New Fed Chairman, Same Old Story

President Trump nominated Jerome H. Powell as the new Chairman of the Federal Reserve Bank. Don’t look for much to change. And Janet Yellen’s announcement that she will resign from the board upon Mr. Powell’s induction as board chair is pretty much a non-event.

Where we are today is the culmination of decades of irresponsible financial/fiscal policies and a complete abdication of fundamental economics. Continue reading “New Fed Chairman, Same Old Story”

The Fed’s 2% Inflation Target Is Pointless

Within the Federal Reserve sometime in 1996, a discussion took place among FOMC (Federal Open Market Committee) members regarding the subject of inflation targeting. Federal Reserve District Governor (San Francisco) Janet Yellen believed that a little inflation “greases the wheels” of the labor market. Her preferred “target” was 2%. She asked Chairman (at the time) Alan Greenspan his preference.

The Chairman replied.  “I would say the number is zero, if inflation is properly measured.”

On the surface, it might seem that Chairman Greenspan is indicating that no inflation is preferable to “a little” inflation.  But that is contradictory to the actual mechanics of ongoing monetary action by the Fed since its inception in 1913.

The Federal Reserve creates inflation through ongoing expansion of the  supply of money and credit. Our fractional-reserve banking system is intrinsically inflationary – at the very least. And what did he mean by the parenthetical comment, “if inflation is properly measured”.

More likely, he was adopting the role of devil’s advocate and trying to promote further, active discussion among FOMC members. The results seem to indicate this.

In meetings the next day, Greenspan summarized the discussion: “We have now all agreed on 2 percent.” The Federal Reserve now had an internally stated, unofficial inflation target. Their own “guiding light”. But they didn’t want to talk about it publicly.  At least Greenspan didn’t.

He termed their discussion “highly confidential (in) nature” and said: “I will tell you that if the 2 percent inflation figure gets out of this room, its going to create more problems for us than I think any of you might anticipate.”

Ben Bernanke didn’t share Greenspan’s reservations.  He wanted everyone to know that the Fed’s inflation target was 2%.  But why?

One possibility is the need for justification.

Actions by the Federal Reserve are historically unclear as to logic and purpose. That allows for a modicum of privacy and the false descriptive of an independent Fed. It also suggests an aura of ‘special dispensation’ surrounding the Fed.

By late 2010, however, those notions were unravelling quickly as people wallowed in the after effects of the financial crises of 2007-08. Mr. Bernanke and his fellow practitioners of monetary medicine were seen as ineffective, at best, and appeared as if they did not know what they were doing.

Action was, in effect, demanded. And they were not afraid to pull the trigger. But they needed a clear, publicly observable target. How does anyone know you hit the target if they don’t know what you are aiming at?

Having a clearly acknowledged target changes the focus. Judgment is restricted to the new area of focus.  Did you hit the target or didn’t you?

This presumes that the target is justified, of course.  And if an inflation target is justified, why 2%?  Why not a lower number? Or any other number? In truth, it probably doesn’t make any difference.

From the Fed’s perspective, it gives them a license to openly discharge their firearms in the public square. If they miss, they can just reload and fire again.

Should they happen to hit the target, they can either maintain their current posture, or tweak it accordingly so as not to overshoot in the future.

But they will never “hit” their target.  Especially this one.  Why not?

Because it is a moving target, comprised of moving parts. And it is the result of the Fed’s own previous actions.

There is only one cause of inflation: government.  The term government also includes central banks, especially the US Federal Reserve Bank.

What most people refer to as ‘inflation’ or its causes are neither. They are the effects of inflation.   The “increase in the general level of prices for goods and services” is the result of the inflation that was already created.  …Kelsey Williams

Bernanke pushed until he got his way. A formal, precise inflation target rate of 2% was adopted at the FOMC meeting on January 24, 2012.

Five years later…

HEADLINE: The Fed’s Janet Yellen could use some target practice

Quote: Ever since the Federal Reserve adopted an explicit inflation target of 2% in 2012, the central bank has had limited success in hitting it. Only once, in fact, in the months between April 2012 and today, did the year-over-year increase in the personal consumption expenditures (PCE) price index breach 2%. …MarketWatch/Caroline Baum 12July2017

That shouldn’t be a surprise given that it’s a moving target.  But there is more to it than that.

Right now, the inability to hit the target serves as the Fed’s perfect excuse for not acting more decisively.  This is especially true with respect to raising interest rates. In addition, Ms. Yellen is afraid to do anything. Here’s why.

The bigger risk to the economy and financial stability is another credit collapse.  And they can’t claim ignorance as they did the last time. They know its coming. They just don’t know when.

The levels of debt, the convoluted intricacies of the derivatives market, the interwoven relationships within the shadow banking system are all at hugely more precarious tipping points than ten years ago.

And it is the Fed’s own inability to hit the 2% inflation target that is warning them.

Think of all the hundreds of billions of dollars that went into saving the system from collapse before. And then force feeding the money drug into the patient for another nine years.

The problem is that all of the beneficiaries (i.e patients) of the Fed’s assistance are now hard-core addicts. If the Fed tries to raise rates they could very easily trigger another collapse much worse than before.

The Fed continues to look for the effects of all of those hundreds of billions of dollars to show up in the ‘rate’ of inflation. Supposedly that would be a sign to them of improved economic activity and growth. That isn’t happening.

The reason is because most of the ‘help’ effects showed up in ever higher prices for financial assets (stocks and bonds) and real estate.

And all of those toxic assets (CDOs of every letter and color, and various other esoteric derivatives) have swollen in price to levels far beyond any reasonable value. In addition, far too many of them are resting quietly on the Fed’s balance sheet.

The Fed has actually blown another bubble much bigger than the previous one. Nothing fundamental has changed. The only difference is that the situation is worse than before. Now, out of fear, they are trying to steer a course between action and inaction.

The action, of course, is raising interest rates and offloading their own balance sheet. But their actions could trigger events similar to 2007-08. In which case the Fed’s image would forever be tainted. (I think this is more of a concern for Janet Yellen than her fellow board members.)

The inaction – doing nothing – is pretty much where things are currently. If the Fed maintains ZIRP (zero interest rate policy), the patient could overdose and slip into a coma.

The Fed’s 2% inflation target is an attempt to predict the effects of inflation. That’s impossible. It is also unwise as it reinforces the acceptance of a “little inflation” as normal, necessary. It isn’t.

A “little inflation” is why the U.S. dollar is worth ninety-eight percent less than in 1913 when the Federal Reserve originated.

(Read more about the Federal Reserve here)

 

 

 

The Fed’s Dilemma – Doing The Right Thing Won’t Help Janet Yellen Or Us

The Federal Reserve doesn’t know what to do.  That’s too bad.  For all of us.

The bigger problem is that it probably doesn’t make much difference what they do – or don’t do.  Continue reading “The Fed’s Dilemma – Doing The Right Thing Won’t Help Janet Yellen Or Us”

The Federal Reserve And Drug Addiction – A Prediction

The Federal Reserve Bank was established in 1913. Its stated purpose was to control the economic cycles; more specifically to avoid panics and crashes by smoothing out the variances in the stages (prosperity, inflation, recession, depression) of the economic cycle.

The plan centered around control (expansion and contraction) of the money supply and exertion of any influence it could muster regarding direction (up, down, or stable) of interest rates.

Before going further, lets talk for just a bit about drug addiction. Without being overly technical, lets briefly and generally look at the course of addiction; other than for purely experimental reasons, or peer pressure, or social association. Most addictive habits are the result of attempts to escape, or hide, or avoid problems and concerns.

What is most important, however, is the process itself and the effects of usage; both concurrent and cumulative.

An initial ‘fix’ will likely provide temporary relief and/or even induce a state of calm or euphoria. All good so far.

After a reasonably short period of time, the effects (for the most part) seem to dissipate and the individual returns to previous reality.  And, of course, after a brief interlude, is just as aware of the issues that were of concern previously.

Soon thereafter, the next attempt at escape is pursued.  But something is different.  This time the effects experienced are not as ‘positive’ as before and don’t last quite as long.  In addition, the aftereffects resulting from the ‘come down’ are more pronounced.

The seemingly logical next step for most users is to up the dosage; which is done. And the effects are more positive and might even last as long as the first time. But the aftereffects are worse.

The Federal Reserve has proclaimed their intention to manage the economic cycles. And, yes, they do believe they can. At least they say they can. And they have said that for decades. But, unfortunately, for them and  for us, they have not been able to do so and cannot do so. Not that they will admit that.

The Fed’s efforts at controlling the money supply are attempted in expectation of minimizing the effects of recession, maintaining financial and economic stability, promoting prosperity, and avoiding calamities like the Depression of the thirties.  Certainly those are commendable objectives. But are they even possible?

Likely not. And their track record thus far indicates more harm than good has come from their efforts.

The Fed has the tools to expand and contract the money supply. But on a continuous basis, and ongoing for over one hundred years, the focus is on expansion. And the net result of their cumulative expansionary efforts is a ninety-eight percent decline in the value of the U.S. dollar.

That is the price we have paid for hoping and believing that a small group of individuals can “manage the economic cycles” and avoid temporary and  short-term pain associated with the changes in the cycle.

As addiction to drugs becomes more intense, and the dosage and frequency increase, so do the cumulative negative effects. An individual who is habitually addicted starts to notice a breakdown in organs and systems within the body. And each succeeding fix or dosage supplies less and less of the intended effects; and doesn’t last as long.

As the reality of the addiction sets in, and all along the way, half-hearted attempts are made at kicking the habit. Get off the drugs and get better.  But in most cases, the shorter, temporary illusion of something better or something not as bad prevails. And so the destructive behavior continues.  But the withdrawal symptoms are worsening. Hence, any abstention is brief.

By now, death may very well be apparent. Continued usage will kill the patient. But the effects of withdrawal, by necessity, might pose just as great a risk. In other words, it just might be too late to do anything of lasting, positive, consequence. Damned if you do, and damned if you don’t.

What we refer to as ‘inflation’ are really the effects of inflation that has already been created by the Fed.  The continued, ever-increasing expansion of money and credit destroys the value of existing money. Over time, as the existing money loses its value/purchasing power, the effects show up generally in the form of rising prices.

This is why it costs more today to buy life’s necessities (and luxuries) than it did ten years ago; or twenty years ago, etc. On a year-to-year basis it is usually not too noticeable. But sometimes the symptoms are exacerbated such as in the seventies.

The long-term results of reliance on the Fed’s infusions of money and credit have brought us to a similar juncture as that mentioned above in the drug addiction scenario.

As we become more dependent on the inflation to keep things going, the effects of each successive expansionary effort have less impact. And we become more vulnerable in two ways.

The first is an overdose. Too much money, too quickly, leads to complete destruction and repudiation – death – of the currency. The runaway or hyper-inflation in Germany in the 1920s is a defining example.

The second is a credit collapse. Not enough money at the right time and the patient slips into withdrawal. And the effects of withdrawal – monetarily speaking – could be so bad as to usher in true deflation and a full-scale depression.

Just as a drug addict must endure pain and discomfort in order to cleanse himself, so must it be with our monetary system. It is not the individual, per se, or the system that are at fault. The dilemma results from the  cumulative effects of repeated bad choices over long periods of time.

In 2008-09 our economy bordered on the verge of collapse. Think of the drug addict who has slipped into withdrawal and the accompanying symptoms have become almost unbearable.

Doing the right thing would have required enduring the pain while setting things straight. In order to effectively cure the patient, this means implementing sound monetary policy; admitting the failure of policies and actions that had been pursued for the past century; and resisting the temptation to avoid the necessary pain by relapsing into previous bad habits.

Unfortunately, the Federal Reserve chose to ramp up the dosage and increase the frequency.

The patient (U.S. dollar) has stabilized and is currently in recovery – temporarily. But full recovery is only possible if a purging and cleansing occurs. That won’t happen voluntarily; by the Fed, the U.S. Government, or by U.S. citizens.

The path chosen is one of managing the illness. The addict who wishes to avoid withdrawal and its often excruciating symptoms does something similar. Temporary comfort and illusion provided by regular doses of the drug – in this case, money – masks the pain and avoids the reality of the existing condition. And it leads eventually to death and destruction.

You cannot get better by killing yourself slowly, a little bit at a time.

What’s worse, however, is the increased likelihood that the entire system will collapse under its own weight, no matter how hard someone tries to avoid the inevitable consequences.

That is where the Federal Reserve (and U.S. Government) are today. It is exactly as we said earlier in referring to the addict who has passed the point of behavior modification and common sense having the desired effect.  Too much damage has been done. Damned if you do, damned if you don’t.

Something similar to 2008-09 is going to occur again. Only it will be much worse. And regardless of the traditional, reactionary talk and efforts to save us, the system will likely not withstand the “symptoms of withdrawal”.

Learn to enjoy things now; as they are currently. It probably won’t get much better than this.

(more about The Federal Reserve: A Game Of Chess And The Source Of The Federal Reserve’s Power)

 

 

 

 

 

Origin And Danger Of Fractional-Reserve Banking

If there is any one thing in particular that threatens the collapse of our banking system and financial structures worldwide, it is the practice of fractional-reserve banking. The subject is rarely mentioned in the financial press. When it is mentioned, a clear explanation is usually not available.  Continue reading “Origin And Danger Of Fractional-Reserve Banking”

Mansa Musa, Gold, And Inflation

From Wikipedia…

 Musa Keita I (c. 1280 – c. 1337) was the tenth Mansa, which translates as           “sultan” (king) or “emperor”, of the wealthy West African Mali Empire. 

During his reign Mali may have been the largest producer of gold in the world at a point of exceptional demand. One of the richest people in history, he is known to have been enormously wealthy; reported as being inconceivably rich by contemporaries, “There’s really no way to put an accurate number on his wealth” (Davidson 2015).  Continue reading “Mansa Musa, Gold, And Inflation”

Gold – It’s Still All About The US Dollar

The US dollar is the world’s reserve currency.  And that isn’t likely to change in any radical way, anytime soon.  Unless there is some kind of calamitous implosion of the dollar.  I am talking about outright rejection and repudiation.  And that could happen.  The problem is that there isn’t another currency that could likely take its place.   Continue reading “Gold – It’s Still All About The US Dollar”

Inflation – What It Is, What It Isn’t, And Who’s Responsible For It

Inflation is the debasement of money by the government. Period.

It is not an increase in the general level of prices for goods and services.

The above statements are critical to an understanding and correct interpretation of events which are happening today – or expected to happen  – that are casually attributable to inflation.  So, let’s go one step further.

There is only one cause of inflation: government.  The term government also includes central banks, especially the US Federal Reserve Bank.

Inflation is not caused by “greedy” businesses, excessive wage demands, or accelerated consumer spending.  Even government’s own propensity to spend, as reckless as it is, does not cause inflation.  And that does not contradict my earlier statement that government is the only cause of inflation.  They are.  But not because of their spending habits.

Economic growth does not lead to higher inflation.  There are statements made often that imply a link between growth in our economy and inflation.  And that we have to “manage the growth” so the economy doesn’t “grow too quickly” and “trigger higher inflation”.  These statements are false and misleading.

Also, inflation will not “accelerate over the next couple of years due to higher energy prices and stronger wage growth that leads firms to raise prices”…Gus Faucher/PNC Bank/WSJ  (It is possible that inflation will accelerate over the next couple of years, but it can’t/won’t be for the reasons stated.)

So how does the government cause inflation?  It’s time for a bit of history…

Early ruling monarchs would ‘clip’ small pieces of the coins they accumulated through taxes and other levies against their subjects.

The clipped pieces were melted down and fabricated into new coins. All of the coins were then returned to circulation. And all were assumed to be equal in value. As the process evolved, and more and more clipped coins showed up in circulation, people became more outwardly suspicious and concerned. Thus, the ruling powers began altering/reducing the precious metal content of the coins. This lowered the cost to fabricate and issue new coins. No need to clip the coins anymore.

From the above example it is not hard to see how anything (grains and other commodities for example) used as money could be altered in some way to satisfy the whims of government. But a process such as this was cumbersome and inconvenient. Of course it was. What a shame. There had to be a better way. And there was.

Enter: Paper Money

With the advent of the printing press (moveable type) and continued improvements to the mechanics of replicating words and numbers in an easily recognizable fashion, paper money was now in vogue – big time.

However, people viewed the new ‘money’ with healthy skepticism and coins with precious (or semi-precious) metal content continued to circulate alongside the new paper money. Hence, it was necessary, at least initially, for government to maintain a link of some kind between money of known value vs. money of no value (in order to encourage its use).

Over time, eventually, that link was severed; partially at first, then completely. And it was done by fiat (a decree or order of government).

Not only does our money today have no intrinsic value, it is inflated (and therefore debased) continuously and ongoing through subtle and more sophisticated ways such as fractional-reserve banking and expansion of credit. The printing press is still at the core and is humming 24/7 but the digital age has ushered in new and ingenious ways to fool the people.

Government causes inflation by expanding the supply of money and credit.  And that expansion of the money supply cheapens the value of all the money.  Which is precisely why, over time, the US dollar continues to lose value.  It takes more dollars today to purchase what could have been purchased ten years ago, twenty years ago, etc.  And it has been going on for over one hundred years.  It dates back to the origin of The Federal Reserve Bank in 1913.

What most people refer to as ‘inflation’ or its causes are neither. They are the effects of inflation.   The increase in the general level of prices for goods and services is the result of the inflation that was already created.

More history…  The Arab Oil Embargo in 1973 and the demands for more money for oil which led to the formation of the Organization Of Petroleum Exporting Countries (OPEC) followed close behind then President Nixon’s severance of all ties of the US dollar to Gold.  The underlying fact of the matter was that the dollars which they were receiving for their oil were worth less (not quite ‘worthless’) and had been losing value for several decades.  And the price had been fixed for decades.

To understand this better, imagine that you were a company selling widgets for $1 each and according to your contract you cannot receive any more than that. Fast forward twenty or thirty years.  You are still selling lots of widgets and  still receiving $1 for each one you sell.  But your costs over the years have continued to climb.  And it also costs you more for everything you buy to maintain your standard of living.  And it’s not just you.  Everyone is paying more for everything.  Yet, on an ongoing, year-to-year basis, things seem reasonably normal.  But prices now are rising more frequently and the rate of increase is higher than before. What is going on?

The effects of inflation are showing up.  Those effects can be very subtle at first, or not noticed at all.  But at some point in time the cumulative effects of inflation become more obvious and everyone starts acting differently.  Businesses try to plan for it and individuals invest with inflation in mind.

If your dollars were freely convertible into equivalent amounts of gold based on the prices in effect at the time of your original contract to produce widgets – or sell barrels of oil – then you could just exchange your dollars for gold.  Which is exactly what happened.  Foreign governments in the late sixties began to demand the gold to which they were legally entitled.  And countries which produced and sold oil wanted a higher price for their oil.  Wouldn’t you?

As people become more aware of the effects of inflation they start looking for reasons.  And for guilty parties.  Government is quick to act of course.  They start by implementing wage and price controls.  This is like setting the stove burner on ‘high’ and putting a lid on the pot with no release for the pressure.  And they talk a lot.

They have talked enough over the past thirty years to frighten us into thinking that our own spending and saving habits are the problem.  Sometimes the blame is directed at foreign countries and their currencies (China/Yuan for example).

Our sense of ‘unfairness’ over China’s attempts to weaken the Yuan seem to be misplaced.  We criticize them for doing the same things the US government and Federal Reserve have been doing for over one hundred years.

The inflation (expansion of the supply of money and credit) produced by the Federal Reserve is deliberate and intentional. And ongoing.  The effects of that inflation are volatile and unpredictable.

Even with the hugely, inflationary response of the Federal Reserve in 2008 and afterwards we did not see the “obvious substantial increase in the general level of prices for goods and services” that some expected and predicted.  But we did see a resurgence of higher prices for financial assets like stocks and real estate.

During the seventies, prices for basic necessities were rising on a weekly, even daily, basis.  But things eventually settled down and we had an extended period of stability and relative US dollar strength for a couple of decades.

And yet, the effects of inflation are very clear.  How much are you paying  for things today compared to fifteen years ago?  Ten years ago?

As time marches on, the effects of government inflation will become more extreme and more unpredictable.  And the loss of purchasing power of the US dollar will reflect that.

 

 

Gold Price – US$700 Or US$7000?

Does either of the above preclude the other?  In other words, if we expect gold to reach $7000.00 per ounce, and we are correct, does that mean that we can’t reasonably expect gold to go as low as $700.00 per ounce? Conversely, if we are predicting or expecting gold to continue its current decline, and even breach $1000.00 per ounce on the downside, can $7000.00 per ounce, or anything even remotely close to that number, be a reasonable possibility?

I do not think either one precludes the other.  In fact, I think it is entirely possible that we can see both figures.  And not necessarily spread over an inordinately long period of time, either.

Here is a possible scenario that would allow that to happen.

As the US dollar continues to strengthen, the US dollar price of gold continues to decline.  This is clearly evident in the price action of gold since its high point of approximately $1900 per ounce in 2011. There is no way to know for certain how long the current dollar strength will last.  At some specific price point the two (US dollar, gold) will find equilibrium.  And it is reasonable that if ongoing dollar strength takes gold below $1000, it might come to rest somewhere between $860 – 890.00 per ounce.  In January 1980, gold peaked at $850.00.  Revisiting that number is plausible, and well within the realm of realistic speculation.  And, yes, there are technical indicators that point to a gold price of as low as $680-700.

But what type of economic conditions might accompany the reality of that price projection?

I think the consensus is that an ongoing stronger US dollar would be accompanied by a stronger economy.  That makes sense.  But what if it doesn’t happen that way?  What if the economy continues to struggle even more?  Remember, we have been subjected to huge creations of money and credit over the past eight years.  And that is on top of similar policies and actions by the Federal Reserve over the past one hundred years. Is our economy strong enough to weather the effects of attempted normalization/withdrawal?  And, furthermore, have we already ‘killed the patient’?

I believe that is exactly the question that is plaguing the Federal Reserve.  And the very reason they have struggled with firm decisions on altering their accommodative expansion of money and credit.  This is most obvious in their lack of decisiveness regarding interest rates.

Regardless of that, whatever the Federal Reserve has done – or hasn’t done – since 2011 (when gold peaked at $1900.00) has been interpreted positively, generally.  At least as far as the US dollar is concerned. Otherwise, we would not have seen the US dollar price of gold drop over that time to its current level of $1270.00 (and previously as low as $1040.00 in January 2016). But even with a stronger US dollar, the economy still struggles. And there are indications that it could get worse.  Regardless of the Fed’s attempts to avoid it, deflation is a very real possibility. An implosion of the debt pyramid and a destruction of credit would cause a settling of price levels for everything (stocks, real estate, commodities, etc.) worldwide at anywhere from 50-90 percent less than currently.  It would translate to a very strong US dollar.  And a much lower gold price.

Those who hold US dollars would find that their purchasing power had increased.  The US dollar would actually buy more, not less. But the supply of US dollars would be significantly less.  This is true deflation, and it is the exact opposite of inflation.  Of course, this would be accompanied by a complete collapse of any and all forms of real estate, commodities, stocks, etc. – pretty much any asset or item denominated in US dollars.

The most severe effects would be felt in the credit markets and in any assets whose value is primarily determined and supported by the supply of credit available.  Things would be much worse than what we experienced in 2008-12.  The biggest difference would be that the changes would result in  depression-like conditions on a scale most of us can’t even imagine.  And the depression would likely last for years, maybe even decades.

Imagine, if you will, that groceries, gasoline, and house rent cost half of what you now spend.  Whatever cash you have, or is available to you, would buy twice as much.  And you would have money available for other things.  Deflation, in and of itself, is NOT a bad thing.  Unfortunately, you might not have a job.  Or you might live in an area which experiences social unrest.  Also, there could be disruptions in transportation and the orderly supply and delivery of various goods and services.

As far as gold is concerned, its value will be determined by seeking a level that is inversely in accordance with whatever level of strength the dollar achieves. For example, if purchasing power of the US dollar increases by one hundred percent, generally speaking, then we can expect a fifty percent decrease in the US dollar price of gold.

It is quite reasonable to expect any and all of the things mentioned above.

What will make things worse will be intervention and interference by government.

Government hates deflation. And not because of any perceived negative effects on its citizens. It is because the government loses control over the system which supports its own ability to function. Inflation, fractional-reserve banking, enhanced supplies of money and credit are intentional creations of government. They are used to fund and reinforce the operation and grandiose plans of government.

Hence, we can expect government to respond decisively to any series of events which resemble those previously described. Their intentions would be clear. All efforts would be focused similarly to those employed in our previous brush with financial disaster just a few years ago. But don’t expect similar results.

The events themselves are a logical end result of a financial system which has overdosed on artificial stimulation; not entirely dissimilar to an addict’s reactions to long-term drug abuse.

Since each successive financial ‘fix’ requires a stronger dose to maintain the expected results, and since the ongoing systemic damage is cumulative, we reach a point that demands recognition of the problem, and then painful steps to resolve it successfully. The government and the Federal Reserve will not ever acknowledge the harm their policies have caused. And they will never take the steps necessary to ‘save the patient’.

And even if the attempt were made, the shock to the system would likely ‘kill the patient’ at this point. At best, they might be able to postpone the inevitable rejection.

What government definitely will do is ANYTHING AND EVERYTHING that they think will minimize, end, and reverse events which would bring about deflation.

Which is exactly what they did eight years ago. And they succeeded temporarily in keeping the patient alive. But we don’t really know how much systemic damage was done (i.e. exactly how much money and credit were created, how big is the Fed’s balance sheet and how badly inflated are the numbers, how under-capitalized are the banks). I assure you, it is much worse than anything we have been told.

Similar events today would bring about the price collapse in various markets which we discussed, as well as usher in deflation and a full-scale depression. All of this would be resisted on every front by government and the Federal Reserve. They would literally launch an all-out financial war (and maybe another real war, too) by opening the money and credit spigots full force in a futile attempt to reverse the credit implosion and negative price action of critical assets.

In effect, their efforts and intentions would be similar to those observed during the Great Depression of the thirties. The results, at best, would be similar (not productive), too. The depression in our scenario would also last much longer than needed. And the price declines which are necessary to correct the excesses of the past and cleanse the system would be countered every step of the way by regulations and programs of dubious value. The efforts of government would actually worsen things and prolong the suffering.

It is more likely, though, that the results would be much worse than anything we could expect. Even a relatively strong US dollar would be unable to survive the onslaught. In their efforts to ‘save the patient’, the government would ‘kill’ the dollar. We would likely find ourselves awash in money and credit created without regard to potential damage. All in order to stave off the inevitable results while ignoring their curing effects on a very ill economy.

As the reality of the ‘new’ Depression sets in, the failure of initial efforts by government will be seen more clearly. They will then step up their efforts. Damage to the US dollar would be reflected in the US dollar price of gold which could easily go from $700 to $7000 in months, maybe weeks.

By that time, the US dollar price of gold will be meaningless. What will be more important is owning physical gold. The turmoil, social unrest, and economic upheaval that accompanies a complete repudiation of the US dollar will probably set us back 50-60 years – or more – on a lifestyle basis.

So, if you are one of those who thinks that $7000.00 gold is right around the corner, better plan accordingly. And don’t discount entirely the possibility of deflation and $700.00 gold before your wish comes true.