JohnAl

Gold Should Be at the Heart of a New Global Reserve Currency

Why not just let the market decide? Repeal the legal tender laws that require the acceptance of Federal Reserve Notes "for all debts public and private", and let's see what the market comes up with as alternatives.

12 Reasons to Short Gold

The contrarian in me wants to short, or at least stop buying, but I'm not only still in but buying more on most every pull back. PMs are rising because people are still betting on inflation and as long as that play is on I'm along for the ride.

Plus, I just don't see either, how this ends without price inflation:

-The US gov needs to borrow trillions.

-The Chinese are making noise about cutting back their lending and asking for assurances on the soundness of the dollar.

-The trade surplus to all the big international lenders (China, Japan, Arabs) is down 'cause we're broke and not buying their stuff so they'll have fewer dollars to buy our increasingly growing debt.

-There's clearly a treasury bubble.

So how do they fund the expanding debt without Bernanke's help?

Sounds like an inflation scenario to me. Just wish I knew when.

What's Going to Replace the Dollar?

"It's IDIOTIC to think WAMPUM (gold, silver etc.) will replace any currency."

Is it really? PMs have been used as money by many cultures throughout much of human history, and as the author points out, a modern PM backed money wouldn't necessitate carrying around metal. The conveniences of modern banking would still exist.

I do think it's likely that before we arrive at this juncture, though, there will be attempts to replace the dollar with other fiat currencies. Governments don't give up easily, and they need the fiat currency to maintain their power and their growth.

My guess is that the next step, which will come only after things get worse in the US and the government gets increasingly desperate, is that there will be an attempt at a world currency. This would necessitate the US giving up much of it's advantage though, which is why I don't see it happening until things are much worse here. They may even make a show at tying this new currency to PMs in some way. But it will be a sham. They will want to maintain their ability to create money out of thin air.

Thoughts on an Inflationary Depression

I think you may be right. The new money may flow into the economy only slowly, since borrowing demand is low and may remain low while individuals and businesses save and cut costs. But the inflow of new money should raise the general price level anyway, at least to the degree that it exceeds any further credit contraction still taking place. I'm not sure that I agree that prices will rise rapidly though, since in this scenario the new money flows into the economy slowly.

Also, there IS something that government CAN do to help, though the likelihood that they will do it is absolute zero. They could cut taxes and CUT spending. The benefit of cutting taxes is obvious. Taxpayers would be more flush. They'd save more and they'd spend more. Cutting spending, I contend, would also help because it would send a powerful signal to investors that the US government is serious about putting it's fiscal house in order.

Of course cutting spending is not going to happen since Keynesianism predominates political thought at the moment. And it's true that cutting spending WOULD hurt those who would have received the spending, but as far as the general economy is concerned it would simply be putting the purchasing power back into the hands of those who earned the money - the rightful owners.

Economy Watch: What if Stocks Were Priced in Gold?

Mr. Ahlgren, another well thought out and well written article. Thanks.

Your reasoning is sound. Like you, I've lost confidence in the dollar, but it appears that we're either wrong or early. I'm in gold, but I'm still hedging my bets. They may be able to patch this thing up one more time. People want to believe in the dollar, which comes down to belief in the US government. Obama popularity polls may be the best indicator out there. The expectations are high that he's going to be able to fix things. To the degree his popularity wanes that's an indication that "hope and change" are on the decline. That's an indication that it's time to buy more gold.

Gdog, your's was a very interesting comment. Especially this:

"Productive ideas, innovation, intellectual capital, these are the things the are important in a knowledge economy, in any economy. This is where uninhibited scare resources always flow.

Investment in the US is all that matters. New technologies, new energy, wonderfully productive things yet thought of that will change and shape our lives. This is what the US does. It is what we are very good at.

... Come on people. Believe in this country!"

I agree, but for the life of me I don't see how sound money, based on gold or something else, is incompatible with this. I don't see how sound money doesn't help this country.

Why do you think fiat currency is good for the US or any country?

Evidence That Big Inflation Is Coming

Excellent article and commentary!

I'm starting to feel comfortable in the "(general price) inflation will return later rather than sooner" camp. I don't see how "big" inflation can return until "big" borrowing does. Desire to borrow is the main missing ingredient in the credit bubble reflation formula. Desire to lend is missing right now too, but I'm guessing that banks will get cleaned up and will be ready to lend again before people and businesses are ready to borrow big again.

Many individuals with big debt got crushed last fall and others had the crap scared out of them. And most everybody is looking over their shoulder and hoping the boss doesn't show up with a pink slip. People are doing the right thing now, the rational thing - saving - and aren't likely to want to get in over their heads borrowing again any time soon, if ever.

And what business is interested in borrowing for expansion right now, with unemployment rising and the general economy looking like it's on life support?

Yes Bernanke and the gubmint are doing everything they can to reflate the credit bubble, and we can all see the enormous base money increase, but it can't do much harm just sitting there in the banks.

It's like Bernanke is furiously trying to light a bonfire but the wood is soaking wet. It's gotta dry out. It's gonna take a while to light.

De-Leveraging Is Not Deflation

"Consider_this", your conclusion says it all:

"None of that is sure, so don't be so sure to take a fixed position in this market. I wouldn't bet my fortune one way or another, the key in this market is to be either crazy nimble, or incredibly still and calm."

Here's what I see (and I'm sure I'm missing a lot):

We have consumers, their 401Ks decimated and their housing values in free fall, acting rationally (for a change) and saving rather than spending.

We have banks, having just been burned badly and not knowing who is and is not solvent, also acting rationally, and not lending (much... yet).

We have investors, both domestic and foreign, some in treasuries or simply cash for safety, some in gold or other assets, expecting inflation.

Finally, we have the fed and the government, trying desperately to reinflate the credit bubble.

And the way I see it, there are many possible next scenarios, but nobody really knows what's going to happen next or when.

If the consumer starts feeling chipper, he may start to borrow and spend again, banks willing, which will mean inflation. If that happens and it really heats up - given how loaded up the banks are with reserves - we may see raging or hyper inflation.

But then again, we may just be stuck in a Mexican standoff for awhile.

Inflation seems really likely at some point, but how much and how soon?

Best action now... wait... watch carefully... get ready to move quickly... and continue reading Paco's interesting columns and the insightful commentaries he draws out!

Gold Cannot Be Inflationary, But the Dollar Sure Can

Mr. Ahlgren,

Wonderful article. I find much to agree with in your analysis.

While I've recently added substantially to my PM investments, including both physical and mining shares, there's one thing that's keeping me from jumping in with both feet, and it has to do with the questions you asked here:

"The supply of dollars is increasing. Prices and rates are going to rise unless the Fed can miraculously find a way to bring all those dollars back in, very quickly. But how could they possibly achieve that? Are they going to borrow more? Are they going to print more money? The problem is so obviously and viciously unsolvable that I'm not quite sure how anyone thinks the dollar can survive."

The Fed recently announced that they're looking at issuing their own debt. Many analysts speculated as to why. I'm not sure it's even legal for them to do it at the moment, but of course Congress can change that in the matter of a few days, and will if the Bernanke says it's necessary.

I'm thinking that the reason they'll want to issue debt is precisely to avoid the raging, or even hyper, inflation scenario. If the market were to accept and buy Fed debt, (and this is by no means a given), this would be a way for them to pull vast sums of dollars out of the economy very quickly, even while their balance sheet contains crap that, were they to sell it, wouldn't otherwise do the trick.

Whether they would or could act quickly enough to offset a credit expansion that could be expanding at light speed, given the monetary base your graph depicts, once banks DO start lending again, is another question.

Gold Equities Should Reward the Patient

The reason there are no 100% reserve demand deposit banks isn't because consumers don't want them, it's because the government guarantees fractional reserve demand deposits, making "free checking" profitable for banks. In turn, consumers will choose "free checking" instead of fee checking.

The question people need to ask about banking is why bankers aren't concerned about lending out checking account money, which depositors think of as their money, available on demand. Because if everybody went to the bank to remove their checking account money the banks would obviously fail. But they don't worry about failure because the government guarantees the deposits.

Many economists believe that it is this government intervention which is largely responsible for the 20th and now 21st century boom and bust cycle. The process goes like this.

Banks lend out a large portion of their demand deposit money, money they would never lend out in a free market system. This causes interest rates to be lower than they would be in a free market when this new government backed credit is added to true savings (the money that investors ARE willing to put on time deposit). This expansion of credit leads to credit bubbles, which recipients of the credit, like mortgage borrowers in the present crisis, use and thereby inflate the value of certain assets, like housing in the present crisis.

Eventually the credit bubble busts. In the present mortgage crisis the bust came when interest rates rose, and ARM rates based on interest rates went too high for the least qualified borrowers (those who wouldn't have received the loans in the first place but for the cheap credit caused at the start of the process.)

Of course, at the hub of all of the banking activity is the FED, acting like the Wizard of Oz, trying to engineer "just the right" rate of credit expansion. And that's the second big problem with the banking system - that it's essentially "centrally planned". And we know that central planning can and does fail. (Anybody remember the Soviet Union?)

Free market oriented people should question this whole process. I've come to believe that it's these government interventions that cause the boom and bust cycle. If we removed the government from the monetary system and allowed truly "free banking", we could avoid the pain of busts, because we wouldn't have false booms.

If you're interested in learning more about how government creates the boom and bust cycle start here:

mises.org/story/3128