April 23, 2024

Gold and Silver Are the Answer to Endless Fed Printing

October 30, 2013 by 1 Comment

gold-buffaloBy: GE Christenson

THE SETUP

A century ago bankers created the plan for a U.S. central bank, bought enough votes to get it passed into law, encouraged deficit spending, government debt, and extracting the interest payments from taxpayers. The process has worked well for the bankers.

After several expensive wars and the expansion of social programs the U.S. had created considerable debt. In fact, debt and the money supply had increased so much that inflation became a serious problem in the 1960s. Further, the U.S. trading partners no longer wanted dollars but wanted gold instead since they could see that dollars were being created indiscriminately and were losing their value. Nixon (August 15, 1971) did what was good for the financial industry, severed the remaining connection between the dollar and gold, allowed the money supply and debt to increase to never-seen-before levels, and planted the seeds of self-destruction for the dollar and the US economy.

THE CRASH

The process continued until 2008 when the debt and derivatives bubbles had grown so massive that the economy could no longer sustain them. The economy and stock market crashed and financial and political leaders stared “into the abyss” of deflationary collapse, reduced Wall Street income and bonuses, loss of votes, and did what they perceived as necessary: printing money, Quantitative Easing (QE), injecting liquidity, bond monetization, extend and pretend, and so on.

Courtesy: coinupdate.com

Courtesy: coinupdate.com

THE “SOLUTION”

The choice was made to “solve” an excessive debt problem by creating more debt – Quantitative Easing (QE) and increased deficit spending. Deficits were increased to a $Trillion or so per year while the government bailed out the bankers and politicians and the public watched Reality TV. It appeared to work, somewhat, for a while.

So the economy (financial industry) and government are desperate for QE, and similar to being hooked on “meth,” they find it difficult to kick the habit and get off the “drugs” of QE, money printing, and central banking. As Gold Stock Bull says,

The economy is addicted to QE and reliant on central bank stimulus to stay afloat. The world now understands that the FED cannot end the bond-buying program and has no intention of doing so anytime soon. If anything, we are likely to see increased quantitative easing in the future, just as a drug addict must up their dosage in order to have the same impact. This monetization of debt increases the bullish outlook on gold, as the gold price has historically trended higher along with the FED balance sheet.

Marc Faber and Deepcaster:

“The question is not tapering. The question is at what point will they increase the asset purchases to say $150 [billion], $200 [billion], a trillion dollars a month…”

“The Fed has boxed itself into a position where there is no exit strategy (and created) a colossal asset bubble…”

Continue QE and you get hyperinflation…”

“Halt, or even taper, QE and the markets crash.”

The picture, sans Fed propaganda, is increasingly clear. QE is necessary to supplement the financial industry and the voracious appetite of the U.S. government for more spending. Merely slowing QE will probably cause markets to crash, interest rates to rise, the government’s expense for interest on past debt will increase while tax revenues decline, and consequently the government needs more, not less, QE.

US debt to gdp

Of course there is always a way out – the “nuclear” option – let it crash and burn! But no one wants a crash as everyone will be hurt by that choice. Consequently the Fed and the U.S. government (the powers that be – TPTB) scramble desperately. What are the options?

  • More QE buys time. Less QE might well cause a crash. So TPTB choose more QE.
  • More spending keeps the big corporations (who make LARGE donations to congress) happy. If the government spends less, “everyone” complains. So TPTB choose more spending, more deficits, and more QE.
  • Higher interest rates mean that the interest expense for the U.S. government increases. More interest expense means larger deficits and so TPTB are forced to choose more QE.
  • Foreign purchases (China, Japan, Russia, etc.) of newly issued U.S. treasury debt are decreasing while some countries are actually reducing their current holdings of treasury debt. This forces the Fed to be the “buyer of last resort” and purchase, via more QE, the debt that normally would have been purchased by China, Japan, Russia and others. Fewer foreign purchases necessitate more QE.
  • A weaker economy and fewer people employed means less economic activity, diminished tax receipts and larger deficits. Those larger deficits guarantee more borrowing and more QE.
  • Obamacare will create more government expenses and less disposable income for average Americans, which means less consumer spending and therefore less tax revenue for federal, state, and local governments. There is no choice here – it is already law and we are going DOWN that road to much higher consumer costs, lower government revenue, and more government control. The result will be a government desperate for more revenue and more QE.

It does indeed look like a “QE trap.” So ask yourself:

  • More QE will weaken the dollar, on average, because more supply indicates less value for each dollar. What will that do to consumer prices for food and energy when the inevitable inflation works its way into the consumer economy?
  • What will happen to the prices for gold and silver when the realization finally hits the populace that interest rates are rising, QE is here forever, congress will never balance the budget, and the dollar will continue to weaken. (Hint: There is no fever like gold fever.)
  • It is clear that other countries increasingly dislike the U.S. dollar, U.S. treasury debt, and the current policies of the U.S. administration. How much will the prices for imported oil, gold, and silver increase as a consequence of the above?
  • What will a dollar collapse do to the prices of gold and silver?
  • Knowing the policies of the Fed, the congress, the administration, and the inevitability of QE, do you own enough gold, silver, platinum, land, diamonds, collectible art and other non-paper assets such that you can sleep well at night?

CONCLUSIONS

The U.S. government has spent itself into the “no-win” position whereby more QE is both necessary and dangerous. Most current policies, such as congressional gridlock, inability to pass a budget for five years, Obamacare, weakening economy and tax receipts, declining relations with foreign nations, massive deficits, declining total employment, inability to reduce spending, ongoing wars, probability of future wars, and more, suggest that QE must continue and probably increase.

Stocks may protect you  but gold and silver are the safer choice given the inevitability of more QE and a potential dollar collapse.

You decide!

GE Christenson
aka Deviant Investor (see full article here)

Filed Under: Currency debasement, Featured, Gold, Silver, US Debt Crisis Tagged With: , , , , , , ,

Ron Paul Talks About Economic Collapse and Lack of Federal Reserve Transparency

October 29, 2013 by 1 Comment

dickensIn an interview with CNBC, former GOP presidential candidate Ron Paul endorsed the efforts of his son, Senator Rand Paul, to hold up the nomination of Janet Yellen as Federal Reserve Chairman until laws are passed requiring more transparency from the Fed.

Senator Rand Paul has introduced legislation for an “Audit the Fed” bill which would require the Federal Reserve to disclose the details involving trillions of dollars the Fed has provided to both domestic and international financial institutions.

According to Ron Paul, “We don’t know the details of the trillions of dollars that were used to bail out banks and central banks around the world and corporations during the crisis.  The numbers that they give you I don’t think are all that revealing.”

Ron Paul has been one of the few voices in the American government pushing for financial responsibility by both the Federal government and the Federal Reserve.

After the most recent capitulation by Republicans to reduce the exponential increase in Federal government debt and spending, Ron Paul lamented the hypocrisy of the deal to end the government shutdown.

The latest spending-and-debt deal was negotiated by Congressional leaders behind closed doors, and was rushed through Congress before most members had time to read it. Now that the bill is passed, we can see that it is a victory for the political class and special interests, but a defeat for the American people.

The debt ceiling deal increases spending above the levels set by the “sequester.” The sequester cuts were minuscule, and in many cases used the old DC trick of calling reductions in planned spending increases a cut. But even minuscule and phony cuts are unacceptable to the bipartisan welfare-warfare spending collation. The bill also does nothing to protect the American people from the Obamacare disaster.

US debt to gdp

Members of Congress and the public were told the debt ceiling increase was necessary to prevent a government default and an economic crisis. This manufactured fear supposedly justified voting on legislation without allowing members time to even read it, much less to remove the special deals or even debate the wisdom of intervening in overseas military conflicts because of a YouTube video.

Congress surrendered more power to the president in this bill. Instead of setting a new debt ceiling, it simply “suspended” the debt ceiling until February. This gives the administration a blank check to run up as much debt as it pleases from now until February 7th. Congress can “disapprove” the debt ceiling suspension, but only if it passes a resolution of disapproval by a two-thirds majority. How long before Congress totally abdicates its constitutional authority over spending by allowing the Treasury permanent and unlimited authority to borrow money without seeking Congressional approval?

private debt gdp

Hopefully, those of us who understand sound economics can convince enough of our fellow citizens to pressure Congress to make serious spending cuts before Congress’s reckless actions cause a total economic collapse.

debt monster

Sound advice Mr. Paul, but the odds of preventing an economic collapse decline with each additional dollar borrowed by the government and each additional dollar printed by the Federal Reserve.  Debt at all levels is out of control and has overcome the ability of the nation to service the debt. Ironically, the only way to prevent a collapse today is through the Ponzi scheme method of further printing and borrowing which puts off the day of reckoning.

Realistically, Ron Paul has been ignored by the public and his fellow legislators for decades.  The odds of controlling the growth of debt by the U.S. and other major industrialized countries is almost zero since legislators are elected based on promises to extend the social welfare state and serve special interests.

The odds of central banks reducing quantitative easing is even more remote since an absence of money printing would hasten the economic collapse Mr. Paul warns about.  The future collapse predicted by Mr. Paul seems inevitable at some point and the only concern of an investor should be finding a safe haven for wealth preservation.

Filed Under: Currency debasement, Featured, US Debt Crisis Tagged With: , , , , , , ,

Global Debt Bubble Will Push Gold and Silver Prices Higher

October 24, 2013 by 1 Comment

money printingBy: GE Christenson

To paraphrase William Shakespeare, “the debt ceiling drama is a tale told by idiots, full of sound and political fury, signifying nothing.” We now have a reprieve for three months – the 11th hour deal, complete with payoffs and the usual corruption, will keep the world safe for more ineptitude, deficit spending, administrative hypocrisy and the guarantee of a sequel. All is well! Celebration! Champagne! Cut to a prime-time commercial promoting big government and Obamacare…

And back in the real world where people work and support their families, life goes on, few noticed the lack of government “services,” and in three months we will be blessed with another episode of our “Congressional Reality Show.”

Gold, Silver, and National Debt

Examine the following graph. It is a graph of smoothed* annual gold and silver prices and the official U.S. national debt since 1971 when the dollar lost all gold backing and was “temporarily” allowed to float against all other unbacked debt based currencies. All values start at 1.0 in 1971.

The legend does not show which line represents gold, silver, or the national debt. Why? Because it hardly matters! Government spends too much money to perform a few essential services and to buy votes, wars, and welfare, and thereby increases its debt almost every year, while gold and silver prices, on average, match the increases in accumulated national debt.

Our 435 representatives, 100 senators, and the administration listened to their corporate backers and chose to increase the debt ceiling, continue spending as usual, not “rock the boat,” and carry on with the serious business of politics and payoffs for another three months. It is safe to say that, on average, gold and silver will continue rising, along with the national debt, as they all have for the past 42 years. Further, like the national debt, both gold and silver (and probably most consumer prices) will increase substantially from here, until some traumatic “reset” occurs. What sort of reset?

  • A “black swan” event that is unpredictable, by definition.
  • Middle East war escalation.
  • Derivative melt-down.
  • A dollar collapse when foreigners say “enough” to the dollar debasement policies pursued by the Fed and the US government.
  • A collapse of the Euro or Yen for any number of reasons.
  • A banker admits that most of the official gold supposedly held in New York, London, and Fort Knox is gone and has been sold to China, India, and Russia.
  • You name the false flag operation.

My guess: Gold and silver prices will rise gradually for a while, and then quite rapidly after one of the above “financial icebergs” smashes into our “Titanic” world monetary system. Further, we will have difficulty locating physical gold available for sale after such an event occurs, even at much higher prices. Now would be a good time to purchase physical gold and silver for storage in a secure storage facility. Paper gold will not be safe…

Congress has acted. The President has spoken. The Federal Reserve will continue “printing” dollars to increase banker profitability, fund the government, and fight the forces of deflation. This is business as usual – as it has been for the past 42 years.

Here is the second version of the graph with gold, silver, and national debt labeled. Note how relatively undervalued silver is at the present time! Dashed lines indicate guesses for the future normalized values for gold, silver, and the national debt.

The debt ceiling drama and “Congressional Reality Show” will return to prime time in January and February, right after “Dancing with the Senators” and just before “House Wives of Salt Lake City.” Expect sound and fury signifying nothing.

Further commentary on the case for gold and silver:

The Reality of Gold and the Nightmare of Paper Silver: The Noise is Deafening
GE Christenson
aka Deviant Investor

* Gold and silver prices were smoothed by taking monthly closing prices and a 24 month simple moving average. Annual prices graphed are the average of the 12 average monthly prices per year.

Filed Under: Currency debasement, Featured, Gold, Silver, US Debt Crisis Tagged With: , , , , , , , , ,

The Term “Easy Janet” Is About to Become Part of the American Lexicon

October 17, 2013 by Leave a Comment

By: Axel Merk

courtesy: www.michaelianblack.net

courtesy: www.michaelianblack.netBy: Axel Merk

While Democrats and Republicans fight with water pistols, the President may be readying a bazooka by nominating Janet Yellen to succeed Ben Bernanke as Fed Chair. You may want to hold on to your wallet; let me explain.

Our reference to water pistols refers to our assessment that bickering over discretionary spending is distracting from the real issue, entitlement reform. For details as to what we believe will happen if we don’t get entitlement reform done, please read our recent Merk Insight “The Most Predictable Economic Crisis”.

Bernanke Fed

Central banks in developed countries are generally considered independent, even if their members are appointed by politicians. In the U.S., however, there’s an added element: aside from a mandate for price stability, the Federal Reserve is tasked with promoting maximum sustainable employment. This simple concept might have been put in place with the best of intentions – who wouldn’t want to have maximum employment? Central banks that have a single focus on price stability, such as the European Central Bank, point out that the best way to foster sustainable growth is by keeping inflation low. The U.S., even with an employment mandate, had pursued the same practice.

That is, until Ben Bernanke appeared to run out of options to lower borrowing costs. Bernanke’s frame of reference had been the Great Depression; he had frequently cautioned that the biggest mistake during the Great Depression was to raise interest rates too early. After a credit bust, as central banks push against deflationary market forces, premature tightening might undo the progress to reflate the economy. In today’s world, it’s not just short term, but also longer-term interest rates that Bernanke has been concerned about – partially because Bernanke has always considered it important to keep mortgage rates low. To achieve his goal, the Bernanke Fed:

  • Talked down interest rates;
  • Lowered interest rates;
  • Purchased Treasury and Mortgage-Backed Securities
  • Engaged in Operation Twist
  • Introduced an employment target

Introducing an employment target was nothing but an extension of existing policies, as it signals the Fed might keep rates low independent of where inflation might be.

Yellen Fed

With Janet Yellen coming in, the concept of promoting employment is raised to a new level. Long gone is the Great Depression, but what remains may be a conviction that monetary policy should make up for the shortfalls of fiscal policy. That’s problematic for a couple of reasons:

  • When the Fed meddles with fiscal policy, Congress will want to meddle with monetary policy. For example, when the Fed buys mortgage-backed securities it allocates money to a specific sector of the economy (favoring the housing market); that’s not what the Fed ought to do – it’s the role of Congress to channel money through tax and regulatory policy. One can disagree whether even Congress should be picking winners and losers in an economy, but that’s a political determination to be made by elected officials.
  • When the Fed keeps rates low to promote employment, there’s a fair risk that important cues are removed from the market that would encourage Congress to show fiscal restraint. Congress has always loved to have a printing press in the back yard, but an employment target suggests that this printing press is going to be moved into the kitchen. The Eurozone may be proof that policy makers only make the tough decisions when forced to do so by the bond market; if, however, the Fed works hard to prevent this “dialogue” between the bond market and politicians, the most effective incentive to show fiscal restraint might be gone.
  • Inflation is a clear risk when the Fed emphasizes employment. In our assessment, inflation may well be the goal rather than the risk in the eyes of some policy makers, as inflation lowers the value of outstanding government debt.

Hold on to your wallet

In a democracy, it’s all too tempting to introduce ever more entitlements. As obligations mount, however, servicing these obligations might become ever more challenging. It’s nothing new that governments tax their citizens. But when deficits are no longer sustainable, governments may be tempted to engage in trickery. Structural reform, that is taking away entitlements, to lower expenditures would be the most prudent path to regain fiscal sustainability. Raising taxes is all too often the preferred alternative; while politically difficult, raising taxes is a strategy that’s all too often politically viable. Yet the path of least resistance may well be to inflate the debt away. Central banks ought to be independent to take this option away from policy makers. We have seen in the Eurozone that it can be most painful when the printing press is not at the disposal of politicians.

In our assessment, a central bank pursing an employment target is a central bank that has given up its independence. It’s only ironic that outgoing Fed Chair Bernanke recently praised Mexico’s central bank for gaining “independence.”

Whatever happened to the government being the representative of the people? Interests of the government and its citizens are no longer aligned when a government has too much debt. The government’s incentive will be to debase the value of the debt. The U.S. may have an easier time debasing the value of its debt than some other countries, as much U.S. debt is held by foreigners who can’t vote in the U.S. Differently said, promoting a weaker dollar is another potential avenue for U.S. policy makers to kick the can down the road. But fear not, whatever policy is coming to a neighborhood near you shall be done in the name of fostering maximum employment.

Axel Merk
Axel Merk is President and Chief Investment Officer, Merk Investments, Manager of the Merk Funds.

More on this topic:

After getting rid of their crazed central bankers, Zimbabwe Achieves Economic Growth by Destroying Ability of Government to Print Money.

obama_zimbabwe

So the good news is that once the economic collapse kicks in and the dollar becomes worthless preventing Hillary Chelsea Clinton Obama III, our 79th President from just printing more money, we too can have an actual economic recovery. Just like Zimbabwe.

“Having a multi-currency economy with no Zimbabwe dollars is primarily good news for Zimbabwe because government can’t print its way out of a deficit,” said John Robertson, an independent economist, in an interview from Harare. “They can’t just print more if they need it, as was happening in 2008.”

So there’s hope for America yet. Our current dictator could learn some lessons from the plight of Zimbabwe, but I suppose destroying the economy is a better means of wealth redistribution, than actually repairing the economy. Until then we’ll go on printing imaginary money.

Filed Under: Currency debasement, Featured, Gold, Silver, US Debt Crisis Tagged With: , , , , , , , ,

Can I Buy Gold In My IRA Account?

October 1, 2013 by Leave a Comment

tenth oz gold-eaglesThe “I won’t buy an umbrella until it rains” crowd has been dumping gold while the case for ownership of  safe haven gold has never been stronger.

As the credit bubble continues to grow at an alarming pace it’s not a question of if but rather when the next financial crisis engulfs the entire world.  Gold has been used forever as the only form of sound money since it has no credit risk or counter party.

Here’s a neat info-graphic from American Bullion that nicely sums up the compelling case for allocating part of a portfolio to gold.

Gold IRA Infographic

Filed Under: Bullion Sales, Currency debasement, Featured, Gold, US Debt Crisis Tagged With: , , ,

Next Economic Crisis Looms as Debts and Deficits Explode

October 1, 2013 by Leave a Comment

money printingForget about a government shutdown. The quibbling over concessions to keep the government funded distracts from what might be the most predictable economic crisis. We have problems that may affect everything from the value of the U.S. dollar to investors’ savings, but also to national security.

In a presentation earlier this year, Erskine Bowles (of the Simpson-Bowles commission) explains why he travels around the country to drum up support for fiscal reform:

  • We are doing this (traveling around the country to drum up support for fiscal reform) not for our grandkids, not even for our kids, but for us.
  • If we don’t get elected officials to pull together, we face the most predictable economic crisis in history. The most predictable, but avoidable crisis.

Mr. Bowles is 68 years old; when someone his age says we need to get fiscal reform done for his generation, we should take note. The good news is that we see awareness increase. The bad news is that policy makers have an amazing ability to kick the can down the road. Former Bundesbank President Axel Weber has said policy makers choose the cost of acting versus the cost of not acting. We fully agree and would like to add that the bond market may be the one force powerful enough to get policy makers to make the tough but necessary choices. Unlike the Eurozone, however, we have a current account deficitin the U.S. which means that should the bond market apply pressure on policy makers, the U.S. dollar might come under far more pressure than the Euro has ever been.

But we are getting ahead of ourselves. To see why we have a problem, let’s look at the projections of the Congressional Budget Office (CBO); we are using their “Extended Alternative Fiscal Scenario.” The extended alternative fiscal scenario incorporates the assumptions that certain policies that have been in place for a number of years will be continued and that some provisions of law that might be difficult to sustain for a long period will be modified. From 1973-2012, government spending averaged 20.4% of GDP; in contrast government revenue averaged 17.4% of GDP. That equates to an average yearly deficit of 3%. As long as an economy grows sufficiently, it may be able to carry a sustained 3% annual deficit. A future Merk Insight might question this logic, but today’s analysis focuses on a much bigger problem.

Democrats and Republicans argue about the size of the government. Democrats tend to favor a larger government to provide healthcare or other services deemed valuable by their constituents; Republicans, in contrast, brand themselves as favoring small government. But as much as anyone may have a preference for one model or another, either approach must be financed. Financing any level of government spending can occur either through increasing revenue (taxes) or borrowing. Trouble is that there aren’t enough rich folks out there to tax to mend the system. Consider the following projection by the CBO:

  • In 10 years, our annual budget deficit is projected to be 4.5% of GDP.
  • In 25 years, our annual budget deficit is projected to be 13.6% of GDP.
  • In 35 years, our annual budget deficit is projected to be 18.7% of GDP.


You might shrug off these numbers as unrealistic given that it’s impossible to forecast 35 years out. However, keep in mind that the biggest driver of expenses in the coming 35 years are known as “entitlements,” taking Social Security, Medicare & Medicaid together, these expenses are expected to rise from 9.3% to 15.7% of GDP; that’s an increase of 6.4% of GDP. If one accepts a substantially larger tax burden, possibly by introducing a national sales tax or carbon tax, one could conceivably finance this increase, although getting the political majority for such taxes might be elusive.

But the biggest elephant in the room is interest expense. As we keep piling on deficits at some point the cost of borrowing might increase to rates that are more in line with historic averages, and we have a problem:

 

According to the CBO, in 2048, we will be spending almost 12% of GDP on interest expense, compared to just over 1% now. Differently said, as a share of GDP, we will be paying more in 2048 for entitlements and interest expense than we currently pay for all government services combined. Said still another way, even with substantially higher taxes, there may not be any money to pay for the military, education, or infrastructure. In fact, Republicans and Democrats can stop arguing about discretionary spending, as there might not be any to fight over! Mr. Bowles argues, and we agree, that our deficits might be the biggest threat to our national security.

Now there’s a thing or two we can learn from Europe. Most notably that policy makers can be incredibly creative when it comes to kicking the can down the road. Culturally, there are differences, too. In Germany, austerity sells. In the U.S., we may be much more tempted to count on the Federal Reserve to help us finance our deficits.

In this context, we think the biggest threat we are facing might be economic growth. That’s because economic growth may send the bond market down, increasing the cost of borrowing. The U.S. currently pays just under 2% on its marketable debt; in 2001, it was over 6%. We are not suggesting that the average cost of borrowing will shoot up overnight. But let’s look at just the next 10 years. The below chart shows a CBO projection next to a projection that suggests we revert to a slightly higher rate, namely the rate that was the average for the past 40 years. Unrealistic? You judge. But it suggests that we might be paying $1.2 trillion in interest expense in 2023:

 

As indicated, with the exception of our suggestion that interest rates might move back up to their historic average, the estimates are CBO projections. If there were another military conflict, for example, expenses could easily be higher.

So what does it mean for investors? The most obvious choice might be to consider shorting bonds. But while we agree that bonds may be one of the worst investments over the coming decades, be warned that it can be very expensive to short bonds. Markets tend to exert maximum pain on investors; as such, it’s conceivable that bonds hold on much longer than one might think, possibly even rise. During this “wait and see” period, investors shorting bonds have to pay the interest on them.

A more effective way to prepare for what lies ahead might be to focus on the greenback. As indicated earlier, the U.S. has a current account deficit. That means foreigners have to buy U.S. dollar denominated assets to keep the dollar from falling to cover the deficits. Higher interest rates might attract investors, but if one believes the Federal Reserve might keep rates artificially low, it also means that Treasury securities would be intentionally overpriced. Less abstractly speaking, if you think the Bank of Japan in Japan or the Fed in the U.S. might try to keep a lid on yields, the currency may well be the valve. In fact, we would go as far as to argue that we cannot afford high positive real interest rates. As a result, the Fed might need to err on the side of inflation rather than cripple the economy. Sure, a hawkish Fed might be able to hike rates in the short-term, but let the economy kick into higher gear. If we look at what happened, for example, in Spain, perception maters more than reality: Spain had very prudent debt management, with an average duration of about 7 years; yet the market started to lose confidence, causing concern in the market that Spain might lose access to the market. Similarly, in the U.S., the numbers above matter little should investors lose confidence. By all means, U.S. markets are deeper and more liquid than Spanish markets. But to us, it also suggests that policy makers will be more tempted to kick the can down the road, only exacerbating the day of reckoning.

All the more so, shorting bonds may only be for the brave. Diversifying out of the greenback, however, be that through gold or a basket of currencies, is also risky, but allows investors to potentially take advantage of other opportunities along the way. A more active investor may want to contemplate whether there’s money to be made from the “currency wars” that might rage as different regions of the world address their challenges in different ways. None of these are easy choices, but doing nothing may also be a risky proposition, as the purchasing power of the dollar may increasingly be at risk.

Please register to join us for an upcoming Webinar as we dive into these dynamics in more detail. Also make sure you subscribe to our newsletter so you know when the next Merk Insight becomes available.

Axel Merk

Axel Merk is President and Chief Investment Officer, Merk Investments, Manager of the Merk Funds.

Filed Under: Currency debasement, Featured, Gold, US Debt Crisis Tagged With: , , , ,

In Four Years the Amount of Money Printed By the Fed Will Exceed the Value of All Gold Ever Mined

September 26, 2013 by Leave a Comment

paper moneyMost people can’t begin to comprehend how much a trillion dollars is.

Try asking someone how much $1,000,000,000,000 (one trillion) is and you are likely to get a blank stare.

To put things into perspective, when the government spends one trillion dollars and pays for it with taxes, the government would have to seize the entire wealth of one million millionaires.  Since the government would very soon run out of millionaires, government spending has become largely financed through borrowings and printed money.

Money printing or QE as the Fed likes to call it has reached levels that bring back visions of the Weimar Republic and unlike the average citizen, the Fed has no problem dealing with dollars in the trillions.

Money printing by the Federal Reserve has gotten so out of hand that within four short years (probably less) the amount of dollars conjured out of thin air will exceed the value of all gold ever mined in human history.

The world’s entire gold stock is about 170,000 metric tons currently valued at about $7.7 trillion.  The Fed is currently holding $3.7 trillion of securities purchased with printed money and the run rate of $85 billion per month weighs in at another $1.02 trillion dollars per year.  If the economy tanks, expect the monthly money printing to really ramp up.

gold-demandFed’s money printing to date stands at $3.7 trillion.  Another four years of money printing at the current rate would pile up another $4.1 trillion for a total of $7.8 trillion printed dollars compared to the value of all gold at $7.7 trillion.

When all of this starts to sink into the public consciousness, the safe bet is that people will start to avoid dollars (which the Fed is manufacturing in almost unlimited quantities) and turn to gold which has been used as a currency and store of value since the dawn of human history.  Another safe bet is to ignore short term price corrections in gold and use the opportunity to increase positions.

Filed Under: Currency debasement, Featured, Gold Tagged With: , , , , ,

Fed’s Inflate or Die Monetary Policy Guarantees A Monumental Financial Crisis

September 25, 2013 by Leave a Comment

economic collapseBy: GE Christenson

The U.S. economy is being overwhelmed by a loss of faith and trust in politicians, government, and bankers, excessive debts, artificially low interest rates, unsustainable deficit spending, expensive wars, QE (money printing) to infinity, “Inflate or Die” monetary policy, potential derivatives implosion, Obamacare and so much more.

If you believe that total government debt can grow FOREVER and more rapidly than the underlying economy, this article is NOT for you.

If you believe that governmental deficit spending, QE, and bond monetization can continue FOREVER without major consequences, this article is NOT for you.

But if you are sane enough to know that our current economic policies will produce a “train wreck,” read on…
A slow-motion collapse is occurring and most of us do not see it.

Consider these thoughts from insightful writers: –
Collapse Indicated by Stalling Growth in Global Financial Reserves

Hugo Salinas Price:

“As it is, the US can only continue to monetize government debt. Higher dollar interest rates are inevitable and will cause further government deficits; the debt overhang in both the US and Euro Zone is so great that a rise of a few points in interest rates will explode the deficits, and so on and so forth.

Bottom line: Stalling growth in International Reserves tells me that a world financial collapse is in the offing.”

Collapse Indicated by Loss of Trust in Western Economic Systems

David Stockman:

“There is no honest pricing left at all anywhere in the world because central banks everywhere manipulate and rig the price of all financial assets. We can’t even analyze the economy in the traditional sense anymore because so much of it depends not on market forces, but on the whims of people at the Fed.”

“The Blackberry Panic of September 2008, in which Washington policy makers led by former Goldman Sachs CEO Hank Paulson, panicked as they saw Wall Street stock prices plummet on their mobile devices, had very little to do with the Main Street economy in the United States. The panic and bailouts that followed were really about protecting the bonuses and incomes of very wealthy and politically well-connected managers at banks and other heavily leveraged businesses that were eventually deemed too big to fail. What followed was a massive transfer of wealth from the taxpayers and middle-class savers, in the form of bailouts and zero interest rates on bank deposits imposed by the Fed, to the so-called One Percent.”

“I think the political realities of the situation make the most likely scenario one in which there will be some kind of real financial collapse and disorder that will require a total reconstruction of the system.”

The Burning Platform:

“Despite the frantic efforts of the financial elite, their politician puppets, and their media propaganda outlets, collapse of this aristocracy of the moneyed is a mathematical certainty. Faith in the system is rapidly diminishing, as the issuance of debt to create the appearance of growth has reached the point of diminishing returns.”

“We are witnessing the beginning stages of political collapse. The government and its leaders are being discredited on a daily basis. The mismanagement of fiscal policy, foreign policy and domestic policy, along with the revelations of the NSA conducting mass surveillance against all Americans has led critical thinking Americans to question the legitimacy of the politicians running the show on behalf of the bankers, corporations and arms dealers.”

“We are supposedly five years past the great crisis. Magazine covers proclaimed Bernanke a hero. If we are well past the crisis, why are the extreme emergency measures still in effect? If the economy is growing and jobs are being created, why do we need $85 Billion of government debt to be monetized each and every month?”

“Just the slowing of debt creation will lead to collapse. Bernanke needs a Syrian crisis to postpone the taper talk. Those in control need an endless number of real or false flag crises to provide cover for their printing presses to keep rolling.”

Bill Fleckenstein:

“Since April, the 10-Year has gone from about 1.6% to as high as 3% recently. Now we have to see when this rally in bonds stops. The bond market will then roll over and then the Fed won’t have the tapering as an excuse. It means the bond market has ceased to price in the scenario that the Fed wants, and the bond market is not responding to the Fed’s moves in the short-run. In the old days we would call that ‘losing control of the bond market.’ And if that starts to happen, all hell is going to break loose.”

Michael Pento:

“The 10-Year went from 1.4% to 3%, and that made Mr. Bernanke panic. The average on that (10-Year) yield is 7% in the modern era since 1971 when we closed the ‘gold window.’ So, if the average is 7%, and the United States of America, this once great land, can’t (even) tolerate a 3% yield on the 10-Year Note, that means the Fed can never unwind QE.

That’s enough to cuff Mr. Bernanke’s hands. So the Fed is indeed trapped as you indicated. They cannot significantly bring down QE. That means a perpetual increase in the Fed’s balance sheet. That (also) means an inexorable rise in asset bubbles like stocks, bonds, and real estate, and it’s going to end (very) badly.”

Hank Paulson Interview:

“Paulson believes there will be another financial crisis.”

“It’s a certainty. As long as we have markets, as long as we have banks, no matter what the regulatory system is, there will be flawed government policies. Those policies will create bubbles.”

Alternate Interpretation: As long as we have Treasury Secretaries who represent the interests of Goldman Sachs and Wall Street bankers instead of the US economy, then we can be certain of another financial crisis.
Collapse in Retirement Income

Dennis Miller:

“While the Federal Reserve holds down interest rates and floods the banking system with money, it’s destroying the retirement dreams of several generations. The Employee Benefit Research Organization reports that 25 – 27% of baby boomers and Generation Xers who would have had adequate retirement income – under return assumptions based on historical averages – will run out of money if today’s low interest rates are permanent.”

In addition to the problem of low yielding investments caused by the historically low interest rates created by the Fed, even more retirees will run out of money, much sooner, when the inevitable inflation in food and energy prices smacks the U.S. economy, and especially retirees.
Discussion

It seems clear that we are losing faith in our politicians, our leaders, and our financial systems. Approval levels for congress and the President of the United States are low. Too-Big-To-Fail banks and “banksters” are despised and openly criticized.

The Federal Reserve is losing credibility; more and more people are realizing that QE is good for the bankers and the wealthy, but that it does little for “Main Street” people except drive up the prices they pay for food and energy.

The American public is generally opposed to war in the Middle East but that seems to matter little to the political and financial elite who will profit from the war.

Most people, so it appears, know that inflation is much higher than officially stated, and that inflation will become far worse than it is today. (When was the last time you saw a cup of premium coffee or a gallon of gasoline for less than $1?)

Read: Going Dark! Economic Cycles Point Downward

GE Christenson
aka Deviant Investor

Filed Under: Currency debasement, Featured, Gold, US Debt Crisis Tagged With: , , , , , , ,

Physical Gold Bar and Coin Sales Soar 78% To All Time High

September 25, 2013 by Leave a Comment

1988-olympic-goldPurchases of physical gold have been hitting new all time records.  Demand has been fueled by the recent pullback in gold prices and the massive amount of money printing being conducted by central banks in Europe, Japan and the United States.  The recent decision by the Federal Reserve to postpone any curtailment of its $85 billion per month of money printing could mark the end of the correction in gold and silver.  The Fed’s refusal to reduce the ongoing program of securities purchases signals that QE has morphed from an emergency measure to a permanent Fed policy.

The demand for gold has been particularly intense in Asia as Thai Gold Buyer Doubles Imports After Bear Slump.

YLG Bullion International, Thailand’s biggest domestic gold importer, expects to more than double purchases this year after the bear market in prices spurred a surge in demand for physical metal.

The company may import as much as 200 metric tons in 2013, from 92 tons last year, Chief Executive Officer Pawan Nawawattanasub said in an interview yesterday. First-half shipments advanced to 112 tons, accounting for 60 percent of the country’s total, she said. A ton is valued at $42.6 million.

Gold tumbled 21 percent this year, heading for the first annual retreat since 2000, as some investors lost faith in the metal as a store of wealth. With prices now 32 percent below the record reached in September 2011, the rout is boosting demand for bullion bars and coins, global sales of which surged 78 percent to an all-time high in the second quarter, according to the London-based World Gold Council.

“Cheaper prices are attracting customers to buy bullion bars as they see it as money better spent than on something like a Hermes bag,” said Pawan, whose Bangkok-based company supplies retailers and investors in Southeast Asia’s second-biggest economy. “Demand in Thailand can continue to grow, partly because collecting gold is in our culture.”

Golden Buddha of Bangkok, World’s Largest Gold Statue -estimated gold value $250 million

Gold demand in Thailand is exceeded only by China and India.  Total gold demand in China and India in the form of jewelry, bars and coins is expected to reach 1,000 tons this year and gold demand in Thailand should reach 200 tons.  Total Asian gold demand from China, India and Thailand could amount to half of total world gold production of approximately 2,400 tons in 2013.

Even more astonishing is the fact that the entire world’s production of gold this year will be purchased by only three sources.  According to King World News, total gold buying by central banks, China and India is “almost equivalent to the annualized gold production of the entire world.”  It is only  a matter of time before a shortage of physical gold based on huge demand results in significantly higher prices.

Filed Under: Bullion Sales, Currency debasement, Featured, Gold Tagged With: , , , , , , , ,

Will The Fed’s “Beautiful Money Printing” Lead to Economic Recovery?

September 23, 2013 by Leave a Comment

The End GameBridgewater’s Ray Dalio, one of the world’s most successful hedge fund investors, has put out a neat video explaining how the economic system works and how the suffocating burden of unmanageable debts can be reduced without propelling the world into uncontrollable inflation or a deflationary depression.

According to Dalio, every deleveraging  in history has involved a combination of cutting spending, reducing debt through defaults and restructuring, redistributing wealth and the printing of money by central banks.

Each method of deleveraging must be done in just the right amount to avoid tipping the economy into either deflation or inflation.  For example, spending cuts, also know as austerity, leads to falling incomes as less money is spent and debt burdens becomes even more untenable as deflation sets in.  Fewer jobs and higher unemployment from spending cuts require even further spending cuts and this vicious cycle of lower incomes and higher debts ultimately leads to a severe economic contraction known as a depression.  Increased taxes on the wealthy to redistribute spending power to the poor and debt write offs must also be conducted in measured amounts to avoid social unrest between the “haves and have nots.”

Money printing by the central bank is also essential in Dalio’s view since interest rates are already at zero and printed money is necessary to make up for disappearing credit.   If money printing along with spending cuts, wealth distribution and debt restructuring are done in just the right proportions, a “beautiful deleveraging” occurs resulting in declining debts and strongly positive economic growth.  If the four factors of develeraging are done properly, money printing will not cause inflation since the printed money merely offsets the credit destruction triggered by reduced lending and borrowing and debt restructurings.

Dalio does not explain how the central bank and central government can accurately determine how to precisely apply his four develeraging factors to get the economy back on track.  In addition, Dalio admits that the whole system winds up falling apart if incomes do not grow faster than debt.  If debts continue to grow at 4% and incomes increase by only 2%, the debt burdens continue to grow, the economic problems compound and banks continue to cut back on lending until incomes increase.

Income growth can outpace debt growth, according to Dalio, if the Fed prints “just the right amount of money.”  Good luck with that – the members of the Fed can’t even agree on whether or not money printing is causing more harm than good and the Fed’s money printing efforts have been totally counterproductive in attempting to increase incomes as Household Incomes Remain Flat.

Over a longer perspective, the figures reveal that the income of the median American household today, adjusted for inflation, is no higher than it was for the equivalent household in the late 1980s.

For all but the most highly educated and affluent Americans, incomes have stagnated, or worse, for more than a decade. The census report found that median household income, adjusted for inflation, was $51,017 in 2012, down about 9 percent from an inflation-adjusted peak of $56,080 in 1999, mostly as a result of the longest and most damaging recession since the Depression. Most people have had no gains since the economy hit bottom in 2009.

Government programs remain a lifeline for millions. Unemployment insurance, whose eligibility the federal government expanded in response to the downturn, kept 1.7 million people out of poverty last year. Food stamps, if counted as income, would have kept out four million.

Since the recession ended in 2009, income gains have accrued almost entirely to the top earners, the Census Bureau found. The top 5 percent of earners — households making more than about $191,000 a year — have recovered their losses and earned about as much in 2012 as they did before the recession. But those in the bottom 80 percent of the income distribution are generally making considerably less than they had been, hit by high rates of unemployment and nonexistent wage growth.

The Fed’s money printing rampage has done nothing but inflate the cost of living for the average American even as wages continue to spiral downward.  What will the Fed do next?  There is every reason to believe that the money printing will continue to expand as it did in the Weimar Republic as explained in The Economic Collapse.

There is a reason why every fiat currency in the history of the world has eventually failed.  At some point, those issuing fiat currencies always find themselves giving in to the temptation to wildly print more money.  Sometimes, the motivation for doing this is good.  When an economy is really struggling, those that have been entrusted with the management of that economy can easily fall for the lie that things would be better if people just had “more money”.  Today, the Federal Reserve finds itself faced with a scenario that is very similar to what the Weimar Republic was facing nearly 100 years ago.  Like the Weimar Republic, the U.S. economy is also struggling and like the Weimar Republic, the U.S. government is absolutely drowning in debt.  Unfortunately, the Federal Reserve has decided to adopt the same solution that the Weimar Republic chose.  The Federal Reserve is recklessly printing money out of thin air, and in the short-term some positive things have come out of it.  But quantitative easing worked for the Weimar Republic for a little while too.  At first, more money caused economic activity to increase and unemployment was low.  But all of that money printing destroyed faith in German currency and in the German financial system and ultimately Germany experienced an economic meltdown that the world is still talking about today.  This is the path that the Federal Reserve is taking America down, but most Americans have absolutely no idea what is happening. It is really easy to start printing money, but it is incredibly hard to stop.  Like any addict, the Fed is promising that they can quit at any time, but this month they refused to even start tapering their money printing a little bit.

Long term investors in gold and silver should continue to accumulate positions at current bargain prices as part of a long term wealth preservation strategy.

Filed Under: Currency debasement, Featured, Gold, Silver, US Debt Crisis Tagged With: , , , , , , , , , ,