Think About It
Let’s talk about inflation. It is certainly a perennial problem in America, so it should be of interest to everyone. We are taught that inflation is the result of wages and prices increasing. We are even taught to measure it by a government invention called the Consumer Price Index. The index compares current consumer prices to previous consumer prices to see how many more dollars you now need to buy the same products.
I would submit that we are putting the cart before the horse. The Consumer Price Index is really a measure of the “symptoms” of inflation, not the “disease” itself. I think we all agree that if there is only one horse in town available to buy, and everyone in town holds $2,000 on Tuesday; when suddenly the mayor graciously gives everyone another $2,000 each on Wednesday, the price of the horse just went up. This is called the law of supply and demand.
Thus, we would make the point that the “inflation disease” is properly defined as the artificial over-expansion of the money supply. Since our national currency is no longer backed by a commodity such as gold, it is called “fiat” money, meaning it can be arbitrarily created by decree. The authority to do this in the U. S. belongs to our Federal Reserve System. However, I am not yet one of those who would cry, “crucify them.” They should expand the money supply in amounts “equal to” any increased production, so that there will be enough money to buy every new product which we can physically produce. But since 1970, the U. S. money supply has actually doubled every 10 years, while GDP (production) has less than trebled in the entire 30 years. That works out to 800% money chasing 300% production. Remember the horse? The way the system works now, the act of printing actual greenbacks is not nearly as important as in the past. By controlling bank reserves, the Federal Reserve can create more money to put into checking accounts, without printing greenback dollars. Actually, about 2/3rds of our $100 bills are held by others in foreign countries.
History shows the real crux of the problem arises when our government wants to fight a war, but does not want to raise taxes to pay the new and extra expenses, nor to cut any present expenses. They meet the problem by “monetizing the debt”, or creating extra money. Our worst example is the Viet Nam conflict, and the Iraq conflict is not far behind.
A good example of inflation to the extreme can be found in Germany after World War I. At the outbreak of the war, Germany suspended the redeemability of its German “Mark”.By the end of the war, the money supply had quadrupled. By1920, prices were up 500%.Confidence in the mark weakened. By 1922, prices had increased another 700%, and yet the government still kept printing money. From mid-1922 to November 1923, hyper-inflation raged! By mid 1923, some workers were being paid 3 times a day, and their wives were meeting them each time; and then rushing frantically to buy goods before the shops were empty. People needed a wheelbarrow of money to buy a loaf of bread. It is said one woman burned money in the stove, because it was cheaper than buying wood. Finally, the government stepped up to the plate. They printed 2.4 billion new “Rentenmarks” to replace the old marks at the unbelievable exchange rate of one rentenmark for one TRILLION marks. But, they committed that no more rentenmarks would be printed, and they severely limited borrowing. Drastic new taxes were imposed, and by 1925, the crisis was over.
If you remember our interest rates of the early 80’s, you saw an example of our government stepping up to the plate, in the form of The Federal Reserve. Interest rates reached 21% on home mortgages. This was a direct result of LBJ escalating Viet Nam, while spending domestically on a “great society”; followed by Nixon, who wanted a landslide re-election in 1972. But, when borrowing is reduced, the money supply automatically shrinks. We finally overcame that inflation, but a lot of people lost their shirts. We are nearing another crossroads. Our debt has mushroomed to nearly $9 trillion (That is 9 million x one million). We are monetizing the debt. We must start to pay it off.
Friday, October 12, 2007
Wednesday, October 3, 2007
U S GOLD RESERVES
Think About It
There is more gold in the Federal Reserve Bank of New York vault than there is in Fort Knox, Kentucky. Unfortunately, most of it does not belong to the United States. It is the gold reserves of foreign nations, on deposit there because it is yet considered the safest bank in the safest country in the world. The U. S., arsenal of democracy during World War II, is said to have owned about 20,000 metric tons of gold at war’s end. It is now reported that we own only about 8,000 metric tons, but there has not been a gold audit in nearly 10 years. The bulk of the loss occurred during the Johnson administration, although it started with the Kennedy administration. Finally, in 1971, Nixon was forced to stop redeeming dollars for gold, because of the continuing international rush to redeem. He abrogated the Bretton Woods Accord, an international post war agreement which required us to redeem our dollars for gold to all other nations.
At the market rate of about $660 U. S. per ounce, our U. S. gold should currently be worth about $186 billion. Yet our government owes almost $9 trillion in debt. M1 is the measure of our most liquid forms of money. Thus it includes all greenbacks in circulation, plus all checking accounts, plus all bank money market accounts. In September, 2006, the M1 value was reported to be $1,357 billion. That means every liquid dollar, not every dollar, conceivably was backed by about 7 cents worth of gold. However, it does not really mean that, because dollars cannot be redeemed for anything else of value, they are simply Federal Reserve Notes. Our domestic redemption right has gradually disappeared during the nearly 100 years the Federal Reserve has existed.
Now please understand. I am not an anarchist. I do not advocate overthrow of the U. S. government, but it could sure use some major remodeling. I do not even claim to have all the answers. But, I do assert that most of the problems are the result of ever growing trade deficits with the rest of the world, and continued profligate Federal spending domestically. The U. S., which was a producer nation for the first half of the 20th century, became a consumer nation in the last half. Most of the manufactured and assembled products we purchase and enjoy now come from the far-east, on borrowed money.
The idea of world free trade has backfired on us. Nissan, even in its American plants, pays straight time of $14 to $23 per hour; while GM pays $25 to $29 per hour. But the real killer for GM is that in the 1950’s, they promised to pick up all employee medical costs, 30 year-and-out retirement pensions, and post retirement medical benefits. Ford and Chrysler were doing about the same thing. It did not show up then as costs, allowing for huge profits. Now it is eating them alive. The first car I bought was a brand new 1954 Ford Customline club coupe, which cost me $1,854. What will that buy you now? GM is said to be now spending $1,525 per car just on medical benefits, more than they spend on the steel included in the car. As their production goes down, their cost per car goes up. No wonder both GM and Ford bonds are rated junk status, below BBB.
America must once again become a producing nation! And we as citizens must realize the government cannot give us anything. We are the government. Would you birth a child and then abdicate any responsibility for its raising? If the answer is “No”, then you must not abdicate your responsibility to control your government. Federal, state and local governments all belong to you. You are the lord, not the vassal. But your control is in your vote alone. Never should you vote for anyone running for office without a thorough study of each candidate’s character and the issues involved. In doing this, my suggestion is to use television only as your last resource.
There is more gold in the Federal Reserve Bank of New York vault than there is in Fort Knox, Kentucky. Unfortunately, most of it does not belong to the United States. It is the gold reserves of foreign nations, on deposit there because it is yet considered the safest bank in the safest country in the world. The U. S., arsenal of democracy during World War II, is said to have owned about 20,000 metric tons of gold at war’s end. It is now reported that we own only about 8,000 metric tons, but there has not been a gold audit in nearly 10 years. The bulk of the loss occurred during the Johnson administration, although it started with the Kennedy administration. Finally, in 1971, Nixon was forced to stop redeeming dollars for gold, because of the continuing international rush to redeem. He abrogated the Bretton Woods Accord, an international post war agreement which required us to redeem our dollars for gold to all other nations.
At the market rate of about $660 U. S. per ounce, our U. S. gold should currently be worth about $186 billion. Yet our government owes almost $9 trillion in debt. M1 is the measure of our most liquid forms of money. Thus it includes all greenbacks in circulation, plus all checking accounts, plus all bank money market accounts. In September, 2006, the M1 value was reported to be $1,357 billion. That means every liquid dollar, not every dollar, conceivably was backed by about 7 cents worth of gold. However, it does not really mean that, because dollars cannot be redeemed for anything else of value, they are simply Federal Reserve Notes. Our domestic redemption right has gradually disappeared during the nearly 100 years the Federal Reserve has existed.
Now please understand. I am not an anarchist. I do not advocate overthrow of the U. S. government, but it could sure use some major remodeling. I do not even claim to have all the answers. But, I do assert that most of the problems are the result of ever growing trade deficits with the rest of the world, and continued profligate Federal spending domestically. The U. S., which was a producer nation for the first half of the 20th century, became a consumer nation in the last half. Most of the manufactured and assembled products we purchase and enjoy now come from the far-east, on borrowed money.
The idea of world free trade has backfired on us. Nissan, even in its American plants, pays straight time of $14 to $23 per hour; while GM pays $25 to $29 per hour. But the real killer for GM is that in the 1950’s, they promised to pick up all employee medical costs, 30 year-and-out retirement pensions, and post retirement medical benefits. Ford and Chrysler were doing about the same thing. It did not show up then as costs, allowing for huge profits. Now it is eating them alive. The first car I bought was a brand new 1954 Ford Customline club coupe, which cost me $1,854. What will that buy you now? GM is said to be now spending $1,525 per car just on medical benefits, more than they spend on the steel included in the car. As their production goes down, their cost per car goes up. No wonder both GM and Ford bonds are rated junk status, below BBB.
America must once again become a producing nation! And we as citizens must realize the government cannot give us anything. We are the government. Would you birth a child and then abdicate any responsibility for its raising? If the answer is “No”, then you must not abdicate your responsibility to control your government. Federal, state and local governments all belong to you. You are the lord, not the vassal. But your control is in your vote alone. Never should you vote for anyone running for office without a thorough study of each candidate’s character and the issues involved. In doing this, my suggestion is to use television only as your last resource.
Monday, October 1, 2007
THE GOLD STANDARD
Think About It
In 1792, the dollar of this country was pegged to silver and gold, or a bi-metallic standard. Dollars could be exchanged with the government on demand for a set amount of gold or silver. In 1862, because of the Civil War, the government issued paper money without metallic backing for the first time. After the war ended, a financial panic ensued. In 1875, the link to metal was re-established. In 1900, the bi-metallic standard was abandoned, and the dollar was made equal to gold, at $20.67 per ounce. In 1933, Franklin Roosevelt passed a law outlawing Americans owning gold, with the government redeeming all of it. The next year, he re-valued gold to $35 per ounce, thus de-valuing the dollar by 41% overnight. But, still, it took World War II to end the depression.
By the end of World War II, the United States was recognized as the strongest free country in the world, with most of the world’s gold. During 1944, the allied countries all met in Bretton Woods, New Hampshire to devise a way to rebuild the world economy. It was agreed the U. S. dollar would be fixed at $35 per ounce of gold, and all nations would peg their currency to it. The United States would now redeem U. S. dollars in gold for all nations at $35 per ounce. The dollar had now replaced the British pound sterling as the world standard. But the U. S. was soon to become a consumer rather than a producer, running huge trade deficits with other countries.
By 1961, with U. S. gold reserves falling fast, John F. Kennedy led in forming the “London Gold Pool”. The U. S. would match gold contributed by 8 other nations, and deposit it at the Bank of England. The Bank of England would buy and sell gold into the market to keep $35 per ounce stable, within 20 cents. Redemption demand continued to rise! In 1968, under LBJ (guns and butter), there was an international run on U. S. gold. England, at the request of the U. S., actually closed the London gold market for 2 weeks. When it re-opened, there was a 2 tier gold market. Central banks would continue to honor the $35 price to each other, but the private gold market would be allowed to find its own level. Then, in 1971, foreign governments requested redemption of another $3 billion U. S. dollars. Richard Nixon removed the dollar from the Bretton Woods agreement; refusing to redeem other nation’s dollars for gold, and effectively taking the dollar off the gold standard. Before long, U. S. authorities reached an agreement with Saudi Arabia, the world’s largest oil producer, to sell oil for U. S. dollars, exclusively, for all worldwide transactions. This means U. S. dollars are figuratively backed with OPEC oil rather than gold. Thus was born the “petrodollar”. In return, the U.S. promised to protect the OPEC countries from foreign invasion or domestic coup. Remember Kuwait?
But, in 2000, Saddam Hussein of Iraq, announced his oil would be sold only for Euro’s, not U S dollars. Shortly thereafter, he switched his $10 billion UN reserve fund from dollars to Euro’s. Since then, the Euro has re-valued upwards from 82 cents to $1.33 against the US dollar. Iraq has the world’s 4th largest oil reserve. If all 11 OPEC countries switched to the Euro for oil sales, the dollar would probably deflate another 20 to 40%. Could this be seen as a problem warranting an invasion? About 2 months after Saddam’s fall, Iraq oil sales and its UN reserve fund both reverted to the U. S. dollar.
Neighbor Iran has the world’s 3rd largest oil reserve. Historically, oil has been traded on only 2 exchanges. The U. S. NYMEX, and the British IPE. Iran is setting up a new oil exchange that will trade in Euro’s. It is called the Iranian Oil Bourse (French for exchange). What might this do to the value of the U. S. dollar? What would be its effect on U. S. / Iran relations?
In 1792, the dollar of this country was pegged to silver and gold, or a bi-metallic standard. Dollars could be exchanged with the government on demand for a set amount of gold or silver. In 1862, because of the Civil War, the government issued paper money without metallic backing for the first time. After the war ended, a financial panic ensued. In 1875, the link to metal was re-established. In 1900, the bi-metallic standard was abandoned, and the dollar was made equal to gold, at $20.67 per ounce. In 1933, Franklin Roosevelt passed a law outlawing Americans owning gold, with the government redeeming all of it. The next year, he re-valued gold to $35 per ounce, thus de-valuing the dollar by 41% overnight. But, still, it took World War II to end the depression.
By the end of World War II, the United States was recognized as the strongest free country in the world, with most of the world’s gold. During 1944, the allied countries all met in Bretton Woods, New Hampshire to devise a way to rebuild the world economy. It was agreed the U. S. dollar would be fixed at $35 per ounce of gold, and all nations would peg their currency to it. The United States would now redeem U. S. dollars in gold for all nations at $35 per ounce. The dollar had now replaced the British pound sterling as the world standard. But the U. S. was soon to become a consumer rather than a producer, running huge trade deficits with other countries.
By 1961, with U. S. gold reserves falling fast, John F. Kennedy led in forming the “London Gold Pool”. The U. S. would match gold contributed by 8 other nations, and deposit it at the Bank of England. The Bank of England would buy and sell gold into the market to keep $35 per ounce stable, within 20 cents. Redemption demand continued to rise! In 1968, under LBJ (guns and butter), there was an international run on U. S. gold. England, at the request of the U. S., actually closed the London gold market for 2 weeks. When it re-opened, there was a 2 tier gold market. Central banks would continue to honor the $35 price to each other, but the private gold market would be allowed to find its own level. Then, in 1971, foreign governments requested redemption of another $3 billion U. S. dollars. Richard Nixon removed the dollar from the Bretton Woods agreement; refusing to redeem other nation’s dollars for gold, and effectively taking the dollar off the gold standard. Before long, U. S. authorities reached an agreement with Saudi Arabia, the world’s largest oil producer, to sell oil for U. S. dollars, exclusively, for all worldwide transactions. This means U. S. dollars are figuratively backed with OPEC oil rather than gold. Thus was born the “petrodollar”. In return, the U.S. promised to protect the OPEC countries from foreign invasion or domestic coup. Remember Kuwait?
But, in 2000, Saddam Hussein of Iraq, announced his oil would be sold only for Euro’s, not U S dollars. Shortly thereafter, he switched his $10 billion UN reserve fund from dollars to Euro’s. Since then, the Euro has re-valued upwards from 82 cents to $1.33 against the US dollar. Iraq has the world’s 4th largest oil reserve. If all 11 OPEC countries switched to the Euro for oil sales, the dollar would probably deflate another 20 to 40%. Could this be seen as a problem warranting an invasion? About 2 months after Saddam’s fall, Iraq oil sales and its UN reserve fund both reverted to the U. S. dollar.
Neighbor Iran has the world’s 3rd largest oil reserve. Historically, oil has been traded on only 2 exchanges. The U. S. NYMEX, and the British IPE. Iran is setting up a new oil exchange that will trade in Euro’s. It is called the Iranian Oil Bourse (French for exchange). What might this do to the value of the U. S. dollar? What would be its effect on U. S. / Iran relations?
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