suep

A Run on Central Banks?

I applaud "Elwind45" with his message. I will add that President Grover Cleveland was an advocate of hard money, especially for gold as a strong alternative for silver, since Nevada's huge quantities of silver was inflationary and was dangerously close to replacing gold as the backing for the dollar in the 1890s. (I add this as germane to a very few people that understand how gold backing insured a stable dollar for 160 years.)

As esoteric as this sounds, the lack of sound money since 1933 remains as the core reason why our economy is in the fix it is in today. How can any person, company, or government plan for the future if the dollar, or the pound, or the peso, etc., is no more stable than a stretched rubber band is a measure of its actual length?

Here is a message that I sent to my senators yesterday which forebodes the ultimate outcome of using a fiat currency.

.........................

The following is the solution to this nation's money worries.

Ignore this advice at our peril. Since I don't believe you and the rest of our government will heed my warning, I am taking steps to protect me and my family in accordance with the advice I give at the conclusion.

The problem as I see it has not changed, regardless of a variety of economic dislocations I have learned about and lived through in the most recent 75 years, to be exact. The problem has continued unabated, regardless of short term fixing attempts, since President Roosevelt eliminated the gold standard. Before you double over in laughter, consider that from date of the nation's inception in 1776 until 1933, which is the date that President Roosevelt decoupled the dollar from gold, there was no inflation. If you don't believe these words, I urge you to pull up any inflation adjuster from Google and test my hypothesis. You will find what I say to be a fact. Until 1933, a politician was constrained by the people from inflating the currency. For if the word got out that too much money was being created by politicians, citizens could simply walk, trot, or canter to the Treasury and demand gold for their dollars. And it worked. In 1776, an ounce of gold bought a man's good suit of clothes. Today, it still does. Here is the way it worked when the country was on the gold standard. If the then-President wanted to give, say, to Peter, he first needed to take it away from Paul. So no politician could easily buy his way into power by giving to both. That was before the fateful year of 1933 when FDR outlawed the private ownership of gold. Since that time, politicians were under no such restraints. They peppered everyone with gifts in the form of the Ponzi Scheme of Social Security, Medicaid, Medicare, outright grants, etc., knowing that there would be no near-term repercussions. Little did they know what monstrous inflation would envelop us and culminate in a financial Armageddon. And it is almost upon us now.

I give it no more than ten years from today for the financial crisis to descend.

Did you happen to read in "USA Today" recently that an esteemed and conservative economics house argued that this year's Federal deficit was not the still-tremendous deficit of some $160 billion that The White House projected, but is rather $2.5 trillion. That disparity exists because the Federal government is singularly under no obligation to account for the present value of out-year debts as private and state governments are forced to be.

Note that when he outlawed private ownership of gold, FDR had bought it for dollars at $20.43 an ounce. When he was satisfied that he had acquired essentially all of the citizens' gold, he unilaterally raised the price to $35 an ounce. Some nice guy!

As a matter of fact, FDR was the very first earmarker. Shortly after decoupling the dollar from gold, he went on a long train ride with Henry Ickes, the Treasury Secretary, father of the current Henry Ickes, Clinton confidante. What was the purpose of the trip? Answer: to win votes. Until that time, no Federal tax money was ever used for infrastructure such as building of bridges, roads, etc. FDR changed all that. Until then, it had all been provided by local and state authorities. He went with his no longer gold-backed, now-unconstrained checkbook to localities, dispensing taxpayer money for bridge building, et. al, in return for promises of votes. It worked. Historians and common people alike know that he successfully ran and won the Presidency four times. FDR saw to it that he could pay BOTH Peter and Paul once he could indiscriminately create money without the restraint of gold. And this country's ruinous flirtation with an unbacked currency began. Sadly, no nation on the face of the earth has decoupled its unit of currency from the restraints of gold and survived. The United States will be no exception.

And we already pay the price today, in spades. Recall that the price of gold in 1933, which remains a proxy for general prices of the time, was $20 an ounce. Today, the price is greater than $900 for that same ounce of gold. That is a price increase of over 40 times. It will get worse. The current price in dollars for an ounce of gold will look like chump change several years from now as Federal budget deficits continue to grow. And grow they will without any meaningful constraints. Why? We all know the reason: the Baby Boomer Generation is fast approaching 65 years of age, and all that signifies to the nation's financial "obligations" to them. Need I enumerate? Can you say, "Social Security?" Can you say "Medicare?" The unfunded liabilities for these programs approach $60 trillion.

But all is not lost.

Why not?

Social Security and Medicare are both creatures of Congress. Each can simply be changed by law. Neither program is supported by a contract. That would change the problem into a most ruinous one. But fortunately, Social Security and Medicare are creatures of Federal law. They can be amended by Congressional action. They can be abolished by Congressional action.

But there is a downside for the Congress that will be forced to face the eventual roaring tide of uncontrollable debt (as if what we have now is managable). Since each of these programs is always considered sacrosanct and untouchable by the voting public, those Third Rails of politics will incinerate the legislative careers of those who kick either one in the ... teeth. And it will happen, eventually. The country will not be able to support the budget-busting payouts when they are forced to pay trillions yearly from the Federal treasury.

Let us look at what has happened to the size of the Federal budget in the last hundred years or so.

In 1900, the entire Federal budget was $550,000,000. In words, over one-half billion dollars. Compare that to President Bush's projected 2009 budget: $3,107,000,000,000, or, again, in words, three trillion, three hundred seven billion dollars. Dividing, 2009's budget is nearly 5,700 times larger than it was in 1900. Scrubbing this ratio by inflation over that same time period, the current Federal budget is "only" 140 times larger than it was in 1900. And we wonder if the nose of the Federal government is under our own tent? Don't wonder. It is.

Under either President Obama or Clinton, that number is certain to increase. And I'm far from certain about President McCain

What about the National Debt? You may say, "Who cares about the National debt?" I say, "You should care," because you are paying interest on it with every Federal income tax payment you pay each April 15th. Not one person in a hundred is aware of what I am about to write...

Early in President Reagan's first administration, the National Debt crossed $1 trillion. A scant 25 years later, it has crossed $9 trillion, increasing a cool 900%. It is now increasing at the rate of $1 trillion every 15 months! The rate of debt increase promises to quicken, and since the slope of the curve is positive, it means that the National Debt is accelerating over time. In the next 25 years, the nation's National Debt promises to be even larger than $81 trillion. Attendant increases in the annual carrying cost measured by interest on this debt are reflected in rising Federal income taxes borne by every taxpayer. That serves to explain why the Fed is moving heaven and earth to try to keep interest rates low. Interest on the National Debt must be paid to the holders of that debt. But unstoppable Congressional spending increases constantly exacerbate the Fed's problem. The only way for the nation's citizens to be able to service the interest on the National Debt, along with rising payouts for Social Security, Medicare, Medicaid, etc., is for inflation to be the norm. No wonder why "Helicopter Ben" says he will dump dollars indiscriminately to prevent deflation.

And inflation is baked into the cake, as they say. It has been with us for a long, long time. And it will remain thus. That is, if Fedhead Bernanke has anything to say about it.

What to do? Buy gold at pace, and have a foreign bank account that you fund as best as you can.