be debased — their purchasing power would actually rise.

But how much wealth can be stored in paper cash? And in such a scenario, bank deposits and government bonds would certainly become highly dangerous assets, indeed — and gold would again be an important self-defence asset, even in a deflation.

I do believe that in both an inflationary and a deflationary crisis, gold is a lifeboat. But I am not being facetious if I say that Mr. Wolf has his finger on the pulse of the establishment. What he suggests for the eurozone — saving it via the printing press — also applies to the U.S. It is the position that the global policy bureaucracy will most easily drift toward. The logic on display in that article is the logic of the policy elite.

As to Mr. Napier’s assertion that practical limits to money printing exist — I think he is wrong. For a “determined” central bank, a leverage ratio of 50-to-1 is no hindrance whatsoever. Look at the balance sheet of the People’s Bank of China. Its leverage ratio is 1,200-to-1, which makes it undoubtedly the most heavily geared institution on the planet. That is where we’ll be going.

That must be what Mr. Wolf calls a proper bazooka.

In the meantime, the debasement of paper money continues.

Regards,

Detlev Schlichter

Faster, Pussycat! Print! Print! was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

No one I spoke to would venture a guess as to how high gold would rise before it hit its peak. But most stressed that people forgot that gold’s value was driven by sentiment.

“Gold doesn’t have any intrinsic value,” said Larry M. Elkin, president of the Palisades Hudson Financial Group in Scarsdale, N.Y. “It’s this era’s wampum. At one point you could buy Manhattan for beads.”

(Mr. Elkin said what bothered him the most about investing in gold was how irrational it was, unlike buying a blue-chip stock whose value rises and falls based on what the company produces.)

That said, having gold in a portfolio is still a good buffer against swings in other markets. Mr. Fisher calculated that over a 43-year period ending in June 2011, the average annual increase for gold, accounting for inflation, was 3.82 percent compared with 4.92 percent for the Standard & Poor’s 500-stock index. Gold, however, was 28 percent more volatile.

“The smoother the ride, the more likely the investor is going to stay in his strategy,” Mr. Fisher said. “That produces a better result.”

He said that from the perspectives of both return and volatility, a better strategy would have been to put 10 percent in gold and split the rest 60-40 between stocks and five-year Treasury bonds. Rebalancing the portfolio to maintain those ratios would have meant an average annual return of 4.66 percent, with more than half of the volatility of gold alone.

For those who fled to gold and Treasuries, the hardest part will be deciding when to get back into other securities. The best way in uncertain markets may be to go slowly in small chunks — a practice known as dollar-cost averaging.

They might have asked us. We have lots to say on the matter!

First, gold isn’t supposed to “do” anything. That’s why we like it and why it has been used for money for as long as there’s been the need for money. It is a store of value, not a value-creating business or a head of cattle or an acre of fertile land

And during times when the government and central bank have been doing plenty…running unpayble deficits, artificially inflating asset values by means of interest rate manipulation and by expanding debt and the currency supply…you want something that will “do” nothing.

Second, gold buying based on sentiment? And irrationality? Yet lending money to the government or buying overpriced stocks are both reasonable acts?

Lending money to the U.S. government to protect your savings is like running to an armed assailant for comfort. The government is doing everything in its power to make sure you are paid back in dollars that are worth less than the ones you lent…at an interest rate that doesn’t begin to make up for the rate at which your purchasing power is being destroyed.

Stocks meanwhile may represent ownership in productive businesses…but the costs of those earnings are currently too dear. They are not a good buy. Eventually those earnings will be on sale again. If you buy now, that means you are almost certain to lose money.

It’s about more than smoothing out volatility. It’s about recognizing what’s happening now. It’s about giving the Fed’s actions their due respect and a wide berth.

You have to understand that the very existence of a central bank is the problem. Minus a central bank and government propaganda, gold and silver are very naturally perceived as money, while economic growth is based on savings that aren’t discouraged in the first place by inflation.

With a central bank mucking around with the price and supply of both currency (we hesitate to call it money) and credit, you’re bound to get booms with the busts baked in and all the attendant distortions. You get bubbles moving through asset classes: through the currency, then stocks, then real estate, then commodities and precious metals.

This makes the advice about a having a “balanced portfolio” a bit of a joke. That’s like telling you to inject yourself with both steroids and Ebola and hoping the two will balance each other out. When you have a busybody central bank creating serial bubbles, you need to move from one investment class to the next.

You should have been trading your rising stocks for sleeping gold for the past decade. You should have been selling off your real estate and buying silver too.

We’re going to keep trumpeting the “do nothing” metal and its more industrious companion silver. Especially as the New York Times quotes experts who scratch their heads at this gold thing.

Gold has gone from under $300 to nearly $2000 in the last decade. What has the Dow done? It was around 10,000 ten years ago. It’s around 11,000 now. Yet these guys are still rolling their eyes at the people who were “all in” with gold, the price of which is now around sixfold more.

Sure there were a couple of dips in the Dow in the past ten years. You might have made a little money if you bought and sold at just the right time.

Gold took a lot less timing and a lot less effort. Those recommending gold were begging people to take advantage of gold’s years of dormancy. They begged them to keep accumulating while gold was cheap.

The price of gold is more than mere “sentiment”. That price is trying to communicate something. Gold’s price is declaring that fiscal policy stinks, that government deficits are no laughing matter, and that the stock market on the whole is a sucker’s game right now.

Regards,

Gary Gibson
Managing editor, Whiskey & Gunpowder

Gold Still A Better Idea Than Mainstream Asset Allocation was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

This flies against policy (our policy) of never buying anything except that which can be paid for at the time of purchase – and even though I know full-well that we won’t really own the land, just as we don’t really own the land we have (or the house that sits upon it) because owners don’t pay rent in perpetuity to the government, which we, like all “owners” must (in the form of annual property taxes) if we wish to continue to be allowed to remain on the land (and in “our”) house.

Anyhow.

We did this deed as a way to hedge against what I am increasingly convinced is coming – the destruction of the dollar, followed about five minutes after this becomes common knowledge by the final implosion of what’s left of the American economy.

Land – physical land – is a good way (perhaps the only way, in a major economic crisis) to keep at least some of your wealth intact and more importantly – if you act in time – a way to transfer the value of fiat dollar-denominated assets into something tangible, of real value.

Gold, of course, is another way to do this but it has a major disadvantage: It is only valuable as a sort-of proxy for wealth; that is, it has value only as long as someone else who has something you want is willing to trade you what he has for the gold you have – which means that he (the owner of the item you want) must believe he will be able to then swap the gold he gets from you to some other person who has something he wants, something that’s not gold. Put another way, gold is fungible only if there’s a still-operating economy.

If the worst happens and the system really does experience a catastrophic collapse, the value of gold may collapse along with it – at least, for awhile. Until civilization re-assembles itself. But in the meanwhile, what will you do with your gold? It is pretty to look at but you can’t eat it and outside of a few specialized industrial applications that won’t matter during a period of crisis, it is useless.

Land, on the other hand, not only has tangible value (like gold) and is fungible (also like gold) because you can always convert it into gold or trade/sell it for something else you value – but perhaps much more importantly, in a time of real crisis, land can give you life.

Literally.

You can grow food on land – which could mean the difference between life and death, when the system runs off the rails and Costco and Safeway are looted to the linoleum. Which – count on it – is sure to happen the moment the masses get a whiff of the dollar’s imminent collapse. And you can hunt on land, too – assuming enough acreage.

But the number one advantage to land, as I see it, is physical distance between yourself – you and your family – and the latter-day Golden Horde that is already in the process of forming itself up. (Witness the so-called “flash mobs” of “youths” in Wisconsin, Philadelphia and other places.)

Just as it is harder for a thug to assault you from 20 yards away than when he’s right up in your face, you stand a better chance of making it through what may be coming if you and yours are not in the immediate vicinity (or path) of the rampaging mobs. They may not even notice you – and more significantly, you will enjoy a greater likelihood of noticing them before they notice you. In old-school cowboy lingo, this means getting the drop on them. And that can be the difference between life and death as much as having some food and other supplies stored up to get you through a few months of hard times.

In the most extreme eventuality – minions of the Clover State [the Clovers are the authority-worshiping apologists for any action by the state, no matter how egregious--ed.] coming to round you and yours up for “relocation” to a FEMA camp or god-knows-what-else in the immediate aftermath of a SHTF-type scenario – you have the option of just…disappearing. Of going off the grid, into the heart of darkness. It will not be easy. It will certainly not be pleasant. But it is much more pleasant than the alternative.

I am in my 40s now and like most people in that age bracket, I like my comforts. I enjoy having my motorcycle and car projects; even doing the chores around the place that need to be done. But if the S does H the Fan, I will do everything in my power to make it through to the other side of whatever’s coming, which will hopefully be something better than what we have now. But above all else, I will not Submit and Obey. If they come for me and mine, if they are not willing to leave us be in return for us extending the same common decency toward them – well, then we have options.

Because we have some land.

If you are reading this, there is still time for you to do the same. I hope you will consider it – and I hope you can make it happen.

Meanwhile, let’s hope for the best and that all we’ll be doing next summer is cutting the grass…. .

Regards,

Eric Peters

http://epautos.com/2011/08/17/a-not-car-column/

Eric Peters is a Washington, D.C.-based automotive writer and frequent contributor to the Detroit Free Press and Detroit News. He has written for the Wall Street Journal, Investors Business Daily and Washington Times, among others. In his free time, he enjoys working on old cars and currently owns a 1964 Chevy Corvair Monza coupe and 1976 Pontiac Trans-Am equipped with a modified 455 V-8.

Land More Valuable Than Gold In A Total Meltdown was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Having thus be-clowned themselves, they went on to elaborate: gold prices are volatile, gold doesn’t pay a yield, it depends on a “greater fool” for capital gains, central banks are net sellers, it doesn’t beat inflation, Warren Buffett hates (and does not understand) it, and you can’t eat it.

Oh dear. The gold price in dollars is volatile because the US dollar is volatile. An ounce of gold has almost always bought you a nice suit at any time in history. The volatility in the gold/dollar exchange rate is all on the dollar’s end. And that’s because the supply of dollars is always increasing. Also, the futures exchanges have been pretty active boosting margin requirements on gold contracts. That’s made for some larger-than-normal price moves. But the value? Rock steady over time, baby.

And that’s the point. Gold isn’t really an investment. It’s money. And it’s money that holds value well over time. You only worry about capital gains if you’re investing in gold. If you’re buying money, you’re more focused on preserving purchasing power.

Gold doesn’t have a yield? Someone should tell the boys at Wells Fargo that 10-year US Treasury yields went negative in real terms this week. Investors are so terrified of the debt super volcano upon which asset prices are built, they are paying rent to Uncle Sam in order to park their money in bonds.

By the way, this willingness to lose some of your capital in exchange for the illusion of safety and liquidity, in the short term, is probably going to be the catalyst for a violent stock market rally. All that money will come out of bonds and into stocks. After all, you have to beat inflation somehow, don’t you? This is how artificially low interest rates destroy savings (negative real yields) and encourage speculation in equities.

The claim that central banks have been net sellers “in recent years” isn’t backed up by any facts. But in any case, the Bank of England sold all its gold in May of 1999, near the bottom of a 20-year bear market in gold. Peter Costello, who was Australian Treasurer at the time, beat Brown to the punch when he sold two-thirds of Australia’s gold reserves in 1997 for the handsome price of $306.60 an ounce.

This was at the height of political efforts to eliminate gold’s role in the financial system. Costello said as much. He said gold, “no longer plays a significant role in the international financial system.”

You’d expect politicians to say that. You’d expect them to want it to be true. A gold standard was the only check on the permanent expansion of government debt in the early 20th century. That’s why it was abandoned. With a gold standard, the Warfare State and the Welfare State are not possible. Get rid of the gold standard and discredit gold as money and you can expand the role of the State to your heart’s delight.

Central banks are the largest holders of gold bullion in the world. Politicians sold gold because they’re stupid, ignorant of monetary history, and think only in terms of election cycles. Most central bankers, Ben Bernanke notwithstanding, recognise that gold is money. Its role in the world’s financial system is growing, not shrinking.

Warren Buffett doesn’t like gold? So what. Buffett is an investor. Gold is money.

You can’t eat gold? Is that so? Well, you can’t eat dollar bills either. You can always sell gold and silver for local currency and buy food, which you can eat. Being a medium of exchange is only one property of money. Just because you can’t yet use gold coins to buy a Big Mac doesn’t mean gold isn’t money or isn’t useful. Claims to the contrary are ignorant.

We asked Diggers and Drillers editor Dr. Alex Cowie what he thought of the Wells Fargo report. He wrote back:

“They forgot that you can sell gold and buy a room, a hot meal, or an ‘efficient’ jacket, hat and gloves with the proceeds.

“Their mixed salad of an argument was full of holes, and didn’t mention the epic growth in Chinese gold demand that is completely reshaping the market. China is the biggest importer of gold now, and these imports are about to double.

“The reason China and the rest of the world is buying gold is that the financial system is corrupted with debt, bailouts and defaults.

“And who is Wells Fargo’s number one share holder?

“None other than Mr Warren Buffett: the world’s biggest gold hater. Interesting that the bank’s analysts are now quoting him, like lovesick schoolgirls.

‘Do something for me,’ and [the gold] says, ‘I don’t do anything. I just stand here and look pretty.’

“Damn right. It does look pretty.

“It also does something that Wells Fargo hasn’t done too well in the past. It preserves wealth.

“There’s no one to stuff things up with gold. No bungling bankers, no corrupt politicians, no bail outs. And this is why it doesn’t need to pay interest – there’s no counter-party risk to compensate for.

“As the Octogenarian of Omaha points out – there is very little gold in the world. It would in fact fit into a couple of full size swimming pools. This scarcity is exactly what makes it valuable.

“So as the European and US debt crises continue to unravel in the coming months and years, and more and more Euros and Dollars are printed to plug the shortfalls, gold’s scarcity will be more and more valuable.

“So next time you are saving money up to buy some ‘shelter, food or efficient clothing’, buy some gold to do it with.

The Wells report concludes that:

“Gold is a commodity that should be held as a part of a larger, diversified allocation to commodities that is frequently rebalanced. We do not believe that gold should be utilised as a cash-equivalent, no matter how enticing the price returns have been in recent months.”

It’s clear Wells thinks gold is an investment speculation. That’s why they think it’s in a bubble. If the Wells’ bankers treated gold like money, not a financial asset, perhaps they’d allocate a lot more of their cash to it. But oh well.

In fact, that’s part of the problem. The idea that you can build wealth in a balanced way through a uniform asset allocation strategy is crazy. A sound portfolio would rebalance assets annually. That’s a nod to the fact that none of us can predict the future and you don’t want to have all of your wealth concentrated in one asset class, or in one risk.

But what assets should you really have in your portfolio if we’re entering a credit depression? Will stocks generate the same returns over the next 20 years as they have for the last 20 years? You’d think not, given that global credit is due to contract in the years ahead, not expand like it did for the last 20. Stay tuned…

Regards,

Dan Denning
Daily Reckoning Australia

You Can’t Eat Asset Allocation Either was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

None of this should surprise those conversant with Austrian economics. The “fundamentals” of the economy have been and remain awful because the government and Federal Reserve are consistently doing the wrong things. The apparent recovery, fueled by Bernanke’s sheer money creation, has been bogus all along.

Bubble, Bubble, Bubble

For some reason, people still cling to the vague hope that – at least if we wait long enough – the market always goes up, and “buy and hold” is a great strategy. Let’s look at a long-term chart of the S&P 500:

Does the above chart really look like the US stock market is in store for smooth sailing? Just about everyone except Chicago School economists now recognizes, after the fact, that the United States obviously went through a tech and dot-com bubble in the late 1990s and then a housing bubble a few years later. Is it really so difficult to understand that trillions in government budget deficits over the past few years, coupled with unprecedented inflation by the central bank, have set the economy up for yet another crash?

Alan Greenspan’s low-interest-rate policy in the wake of the dot-com crash spawned the housing bubble. Greenspan’s Fed didn’t actually eliminate the need for a recession, but instead postponed the crisis and made it fester. When reality hit in September 2008, Ben Bernanke was in charge of the Fed and implemented his predecessor’s failed approach times ten.

No matter how many pundits and famous economists declare otherwise, Bernanke did not save the day with his interventions. He has simply postponed the day of reckoning yet again, and we can expect the final crisis to be much worse than the mere collapse of a few major investment banks. (The short documentary Overdose makes the case in a chilling fashion.)

Ben Bernanke Engineered the “Recovery,” All Right

In a perverse way, the pundits are correct in crediting Ben Bernanke’s extraordinary programs for “rescuing” the stock market. If we zoom in on the chart of the S&P 500 and superimpose the monetary base, we can see how closely the two have moved since the crisis began.

Although the above chart shows a decent fit, in reality the stock market responded very quickly to changes in the expectations of Fed expansion. Specifically, the sharp upswing in the S&P 500 in March 2009 coincided with the announcement of the Fed’s full strategy for (what we now call) QE1, and the market rally in the late summer of 2010 began as knowledgeable Fed officials made it clearer and clearer that QE2 would kick in after the fall elections.

Of course, those economists who believe Bernanke is engaging in a tight-money policy would point to the above as evidence in their favor – the Fed just needs to print more, because it’s worked twice already! But if one believes that showering trillions of newly created dollars into the financial sector (with the specific aim of bailing out the very parties who made reckless loans and investments during the housing bubble) is notconducive to a healthy recovery, then the booming stock market of the last few years should have been an ominous sign. Note that this isn’t 20/20 hindsight; other Austrians and I have been warning that this “recovery” has been bogus all along, and that the stock market could collapse at any time.
Inflation Lifts All Boats

None of the above analysis implies that investors should dump all equities immediately. It is true that the prospects for real economic growth are terrible – especially in the Western countries – over the next decade, because of increased regulations and swollen government debt loads. But at the same time, various central banks, especially the Federal Reserve, have been all too willing to create new money as an apparent solution to every crisis. (A case in point was the absurd proposal for the Treasury to issue two trillion-dollar platinum coins to evade the statutory debt ceiling.)

In this environment, someone relying on fixed-income investments (such as private annuities or, heaven forbid, government retirement checks) could be wiped out by massive price inflation. As awful as the US real-estate and stock markets might be in the short and medium run, holding a portion of one’s wealth in assets not denominated in fiat currency may turn out to be a very wise defensive move. (The problem with shooting the moon on precious metals is that for all we know the dollar will crash next year and Obama will make it illegal to buy and sell gold.)

Conclusion

The US economy still needs to recover from the festering malinvestments that accumulated during the previous two booms. By pushing interest rates down to zero and bailing out the very people who made such bad financial decisions in the first place, the Fed and Treasury are doing everything they can to exacerbate the problem.

In this volatile world economy, investors can expect continued volatility in the stock market. The only thing we can really be sure of is that the government will use each new crisis to justify further extensions of its power. At some point the feds will probably seize the highly volatile 401(k)s and other stock-market holdings from citizens and replace them with “safe” government annuities.

Knowledge of Austrian economics doesn’t render someone an expert investor, but it certainly gives advance warning of the major trends in the economy. Those investors who rely on the Keynesians featured at CNBC think that another stimulus package or QE3 might do the trick.

Why Is the Stock Market Crashing? was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

A gas station in Ashland, Oregon, May 2011

…If you pay with un-debased U.S. currency.

One gas station in Ashland, Oregon, is accepting payment for gas in the old, un-debased version of the currency.

The more prices change, the more they remain the same. At least when the currency is sound.

A gallon of gas was nearing $5 per gallon at the time the above picture was taken. Two old 90% silver dimes were worth about $5.00 of the newer 0% silver dimes and quarters. If you’d saved your money in plain ol’ currency back before the Treasury pulled another fast one, you’d be able to buy about a gallon and half of gas for $0.20.

We often tell people to start saving their nickels. This is why. This isn’t a get-rich-quick scheme. It’s not even a get-rich-slow scheme. It’s a don’t-get-hosed-by-central-bankers scheme.

Note that for all the years that dimes and quarters were 90% made of silver, the price of gas was around two of those (mostly) silver dimes.

Also note that there is a red line that shows the inflation adjusted gas prices. When the currency was sound and stable and the dollar price of gas was stable, people were better able to afford gas. This is because prices were stable as incomes were rising, a condition that Keynesians generally can’t stand.

(And heaven forbid prices actually fall slightly while incomes stay the same or even rise slightly. That sort of “deflation” is to be stopped at any cost.)

But see what happens when the silver is removed from the coinage in 1964? The price trends up a bit. And then after the U.S. dollar is entirely cut from gold in 1971, the price of gas really started to move in dollar terms. There was a spike leading up to 1980, a slight drop and leveling off for years (for various reasons we won’t go into now) and then it was back off to the races.

In 1918, a gallon of gas was about two 90% silver dimes. In 1928 about the same. And in 1948. Fast forward to 2011 and a gallon of gas is still about two 90% silver dimes, despite the rise in price in terms of the debased currency that really got going in 1974.

Even with all the Hunt Brothers drama and attendant price drops after 1980, silver’s price movements in dollars looks suspiciously like that of a gallon of gas…

Source: SilverPrice.org

You see, a gallon of gas isn’t getting expensive. Your currency is getting cheaper. Has been for a long time, since the official closing of the gold window. The speed at which it’s getting cheaper appears to be accelerating, too, as the central bank creates unprecedented amounts of new cash–unbacked by anything commodity or productive activity of course–to inject into the economy.

Meanwhile, the REAL currency is doing pretty well. Largely forgotten the silver version of the currency is keeping its value relative to things you buy. A gallon of gas is still less than $0.20. Twenty REAL cents. Not the forgeries that pass for money in the minds of the unwary.

If you think that’s something, realize that a gallon of gas is just five or six cents in terms of the old dollar bills that were also gold certificates. (One pre-1934 dollar was good for 1/20 ounce of gold, or about 80 of today’s dollars.) That’s an even more impressive holding of value than the silver coins. (Though silver still stands to surpass gold as the winning bet for beating currency debasement.)

Even the lowly penny has gotten in on the act. Say you missed out on (illegally) hoarding gold before 1934…and then again (legally) with silver coins before 1964…if you’d diligently saved your copper pennies before they were replaced in circulation with that shabby zinc substitute, you’d have protected your purchasing power quite well.  The metal in about $1.25 worth of pre-1983 pennies would buy you a gallon of gas today, priced at about $4.75 of today’s dollars.

Again, roughly a $5 gallon of gas in today’s money is five or six cents of the old dollar gold certificate, twenty cents of the silver dimes, a buck twenty-five of the copper pennies. There appears to be a strong correlation between length of debasement and multiplication of purchasing power.

The dollar was partially debased in 1934, the gold it represented made illegal for private American ownership, then completely cut free from gold in 1971. Dimes, quarters and half dollars started being debased in 1963 and were completely de-silverized by the end of the year (40% silver-clad half dollars were available for a few years after that). The penny got the same treatment and was completely de-copperized during 1983.

The old gold certificate dollars are worth 80 times their face value in the current currency…Well, technically they are collector’s items and museum pieces; the gold they represented is what has value today. The old dimes, quarters and half dollars more than 25 times. The old penny only three times.

The same thing that happened to gold certificates, quarters, dimes and pennies is happening to the cupronickel nickel. The value metal in the five-cent piece is staying steadily above the face value of the currency in which it’s minted. Put another way, a five-cent piece is worth quite a bit more than five cents. About 35% more, or 1.35 times face value as of this writing.

We expect all these factors above in bold to increase over time.

A market for pre-1963 90% silver coins is well established. These coins trade for the aforementioned 25x-plus their metallic content. A market for trade has only just begun to develop for pennies like it has for old silver coins. It hasn’t yet for nickels. It will.

The government figuratively took the gold out of the paper dollar. They literallly took the silver out of the dime, quarter and half dollar, and the copper out of the penny. The nickel is the only thing the U.S. has left to debase. It will probably be getting around to doing just that very soon. So now would be a good time to stock up.

This is your last chance to protect yourself from dollar weakening (and perhaps dollar destruction) by merely saving your money in the right form. No premiums attached! Just go to the bank and exchange whatever dollars and cents you have for nickels. They will give you 100% of your money back in nickel form without taking a cut.

Go to any bank right now and hand them $100 and ask for nickels. The teller will gleefully give you back about $135 in metal (as of this writing). We suggest you do this as regularly as you can.

No, you can’t take advantage of that now by turning around and selling these cupronickel pieces (“nickels” are actually only 25% nickel and 75% copper) for an immediate 35% gain. Not yet. But that time is coming. It could take years, but we doubt it will be that long this time around. The pace of debasement is accelerating over time. It’s taking on the classic “hockey stick” form on the charts.

You should still be buying gold and silver because there is plenty of dollar debasing left to go. But you should also be gathering nickels because they are so damned easy to acquire (go to the bank and see) and because they insure against both dollar strengthening (which could still happen) and declining.

In the unlikely event that the dollar gets stronger over the course of the rest of your life, you have merely saved money that you can still use at face value. In the much more likely event that the central bank keeps printing up new money, the metal content of the nickels will continue to climb far above their face value.

When the metal value gets way above the face value, the Treasury will surely do what they always do: issue a new, debased version of the currency with a much cheaper metal (probably zinc). This could happen as early as next year. This opportunity will not last forever. We strongly urge you get on a program of regular nickel-gathering now.

Perhaps best of all, any substantial wealth is virtually theft-proof in nickel form. As I recently noted on the Whiskey Bar Panel: if you have $10,000 in nickels in your house, no one who breaks in is going to get more than about forty bucks of that. At least not without lots of time, help and planning.

Nickels have very low value per unit. So even a fairly tiny amount of purchasing power in nickel form is very heavy. Forty dollars worth is heavy and awkward enough to make the effort and risk to reward ratio low enough to deter most thieves.

Now if a devoted thief plans a competent heist…if he gathers accomplices and makes sure he has a reliable getaway car and plenty of loading time, then you’re probably out of luck. But I suspect that thieves with that level of skill and dedication would be targeting all the gold bugs, not the nickel-hoarders.

You should absolutely be buying gold, silver or both. Silver especially still looks like the best way to multiply purchasing power instead of just protecting it. But you should also hold some cash, just in case, and much of that cash really ought to be in a form that will do just fine whether the dollar goes up or down. It ought to be in nickels.

Regards,

Gary Gibson
Managing editor, Whiskey & Gunpowder

Gas Prices Don’t Move Much In Good Currencies was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

I have stressed holding coins, especially tenth-ounce American gold eagles.

I am writing this for those who did what I recommended, have quadrupled their money (on paper and in digits), but who may be getting cold feet.

There are good reasons for buying gold. But you should have an exit strategy in mind.

We are told by the mainstream financial media, which never told investors to buy gold over the last decade, that gold is in the final phase of a bubble market. But how can any market be a bubble market when the mainstream financial media are not running report after report on the bubble, telling readers and viewers about how much money people are making.

What mainstream financial outlet warned investors loud and clear, issue after issue, in 1999 that the dot.com market was a bubble? I told my subscribers in February and March of 2000 that it was, and that they should get out. But I published a newsletter. I was not mainstream.

What major outlet warned people in 2006-2007 that the real estate market was a bubble, that wise investors were getting out? I did in November 2005.

Bubbles always continue for months or even years after old timers say they will pop. Old timers have trouble estimating the fear of the buyers at being left out and the fear of lenders at being left out. The two sides — debtors and lenders — keep the dance of doom going much longer than old timers can imagine possible. But eventually the dance ends.

I spoke at Lew Rockwell’s conference. One of the speakers is a banker. He lives in Las Vegas. He was taught by Austrian School economist Murray Rothbard. He earned a masters degree in economics. Then he went into banking.

As an Austrian School economist, he understands the business cycle. He understands that the Federal Reserve system has pumped money into the economy, creating a housing bubble since 1996. He knows this boom will bust.

He has no illusions about this housing market. Compared to him, I have been Pollyanna. He spoke of the mental outlook of the builders in Las Vegas. They all know it can’t go on, but they are determined to party until it does. “Then they will declare bankruptcy and start over,” he said. This is their exit strategy.

He was correct. It happened. He lost his job as a Las Vegas banker. He is now the president at the Mises Institute.

I went on to write the following:

I think a squeeze is coming that will affect the entire banking system. The madness of bankers has become unprecedented. They have forgotten about loan diversification. They have been caught up in Greenspan’s counter-cyclical policy of lowering the federal funds rate. Now this policy is being reversed. Rates are climbing. This will contract the loan market. Banks will wind up sitting on top of bad loans of all kinds because the American economy is now housing-sale driven.

But I was on the fringes of the investment community. The bubble was about to burst, but the media attracted viewers and readers by staying on the bandwagon. To call attention to what should have been obvious would have reduced the audience. The editors knew better.

So, when I read articles about gold in a true bubble market, I know it isn’t. The salaried reporters with no savings, underwater in their homes, and in a dying industry are merely writing what their editors think will sell.

What sells? Articles that confirm what conventional viewers and readers want to hear, namely, that they were not really losers by staying out of the gold market (they were), and that those who buy good now will lose everything (they won’t), and that now is a good time to buy stocks and bonds (it hasn’t been ever since March 2000).

Mark Faber, who recommends owning gold as a hedge against a declining dollar, recently wrote this: “In my opinion the Fed funds rate should be at 5% . . . That will provide real interest rates. I don’t think the Fed will increase interest rates to a positive real rate. So, I’d say to an investor, he should have at least 20 to 30 percent of his money in precious metals.”

When asked about his opinion about renewed fears of a bubble forming in the gold market, the student of the Austrian School of economics theory scoffed at the pundits who say the gold trade has become crowded.

Faber said he routinely sees less than 5% of attendees at his speaking engagements raise their hands during his casual sentiment polls regarding the precious metals. Sometimes he sees no hands raised, he said.

There are many ways to own gold. The ones that most investors choose, and which most investors will rush into during the final phase of the bubble, is in fact not gold. It is a promise to invest in gold. It could be an ETF, which is a form of derivative. It may be a commodity futures contract — another promise.

But what about gold, in contrast to a promise — “cross my leveraged heart and hope to die” — to invest in gold on your behalf?

Gold coins are gold.

Why Gold Coins?

The problem with today’s economy is that it is built on promises and trust. It is therefore built on debt.

In the United States, the financial promises always come back to these:

1.    The Federal Reserve System will remain the lender of last resort.

2.    The Federal Deposit Insurance Corporation (FDIC) will pay off all bank accounts up to $250,000.

3.    The U.S government stands behind the FDIC’s promise with a $600 billion line of credit.

4.    The government can get this money from the Federal Reserve System, if necessary.

The problem with these promises is this: the ultimate insurer — the FED — can fulfill its obligations in a deflationary crisis only by hyperinflation. That means that the only sure guarantee against the systemic failure of the American banking system is the destruction of the dollar.

If we get the latter, do you want promises to pay gold, which can be settled legally by the payment of digital dollars? Or do you want coins where you can get your hands on them?

On the other hand, if the FED ever refuses to create money, and if the banking system then begins to implode, do you want promises to pay that were issued by a limited liability corporation, such as a futures exchange?

In between hyperinflation and a deflationary banking collapse, people can buy and sell promises to pay gold. They can pay 28% on all profits (no capital gains protection). They can become self-conscious speculators. There is nothing wrong with this.

But what if you are speculating against long-term price deflation? Then you want paper money. But paper money leaves you at the mercy of the Federal Reserve System and the commercial banking system. Mass inflation could appear rapidly (up to 20% price increases), followed by hyperinflation (anything from 20% to infinity).

What if you want an asset that will do well in mass inflation or hyperinflation, but which will not do as badly as most other leveraged capital assets in a banking collapse?

I keep getting this answer: gold coins.

Procrastinators Pay Premiums

Most people listen to a story for years before taking action. This has surely been true of the story of gold. When Gordon Brown, as Chancellor of the Exchequer, sold off half of Britain’s gold, 1999-2002, he depressed the world price. He sold it at an average price of $276 per ounce.

This was a massive transfer of wealth from the British government to other central banks, which bought most of the gold. This kept down the market price, as central banks shifted demand from the private markets to the Bank of England’s bars of gold.

This was the last chance for gold speculators to get in on the deal cheap. Not many people did, of course, because not many people ever buy close to the bottom of any market.

So, gold has steadily moved higher over the last decade. Still, the procrastinators procrastinate.

I don’t mean Joe Lunchbucket and Tom Temp. The vast majority of Americans have no liquid savings above a few thousand dollars in the bank. Fewer than 50% have pensions of any size, and the money in these tax-deferred accounts are not at their disposal. The funds they can invest in are not related to gold. They are categories that will keep the fund managers from a lawsuit when markets collapse: American stocks, American bonds, and Treasury debt.

Gold is an investment asset. It therefore will not become popular short of an economic collapse — hyperinflation followed by a depression. The average person owns no gold coins, nor will he anytime soon.

Where would he buy them? How could 100 million households buy a single gold coin per household? This would be impossible. There are only a few small coin stores in any community. They are mostly mom-and-pop outfits. The U.S. Mint could not meet the demand.

When Wal-Mart has a gold coin section in the jewelry department, then we can start talking about a possible bubble in gold. Not until then.

As more people on the fringe of the Tea Party find out about American gold eagles, they will start buying. This will force up the coins’ premiums.

As word gets out about the scarcity of small-weight gold coins, there will be more interest in owning them.

As word gets out that the Federal Reserve’s exit plan is a myth, they will start looking for hedges. Gold is a hedge against serious price inflation.

The government is working hard for existing gold coin owners. The government clearly cannot bring the budget deficit under control. Congress has no intention of doing so. When the government can borrow $1.6 trillion a year at rates as low as four-one-hundredths of a percent (90-day) to under 3% (7 years), why should we expect Congress to cut spending?

Conclusion

If you have yet to buy a single gold coin, buy a tenth-ounce American eagle to get started. That will not bankrupt you. It will get you over the hump.

Most Americans will never take this initial step. Those who procrastinate will pay a high premium when they at last think: “Maybe I really do need some gold.”

Regards,
Gary North
Whiskey & Gunpowder

April 13, 2011

Your Gold Coins vs. the Federal Reserve and the Mainstream Media was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.