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It is well enough that
people of the nation do not understand our
banking and monetary
system, for if they did, I believe
there would be
a revolution before tomorrow morning.
Henry
Ford
When a government spends
more than it collects, logically, there is a gap to fill.
Depending on the
sophistication and popularity of the government, it can fill this gap in 2
ways:
- Issue IOUs (Treasury Notes) to raise money
- Print Money
When the government of Brazil
ran a large budget deficit in the 1990s, it began to print money and spend
it. Hyperinflation followed and they eventually replaced the old “cruzeiro real” currency with the new
“real”.
Of course, the banking
systems of developed Western nations are a lot more sophisticated and
governments are disciplined with their spending, right?
Debt US treasury chart
 
US GDP chart
since 1980
The charts above clearly
demonstrate that over the last decade those IOU’s are being issued at a
more rapid pace than they are being repaid. The debt growth rate is now
higher than GDP growth, a recipe for eventual hyperinflationary outcome.
Institutional and federal
banks around the world are mainly an extension of their respective
governments. Through fractional reserve banking, those banks have unlimited
supply of paper money to buy things*, including the purchase of IOUs issued
by the government or anyone else.
Banks can issue dollars at
no cost, and lend it to the US
government through various public and private vehicles. The end effect of
issuing treasury notes is no different from direct money printing.
Money printing is cleverly
disguised through these tiered levels of the banking system, that’s why
so few care, and hence the quote from Henry Ford above.
While some supply-side
economists argue that enhanced budget-deficit spending is for the good of the
people and therefore shouldn’t be frowned upon so much, central banks
and governments have now taken advantage of the financial illiteracy of the
public to another level.
With millions of Americans
now unable to meet house payments, and mortgage-backed securities liquidity
completely dried up, the government and the Fed are taking unprecedented
fiscal and monetary steps to maintain the fragile fiat money system.
- They are looking into “forgiving”
certain amount of mortgage loans by distressed borrowers on a
nation-wide scale.
- They have injected about half a trillion
dollars to the banking system, allowing any outfit qualified as an
“institution” to borrow as much as needed, with the option
to extend repayments until the they have the ability to pay.
In plain English, this is
akin to the government saying that: because everyone is so indebted but we
still need to keep the system going, to the consumers we will just forgive
some of your loans so your debt can come down to a reasonable level and you
can begin borrowing again; and to the institutions we will lend you as much
as you need for as long as you needed until whatever problems you have go
away. All the checks and balances in maintaining even the illusion of a sound
banking system have been blown away, and we are seeing direct money printing
in its naked form.
There is only one place to
go to preserve wealth in times like this: Gold
Witnessing the breach of
key resistance level of $700, we are ready to embrace the most spectacular
rise in gold since the gold bull started in 2001 at $250. Gold is primed for
$850 and beyond in 2007. We see now as the optimal entry point.
Gold Break-Out Chart
*The Fed and ECB have both
publicly come out and said to lend whatever support necessary to keep the
credit market afloat. They allowed Bank of America, JP Morgan, and Wells
Fargo to issue unlimited amount of credit from the banking division to the
brokerage division where debt purchases took place.
By :
John Lee, CFA
Goldmau.com
John Lee is a portfolio manager at
Mau Capital Management. He is a
CFA charter holder and has degrees in Economics and Engineering from Rice University.
He previously studied under Mr. James Turk, a renowned authority
on the gold market, and is specialized in investing in junior gold and resource
companies. Mr. Lee's articles are frequently cited at major resource websites
and a esteemed speaker at several major resource
conferences.
Please visit www.GoldMau for instant market alerts and stock updates.
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