Frog Soup, Gold & Diamonds
Richard Russell snippet
July 12, 2010 -- "The Golden Rule": "Who has the gold, makes the rules." And China is on a headlong path to accumulate as much gold as it can. China is now the world's largest producer (miner) of gold, and all the gold mined in China must be sold to the government. What in the world could the Chinese be planning? Here's what I'm thinking. The yuan will become the world's most wanted currency, heavily backed by gold and a stable government plus the planet's biggest military. In due time, China will be the new owner of the world's reserve currency.
On my July 7 site, I explained why I am convinced that the Bernanke Fed is on its way to devaluing (cheapening) their Federal Reserve Notes (we mistakenly call them "dollars"). Why am I convinced of Bernanke's plans? Because it is the only painless and politically acceptable way. It's the Fed way. In effect, it's the old "frog in a pot of slowly heating water on the stove". The frog never notices the rising heat. By the time he does, he's frog soup.
Back in 1945 I bought a $10,000 GI Life Insurance Policy. Paying off that policy was a real pain in the ass. I had to send Uncle Sam $20 every month, and that was a lot of money (remember, prior to the Air Force I was lucky to have a job loading trucks for $18.75 a week. That was a union job, and it included half a day on Saturdays). So that $20 a month to carry my insurance policy was hard. As a matter of fact, most GIs who took out this insurance dropped out of it. They couldn't afford it. After a number of years, I paid off that damn GI Insurance policy (deep breath).
Now let's return to the present. After 65 years of systematic inflation, I could pay off my old insurance policy in a day, and I wouldn't miss the money. And that's the way it works for government created inflation. Let the government gradually inflate, and give them enough years, and even the trillions of dollars of debt we owe will seem "manageable."
As I write, inflation in the US is "dangerously thin." Home prices are weak, autos sales are slowing, consumers are cutting back and corporations are hoarding money. Could the next step be actual deflation? This is Bernanke's worst nightmare. Prior to his election as Fed chief, Bernanke stated that under a fiat money system deflation could not happen.
You remember Benny's famous words, "The US government has a technology called a printing press (or today its electronic equivalent) that allows it to produce as many US dollars as it wishes at essentially no cost." Thus Bernanke reasoned that the Fed could create so much money that the dollar would lose its value, and a devaluating dollars is in itself inflationary. With the "cheap" dollar everything would cost MORE in dollar terms. So that's Bernanke's thinking, flood the system with enough Fed Notes and the price of everything rises -- and presto, deflation backs off, and inflation is back again.
As for America's $50 trillion [?] national debt, inflation might go a long way towards solving that problem too.
What's the downside of the Bernanke's "perpetual inflation" strategy? The downside is that his plan of perpetual inflation will gradually undercut all faith in the US dollar. At some point, even though the US can print endless Fed Notes, the rest of the world will refuse to accept these Notes. At that point, the US dollar will be in a collapsing mode. You know the drill -- produce too much of anything and people don't want it (this does not include drugs).
Right now I see the US dollar as the world's biggest bubble. It's a supposed "safe haven" but it's an over-loved and doomed currency. It's held for trading purposes and safe-keeping by almost every nation. Amazing because the US's debt will be 90% of GDP in the coming fiscal year -- a "banana republic" type balance sheet.
Back in the 1960s former Fed Chief Alan Greenspan was an honest man and a firm believer in the gold standard. The following is from a paper Greenspan wrote in 1967. He later forgot what he wrote and became an advocate of fiat currency. I never trusted him after that, and I believe it led to this ego-driven, ambitious twerp's downfall.
"In the absence of the gold standard,
there is no way to protect savings from confiscation through
inflation. There is no safe store of value. If there were, the
government would have to make its holding illegal, as was done
in the case of gold. If everyone decided, for example, to convert
all his bank deposits to silver or copper or any other good,
and thereafter declined to accept checks as payment for goods,
bank deposits would lose their purchasing power and government-created
bank credit would be worthless as a claim on goods. The financial
policy of the welfare state requires that there be no way for
the owners of wealth to protect themselves.
-- A successful and sophisticate investor of mine bought more
bullion coins yesterday, bought 'em during the correction. He
told me, "I'll never sell them, I consider them part of
my estate. I don't give a damn what the price of gold is tomorrow,
next week or next year. I count my gold holdings not in dollar-value
but in the number of ounces I hold."
Richard Russell began publishing Dow Theory Letters in 1958, and he has been writing the Letters ever since (never once having skipped a Letter). Dow Theory Letters is the oldest service continuously written by one person in the business.
He offers a TRIAL (two consecutive up-to-date issues) for $1.00 (same price that was originally charged in 1958). Trials, please one time only. Mail your $1.00 check to: Dow Theory Letters, PO Box 1759, La Jolla, CA 92038 (annual cost of a subscription is $300, tax deductible if ordered through your business).