Monday, October 5, 2009

Finding Shelter From Unrestrained Money Printing

There is an outcry of investors who worry about the consequences of unimpeded printing of dollars, as it increases the danger of hyperinflation. Can our unbacked fiat money system survive the aggressive monetary policies of the central bank? If the history of fiat money is any indication, gold investment is as attractive as ever. For more on this, see the following post from The Prudent Investor.

Neither CNBC, the Bull Street Journal or the Debt Times have covered the latest earth-shaking news reported in the new media concerning gold price suppression by governments and central banks. Let me first send respectful hat tips to Zerohedge, and GATA who all came out in the last 2 weeks with official documents that prove that especially the USA has a most vital interest to keep the price of gold as low as possible. Please check out all three sources to find links to countless official declassified documents that deal with the hot issue of gold manipulation.

Looking at the 10-year chart shows that all multi-billion operations by central banks in the gold market have led to nothing else than the current near-to-record prices although these institutions can short gold unlimited via futures markets.

The fear of a gold price that would correctly mirror the uncountable money printing excesses which show us that central banks are no more than one-trick-ponies. Take away their privateering privileges of creating money out of thin air and it becomes understandable that tireless Congressman Ron Paul wants nothing less than abolishing the Fed.

While Ron Paul has still many hurdles in front of him he at least nurses a strongly growing community supporting him.

Happy USA - it has at least a few million citizens who understand the biggest ponzi scheme in history, AKA Federal Reserve Notes (FRN) created by the trillions nowadays, and who begin to fight this scheme that led to the impoverishment of every generation in the last 3 centuries.

The Situation in Europe is Sad at Best
The situation in Europe is sad at best. I presume that the number of Europeans understanding the diabolic actions of central banks which always ended in hyperinflation would not fill more than a small town concert hall.

While Fed Chairman Ben Bernanke encounters a more and more aggressive environment on his trips to Congress and Senate, ECB President Jean-Claude Trichet can still get away with such blatant disinformation in the European Parliament (EP) like the following 5 bullet points presented to EU politicians on September 28:

1. First, we have fully accommodated banks’ liquidity needs at fixed interest rates.
2. Second, we have further expanded the list of assets eligible as collateral.
3. Third, we have further lengthened the maturities of our refinancing operations.
4. Fourth, we have provided liquidity in foreign currencies, notably the US dollar, to address the need of euro area banks to fund their dollar assets.
5. Fifth, and finally, we have launched a direct covered bonds purchase programme to support financial markets.

You don't have to be an expert to get angry on the nonsense Trichet tells a generally disinterested EP with no second-guessing of his elaborate speeches that hide the simple process of creating unbacked fiat money by the shipload below a couple of technical terms that work like Quaalude on the EP members.

Trusting that my readership knows about the undeniable fact that so far all experiments with unbacked money ended in hyperinflation I nevertheless want to point out that the abolition of metal standards - gold and/or silver - had at least one positive fact: All kingdoms and empires collapsed, beginning with the revolution in France in 1789 that became the first democratic republic and set a precedent for the rest of the world. Monarchic rulers have only survived on a representative level and they are certainly a proper looking circle for ribbon-cutting ceremonies of all kinds.

Allow me to point you again to the 3 sources in the first paragraph of this post (and save me from uploading PDFs when they can be found there easily) that show us that the real power has moved from policymakers to central banks since the USA abandoned the gold standard in 1971 under a pardoned criminal by the name of Richard Nixon.

The gold standard is most uncomfortable for politicians as it would limit their spending. After almost 4 decades where the public was talked out of gold with the main argument that gold is the relic of a past of un-sophisticated finance, gold is stronger than ever.

Gold has Never Lost its Value in 6,000 Years
Gold has never lost its value as all fiat currencies did and it is the last measure we have to calculate real inflation. If you were told that a bag of potatoes cost 3 guilders or 6 florins or 1 mark some decades ago you would not be able to get down to the real price. But if you are parsing historical price statistics and you find out that one troy ounce bought you 100 bags of potatoes it becomes pretty easy to compare it with current prices.

But this probably the last thing those in charge of the financial world want. Inflation can fool people for a long time as every history of a fiat currency begins with the soothing effect that everybody feels richer.

But there is also another undisputed pattern in the history of unbacked money. The trust about its purchasing power took always only a few months, e.g. Germany's hyperinflation, that collapsed in less than 2 years and set the ground for the rise of Adolf Hitler which then led to the demolition of Europe.

In my opinion it is astonishing that in the presently running ruination of the Western world because of unbacked paper money any discussion dogmatically avoids a return to metal backed money. While China's central bank governor favored a commodity based currency last March in a most interesting article I cannot agree to use a commodity basket as backing for a new international monetary system. All commodities are too volatile and can be manipulated in many ways. Just imagine Russia/China/India announcing that their grain stocks have been erased because of bacterial contamination.

There is only one solution to arrive at a stable monetary system: The paper money must be backed by gold and/or silver as they are a value in itself. This worked well for 5,700 years. It would be better for the world to return to this old fashion instead of wasting more time discussing how to repair the monetary system with the same built in weaknesses that have disowned every generation since 1720.

This post has been republished from Toni Straka's blog The Prudent Investor.

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