This is President Nixon’s announcement of the end of gold convertibility for the American dollar. It is interesting to note that all the great things Mr Nixon predicted would happen like a stronger dollar, low inflation and a rebalancing of the trade deficit didn’t! In fact with the abandonment of gold as a monetary anchor the dollar has gone from just over 4 Swiss francs to almost parity today against the franc. Inflation was rampant in the 1970’s also as Mr Nixon closed the “gold window” and has remained rampant ever since and as a result created multiple bubbles of which the latest is the housing bubble. As for the trade deficit it has only gotten worse! America nowadays exports roughly $700 billion less than it imports from abroad! One also only needed $35 back in 1971 to buy one troy ounce of gold! The Austrian School of Economics was right that if the dollar was allowed to float versus gold the value of the dollar would plummet against the yellow metal! Milton Friedman and other mainstream economist were completely incorrect as they pointed out that the value of gold would drop precipitously once the gold standard was abandoned.

An Escape Route in a Time of Disaster

Darryl Robert Schoon
Jul 22, 2008

Only those who have gone too far know where the limits should have been.

Money served throughout history as a medium of exchange and as a storehouse of value. But when gold and silver coins were replaced by paper currencies, money no longer was the same. Paper money, no longer having intrinsic value, now functions only as a medium of exchange, a function that degrades over time.

The value of paper money continually loses value because the constant printing of paper money constantly dilutes the value of previously printed money. The more paper money printed, the less paper money is worth; and today, money is being printed at a faster rate than at any time in history.

In fiat paper money systems, today’s paper money will be worth less than tomorrow’s and will be worth less the day after ad infinitum. This constant degradation of paper money is known as inflation. When the process rapidly speeds up, it is known as hyperinflation. Remember that word.
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By John Browne, senior market advisor – Euro Pacific Capital

This week, we were treated to strong statements by both Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke about the desirability of a “strong dollar”, and the intention of policy makers to pursue strategies that will enhance its value. To the relief of many, the dollar responded to the moral support and managed a mild rally. The move is inconsequential. The harsh realities have not changed in the slightest, and the dollar is set to continue its overall decline.

Although some investors respond to such jawboning, the more sophisticated international players, who in large part determine the foreign exchange market, do not. Why the bearish sentiment despite the bullish talk from Washington?

First, the political situation is that both Paulson and Bernanke were handed a poisoned chalice by their predecessors. By consuming more than we have produced for decades, Americans are now confronting the reality of diminished living standards. These inevitable declines have been masked by a series of massive liquidity injections by former Fed Chairman Greenspan. This was done to avoid the political cost of the natural corrective medicine of recession. It fueled both the dot.com and the real estate booms. The current liquidity injections are now fueling inflation in food and energy.

The problem for policy makers is that large portions of the electorate are starting to realize that a weak dollar is not simply a problem for those who vacation in Paris. People innately understand that a falling dollar is adding to the cost of living. So there are very strong political reasons for the Fed and the Treasury to talk tough on the dollar. In his Congressional testimony, Bernanke noted that the strength of the dollar is “a top priority”. Notably, he did not say that it was “the” top priority.

The political reality of the continued erosion of American wealth, and the reluctance of officials to allow the public to fully comprehend the extent of the problem, has tied their hands and feet. However, their mouths still have the ability to move freely.

While inflation inflicts greater economic damage over the long term, recession causes more “political” damage over the short term. In an election year, it may come as no surprise that the short term problems will attract the lion’s share of attention. However, the rest of the world is not nearly as concerned with these political points, and instead favors combating inflation over recession.

Doubtless, Bernanke and Paulson see the acute danger of raising rates to combat inflation and to defend the U.S. dollar. The present recession is based on a housing collapse of gigantic proportions and could all too easily be pushed into a depression by an interest rate hike. With this terrifying prospect in view, it is little wonder that Bernanke and Paulson are keener to avoid depression.

Therefore, like a tackler in American Football or in Rugby, it pays not to look at what an opponent ‘says’ with his eyes or arms or mouth, but at what he ‘does’, with his feet! By ignoring the head fakes, and concentrating solely on the fundamentals, it’s easy to see that the Fed is pursuing a policy of inflation and dollar debasement. So, expect continued soft to neutral action on interest rates, accompanied by further overall weakness in the U.S. dollar.

With such a stance likely to be in place well into 2009, international faith in the U.S. dollar may fall to such depths that the special “reserve” status it enjoys may be challenged by the Euro. This possibility would move a step closer to a probability once the European Union becomes a sovereign state after January 1, 2009.

By Peter Schiff

This week, as the financial sector began to give way under the unbearable weight of bad mortgage debt, the Federal Reserve stepped in to save the day. At least that’s what it says in the script.

In a surprise move, the Federal Reserve announced its intention to swap $200 billion of treasury debt for $200 billion of potentially worthless mortgage-backed securities. The Fed may have been partially spurred to take the step as a result of the rapid collapse of Carlyle Capital Corp. a publicly traded private equity firm that is a subsidiary of the Carlyle Group. The Dutch firm could not meet margin calls on its depreciating collateral of AAA-rated mortgaged-backed securities guaranteed by Fannie Mae and Freddie Mac. On Friday, the Fed then took the unusual step of providing emergency “non-recourse” funding to Bear Stearns, collateralized by that firm’s similarly worthless mortgage debt. Apparently the Fed now stands willing to assume any mortgage-related risk that no other private entity would touch.

That the Fed would take such extreme measures, which would have been considered unthinkable even a few months ago, followed a few notable media events that may have affected their thinking. On Monday, Wall Street was rocked by an article in Barron’s that suggested that government sponsored lenders Fannie Mae and Freddie Mac lacked sufficient capital to cover the likely losses on the $5 trillion in mortgages they insure (a position that I have taken for years) and raised the possibility of either bankruptcy or a government bailout. On CNBC the next day, Paul McCulley, the managing director at Pimco, the world’s largest bond fund, publicly called for the Fed to use it balance sheet and its printing press to buy mortgages.

According to the Fed, its new plan does not amount to buying mortgages but simply accepting them as collateral for 28-day loans. However, will the Fed really return these ticking time bombs to their true owners in 28 days, inciting the very collapse its actions were originally designed to postpone? Why does the Fed believe that the mortgages will be marketable next month; or the month after that? Nor can we believe that such “loans” will be restricted to only $200 billion. Bear Stearns and Carlyle are certainly not alone in massive exposure to bad debt. Given the unprecedented leverage that many of the biggest financial firms used to play in this market, there will be many more failures to come. Does the Fed stand ready to bail out all comers? Based on this course of action, the Fed, or more precisely American citizens, will end up with trillions, not billions, of such securities on its books.

The problem with these mortgages (other than the borrowers lacking any means or desire to repay them) is that the underlying collateral is worth a fraction of the face amount. With recent foreclosure recovery rates amounting to less than 50 cents on the dollar, it is no wonder that no one wants them. The real estate bubble allowed borrowers to leverage themselves to the hilt using inflated home values as collateral. However, now that the bubble has burst, mortgage balances far exceed current property values. It is a trillion dollar time bomb that no one can possible defuse.

Paper dollars are technically Federal Reserve Notes, which means they are liabilities of the Fed. When it puts newly minted notes into circulation it does so by buying assets, usually U.S. treasuries, which it then holds on its balance sheet to offset that liability. By swapping treasuries for mortgages, the Fed effectively alters the compilation of its balance sheet and the backing of its notes.

However, backing paper money with mortgages is nothing new. The French tried it in the late 18th Century, and it lead to hyperinflation. Assignats, which were first issued in 1790 to help finance the French revolution, were backed by mortgages on confiscated church properties. Although the stolen underlying collateral did have some value, the revolutionaries saw no reason to limit how many Assignats were printed, which resulted in massive depreciation. Within three years, price controls were introduced and failure to accept Assignats, initially an offence subject to six years in prison, was made a capital crime. By 1799 the currency was completely worthless.

If even the threat of death could not prop up the Assignat, does anyone believe that the currency could have been saved if Robespierre had forcefully mouthed a “strong Assignat policy” as President Bush is now doing with the dollar? Rather than repeating the mistakes of history we should learn from them. Our own failed experiment with the Continental currency as well as the Great Depression should prove conclusively that it is Austrian, and not French, economics we should be following.

Visit Mr Schiff’s website

Emergency Action Required Immediately To Prevent Public From Joining The Panic Tomorrow.

Author: Jim Sinclair

Dear CIGAs,

This is it.

The DJII futures are down over 500 points.

If the Federal Reserve fails to take emergency action before the US opening tomorrow, you will see the DJII open down 1000 points as the public joins this professional panic.

Everything you see happening is contained in the Formula, which will be the catalyst that takes gold again above $887.50 and to $1650.

As long as you have followed my plea to have NO MARGIN on anything gold I see no problems.

If you have margin the rule is never meet a margin call, but sell whatever is needed to meet the call or more, never less.

It is a better wager that the Fed will immediately drop rates by 1 full percentage point.

It is a slam dunk that all Western central banks will cut loose and flood the world with more liquidity than ever seen before.

If central banks fail to cause a torrent of liquidity from their unending check books then $450 trillion of derivatives will take us to the world of Mad Max.

Monetary inflation ALWAYS causes PRICE inflation even without strong business conditions.

Prices of hard and transportable assets rise regardless of business conditions.

All currencies fall and the stronger currency is the laggard in the race to the bottom of the tank.

Visit Jim Sinclair’s website

By Peter Schiff

For members of Congress desperate to avoid recession, the takeaway message that Fed Chairman Bernanke delivered in his testimony this week was that a successful stimulus package needs to be rapid and targeted. By this he meant that money would need to be delivered quickly to those individuals who would be most likely to spend, and withdrawn when and if the need for stimulus ebbs.

For those who believe that this strategy is prudent and effective, the debate now becomes choosing the most effective technique to deliver the cash. Proposals include middle class tax cuts or rebates, extension of unemployment benefits and expansion of funding for public works. However, for those who want to engineer spending, the problem with these ideas is that the people who receive the funds may not decide to spend it immediately, if at all. They may, god forbid, elect to pay down existing debt or most perniciously, actually save it instead.

Fortunately, the government has very modern and effective tools available to deliver funds and micromanage spending. Just recently, the Treasury Department launched a program to streamline Social Security payments through the use of debit cards. The same idea could be used for fiscal stimulus. The Government could distribute millions of “Economic Stimulus Cards” to citizens, which could function more like retailer gift cards rather than debit or credit cards. Here’s how they would work:
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Very informative for those who would like to see a strong currency!

Ron Paul 2008

Representative and Republican Presidential candidate Ron Paul questioning Federal Reserve Board chairman Ben Bernanke about the debasement of the dollar at the JEC in Congress on November 8th, 2007

Learn the truth about our present monetary system:

By Mario Innecco

We think the way inflation is presently defined goes a long way to helping central banks and governments perpetuate the debasement of currencies via the over issuance thereof. Prior to the 1980’s The Merriam-Webster Dictionary defined inflation as: “an abnormal increase in the volume of money and credit resulting in a substantial and continuing rise in the general price level”. Nowadays The Merriam-Webster Dictionary defines inflation as: “a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services”. The new definition does not seem that different but notice how inflation is now “a continuing rise in the price level…” instead of “an abnormal increase in the volume of money…”.

This change in definition has allowed central bankers and politicians to control people’s expectations of inflation . Defining inflation as rising prices and measuring rising prices through government measures like the C.P.I. (consumer price index) has allowed central banks and governments to fool people into believing that inflation is under control because the basket of goods and services in the C.P.I. keeps getting adjusted over and over again in order to keep the index from showing the real effects of inflation. We recommend people to take a look at John Williams’ website shadowstats.com to learn more about how statistics like the C.P.I. have been adjusted over the years.

Only through the over issuance of fiat currency can inflation take place and only through central banks can fiat money be issued. When there are no central banks the banking system is limited to the amount of currency it can issue because the supply of gold is finite. Currency issued by banks is limited to the amount of gold on deposit and if a bank over issues, the value of its currency or note will drop below its par value. If a bank wants to stay solvent under a free market system, where there is no central bank to bail it out, it better have enough gold specie to cover its demand deposits. It is the discipline of the gold-backed free market system that keeps inflation naturally in check.

As one can see monetary inflation is only possible when governments give monopoly powers to a bank of issue or central bank and forces people to accept the fiat currency through the legislation of legal tender laws. Felix Somary, one of the most influential bankers in Europe in the early 1900’s once said: “the state alone is responsible for inflation: inflation without government, or indeed against government, is impossible.” (1)

(1) “The Raven of Zuerich - The Memoirs of Felix Somary.” C. Hurst & Company, London, 1986, pg 98