“Frankly, it’s not clear to me how bad [being a net debtor] is,” he added. And for the next two decades or so, owning fewer assets overseas than foreigners laid claim to inside the United States didn’t seem so bad at all.

The long boom delivered by a steady inflow of foreign credit and cash delivered the greatest stock market gains ever enjoyed by U.S. investors. When they topped out, the party switched straight into real estate — adding more than one-third to America’s household wealth on the Federal Reserve’s metrics.

So what if non-U.S. claims on that surging wealth rose faster still? Now the party’s over, inflating away the value of America’s debt will work just as beautifully as always before. Right?

“In my view,” says John H. Makin — a visiting scholar at the American Enterprise Institute writing in the Wall Street Journal — “the least bad option [in fixing the financial crisis] is for the Federal Reserve to print money to help stabilize housing prices and financial markets.”

“America is a country that owes money,” agrees Philippa Malmgren, a former Bush advisor and now head of a risk consultancy in London. “It is natural when you are a debtor that you lean in the direction of inflation, because it makes paying it back so much easier.”

The logic is simple: inflate the number of dollars in issue, and you’ll shrink the real value of each outstanding dollar you owe. But if escaping your debts really could prove that easy, then why is history is littered with the mischief that inflation causes instead…?

Restoration England, 1668

Charles II — still playing his “divine right” as king some 20 years after Parliament cut off his father’s head — steps up the issue of new bonds. Then called “stocks,” they let the King raise cash for yet another losing war against the Dutch.

Charles side-steps Parliamentary approval for these new debts, and starts selling stocks against the promise of future tax receipts (the same wheeze adopted by governments worldwide today, of course). Come 1671, however, all the new money raised went straight to paying interest on the outstanding loans. So Charles opted to default, wiping out 11 of London’s 14 biggest goldsmiths — those early banks who’d first lent the Crown money — and destroying his credit with England’s loyal subjects.

The upshot? The King strikes a secret deal with France, promising to stay out of its war against the Dutch in return for regular cash pay-offs. But the deal — uncovered amid a rash of anti-Catholic panics in London — undermines all support for the Stuart royal family. Fifteen years later, and with the English crown bankrupt once more, his brother James II is overthrown in a popular and (pretty much) bloodless coup.

He’s replaced by William of Orange…head of the Dutch Republic!

Revolutionary America, 1775

Lacking a mandate to tax its population while fighting a war, the second Continental Congress authorizes the “limited” issue of paper money. The new notes, known as Continentals, are backed by neither gold nor silver, but by the expectation of future tax receipts.

Effectively acting as tradable bonds — but exchangeable for goods and services amongst the Patriots, rather than hard currency — the Continentals will only be redeemed when the Colonies win their independence from Great Britain. But long before that happy day, they race toward zero, becoming progressively worthless as their supply increases.

During the first six months, the supply of Continentals goes from $2 million to $6 million. By 1779, the total supply reaches $242 million on one estimate — more than twenty times the volume of gold and silver money in circulation before the war began.

“A wagonload of currency will hardly purchase a wagonload of provisions,” complains George Washington. In March 1780, Congress announces a plan to redeem the Continentals at one-fortieth of their face value, effectively stuffing the American people and taxing the new citizenry more aggressively than George III ever did.

Weimar Germany, 1920

Besides losing 13 percent of its territory and 10 percent of its population under the Versailles Treaty after World War I, Germany also owes “reparations” to the Allied victors worth almost 37,000 tons of gold — around one-third of the world’s entire above-ground supplies at the time.

Expected to settle the final payment seven decades later, the German government opts instead to pay early by printing money. The volume of Reichsnotes in issue rises 35 billion times over between 1918 and 1924 — and “the young and quick-witted did well,” as the German journalist Sebastian Haffner will record, 15 years later.

Equity prices in Berlin rose some 2,772,164 percent by the time a loaf of bread cost a wheel barrow-full of banknotes. The value of those Reichsnotes, however, went the other way — sinking from eight per dollar to 4.2 billion per dollar.

The resulting chaos, now regularly blamed for the rise of Hitler during the Great Depression of the early 1930s, saw “wages paid twice a day and promptly and completely spent within the hour,” notes Glyn Davis in his History of Money.

“Large sections of society, including the middle classes, became impoverished; food riots were common; there was a complete flight from money, which had clearly become worthless to hold.”

The Global Banking Crisis, 2008

“U.S. money supply growth is running at a 47-year high,” notes Bedlam Asset Management, “as the authorities seek to inflate away the debt bubble and prop up house prices.

“Clearly printing such huge amounts of money is not great for the exchange rate. A weak dollar has forced the hand of other central banks as they try and keep their currencies competitive with it.”

But might the scam work? Not if China, Japan and the big dollar-holders of the Arab oil kingdoms can help it. Will they really let their own currencies rise…just so the United States stuffs them by paying its debts with devalued dollars?

Inflation, it’s claimed, eases the burden of settling your debts. But for government and private debtors alike, that’s only true if your income rises faster than your on-going cost of expenditure. Otherwise, you end up struggling to make ends meet today, only to leave yesterday’s debts for repayment tomorrow again.

Middle-class families and savers looking to get ahead of the game — both inside and outside the Federal Reserve’s fast-inflating currency zone — might want to consider buying gold as defense. Because however this latest attempt to inflate away debt pans out in the long run, it’s sure to make history.

And history says — time and again — that solid gold bullion holds its value whenever man-made currencies are forced to lose value.

Regards,
Adrian Ash
May 19, 2008

Inflationary History was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Oil and Gold Still Rising

My Outstanding Investments colleague, Kevin Kerr, and I both expect to see a price increase to $150 for a barrel of oil, and even $200 oil would not shock us. Expect to pay $5 or more for a gallon of gasoline within 18 months, as well. It is part of the Peak Oil future, and that future is now. Darn, we were hoping to have more time. But then again, our society has been wasting time for two generations, since the early energy warnings of the 1970s. And while we are on the topic, we expect to see gold at $850 per ounce in the not-too-distant future. Then $900 and $1,000 within 18 months, if not sooner.

If we have your attention, we regret having to say all of this because it means that the U.S. dollar will be losing value in a precipitous drop during 2008. It will not be a pretty sight. Just imagine the loss of purchasing power and the associated destruction of capital that our society collectively will experience as this occurs. Imagine a scenario of asset deflation and price inflation. What can you do? We’ll discuss that later in this article.

Superheroes, Light and Dark

Yes, oil and gold have risen in price and will almost surely rise some more. In the marketplaces and bazaars of the world, where oil and gold are traded, it is as if a well-muscled superhero is leaping into the sky, blue tights shimmering and dark cape flowing, yelling, “Up, up, and away!” But is this masked character, rising upward and representing the prices for oil and gold, one of those good superheroes who are dedicated to helping mankind? Can higher prices for oil and gold somehow be good for us all? Or are we dealing with one of those evil superheroes, a vicious soul who has been corrupted by the darkest forces of the universe?

As no less noble a character than Batman once inquired, as he looked over a room full of devices that he was considering adding to his battle rattle, “Does this come in black?” Thus, to bring Gotham toward the light, its mythical warrior-savior wears the color that absorbs all wavelengths and reflects none. The Dark Knight wears black. How gothic.

Hard Questions About Oil and Gold

Ask yourself, dear readers: Are the prices of oil and gold rising for simple reasons? Are the upward price trends merely tactical events in the daily battle space of the market place? Or are oil and gold now subject to certain inexorable forces of history, no longer governed by the old rules of a political and monetary world that is now obsolescent, if not obsolete? We have to wonder. These are hard questions.

Will the political leadership and monetary authorities interpret the fast-rising prices of oil and gold as warning signals of imminent and profound trouble? What about those who hold positions of trust and responsibility within the media, business, academe, and even religion? Will this nominal and — we regret to say, somnolent — leadership cadre ignore these key signals, while they waste time counting their retirement points and dismiss these glaring klaxon signals of rising prices as mere “trading activity,” or worse?

However ineptly the leadership interprets or misinterprets the message, there is no denying that there is trouble within our economy, if not within what passes for energy and “money” in our world. At Outstanding Investments, we work to position ourselves and our investments away from the troubles. That is what distinguishes the investment community from the rest of the sorry lot. We are playing with our own money on the table. We don’t want to lose it.

But still, we have to ask if leaders anywhere can act in time to change things for the better. Is there time to plan and implement change, no matter what it is that must be accomplished (and that is very much)? Does the leadership cadre have the knowledge, let alone the wisdom, even to understand the message and the problem?

The End of the Postwar Era?

When we see the prices of oil and gold rise so quickly and inexorably, we wonder if these trends reflect some profound underlying change to the firmament of our national and political existence. A few weeks ago, while I was in Houston for the conference of the Association for the Study of Peak Oil & Gas (ASPO), I had a conversation with a retired employee of the CIA. Our conversation drifted to the question of whether or not the global political construct of the world post-World War II was finally coming to an end. After 60 years of running on the formerly immense momentum of that victorious war, is it all finally grinding to a halt as the U.S. literally runs out of oil and its currency disintegrates in relation to gold? The former Soviet Union encountered severe oil shortages, ran out of money, and all but imploded within a matter of months. Is there some law of nature that declares that something similar could not happen to the dramatically overstretched U.S.?

Through the Eyes of Leo Tolstoy

Look at the basics. Clearly, the prices for oil and gold are rising. That is the easy observation. But are we witnessing a fundamental transformation in the alignment of all mankind, similar in a way to that observed and described by the Russian novelist Leo Tolstoy? Are the prices of these two critical commodities, oil and gold, reflective of the broader themes of war and peace, mankind’s ability to both hate and love, the artificial and the natural, the erotic and the sublime? Where will it all end, and how will it play out?

As the prices rise for oil and gold, are we seeing both sides of a clash between the most profound forces of God and nature? In the rising price trends for oil and gold, are we observing two opposing pathways through life? One era is ending, that of cheap energy and strong dollars. Another era is beginning. What era will that be? Yes, our oil and gold-mining stocks go up while the dollar-based world around us grows poorer. Would it not be better for our stocks to go up while the dollar-based world grows richer? Oh, if only it could be so.

Can You Buy Your Way out of Trouble?

In a Peak Oil world, you might not be able to buy your way out of trouble. Not even if you are rich. Yes, that’s the bad news, and it is very bad. And if you move all of your investments to foreign currencies, along the lines of what our old friend Jim Rogers has announced he is doing, you may still suffer the effects of the declining value of the dollar. If the U.S. economy is, as the analogy goes, the world’s economic locomotive, then this train is about to derail. Think of the looming Citigroup disaster as the financial warm-up act for the last great concert of the Woodstock generation.

Take long-term monetary mismanagement by the Federal Reserve, plus fiscal decadence at home by the U.S. Congress, and an unaffordable war abroad, and you have the ingredients for economic disaster. Stand by for a domestic recession, as the value of the U.S. dollar drifts downward. There will be pockets of prosperity, in export-related fields, such as some high-tech and large capital goods like commercial aircraft (thanks, Boeing). But if you don’t earn a living building Dreamliners, we suggest that you get out of debt fast, and out of dollars faster.

At Outstanding Investments, we think that some protective moves include owning gold or shares in gold miners. Or you could invest in one or more of the foreign currency or commodity-backed FDIC-insured certificates of deposit (CDs) that our friends at EverBank offer. We have to note that Agora Financial has a business relationship with EverBank, through which we promote EverBank products. But still, we assure you that we would not even mention the EverBank CDs if we did not believe that they are suitable investment opportunities for our readers. Check them out.

Until we meet again,
Byron W. King

November 15, 2007

Oil, Gold, Batman and Leo Tolstoy was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.