More on Deficits, Dollars and Gold...

This is a small excerpt from the latest monthly newsletter pubished by Jim Dines.  Over the past 30 years, Dines has probably been the most accurate macro-trends forecaster on earth (http://www.dinesletter.com/):

"Thus it was when the American Congress projected a cumulative 2010-2019 deficit of $9 trillion instead of the $7 trillion previously estimated, we were shocked that nobody protested or even gasped as the number was even greater than one light year! Personally, we believe that the deficit will be closer to two light years, and those who trust that this will end well are not on the same planet. Maybe we are the aliens, but we can hardly understand how Congress could vote for so much deficit spending with a straight face. Whether they just don’t give a damn, or hope to be safely dead by the time it hits the fan is beyond us to comprehend. Fair-minded people could object to that kind of spending no matter who the president is, but such spending deficits per se arouse in us a deep sense of foreboding. Worse, America’s deficit continues to widen, due to rising imports of autos, oil and computers, even while home foreclosures reach a new high. Jobless numbers are down, but Washington fraudulently excludes those who are so discouraged that they have abandoned looking for a job. How does America nonetheless thrive? By the sleight-of-hand trick of just printing money, America’s leading export, going gleefully ever deeper into debt and hastening the day of "The Coming Currency Crisis" for which we have prepared you with the long-term stocks in Supervised List #3, facilitated by a recently reappointed "Helicopter Ben" Bernanke who seems as blissed-out by out-of-control spending as a teenager with his/her first credit card. Unsurprisingly, gold bullion reached a new high at $1020.50/oz in London. One of the points in our recent (IWB) Interim Warning Bulletin, was the tremendous rally in gold bullion, having completely recouped its loss from the ’08 Crash, should now be outperformed by gold-mining shares as they catch up. America’s soaring debts could hardly be more bullish for gold, since the yellow metal is money that represents differing amounts of paper money in various countries."

I want to follow-up that prescient Dines' commentary with an anectdotal story about the U.S. dollar and it's worth as a currency.  This was a reader contribution to tonight's Midas report, available on http://www.lemetropolecafe.com/:

"On another note regarding the all mighty US dollar, I thought you might enjoy the following: My wife returned last week from a business trip to Madrid. On the way back she decided to stop at the duty-free store at the airport to pick-up a couple of bottles of one of Spain's great red wines. When my wife went to pay for the order with good ole American variety greenbacks, the cashier responded that she was sorry but that the store does not accept dollars for purchases but she could pay with either Euros, Swiss Francs, Yen or Yuan ! I guess the dollar really isn't the world's reserve currency afterall!"

Think about the implications of that story.  What is the true worth of the U.S. dollar if you are unable to use it to pay for goods and services outside of the United States?   I have heard several accountings of people who have been travelling through Europe over the past year in which local merchants in several countries refused payment for goods in U.S. dollars.  This problem for dollar-toting American tourists is going to become ubiquitous around the world.  What then?  I guess it is irrelevant as to whether or not the U.S. dollar is the global reserve currency when that dollar has absolutely no value anywhere except inside the U.S.

As for short-term and longer-term price targets for gold, right now it's anyone's guess.  To put a price target in terms of dollars is probably irrelevant, because - by the time the bull market in gold ends - I doubt the U.S. dollar as we know it now will exist.  If that's the case, the best exercise is to figure out your price targets in terms of euros, rupees or yuan.  But for now, I think the following chart is a good starting point for dollar-based guesstimates.  This was sourced, again, from tonight's Midas report:

"Relentlessly the dollar is being abandoned worldwide. Unfortunately, the other G-20 currencies are not much better and that is why gold is so important. Keeping liquidity running into the system hasn’t worked and can’t work"  - Robert Chapman, International Forecaster

Guess Who Said This:

“U.S. Dollars have value only to the extent that they are strictly limited in supply. But the U.S. Government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. Dollars as it wishes at essentially no cost.” (1)

Think about what that statement means for a minute, specifically as it applies to a currency system in which a single currency is the currency which is mandated to serve as the global reserve currency - i.e. the 1944 Bretton Woods Agreements - for all global trading activities.  And then think about what that statement above means when the country which happens to issue the global reserve currency - originally meant to be "anchored," i.e. supply-constrained by gold - decides to disconnect the anchor to gold and freely create as much supply of that currency as it wishes. 

We have actually witnessed what happens in that case, as the value of the U.S. dollar, after 38 years of basically unfettered supply creation, has lost 80% of its value since 1971, when Nixon closed the gold window (meaning that Nixon thus decreed that U.S. dollars would no longer be exchangeable into gold by foreign central banks wishing to do so).

Getting back to the quote above, Ben Bernanke made that statement in the infamous speech in which he proudly announced that he could prevent deflation by dropping unlimited amounts of dollars from helicopters if he had to (he actually bastardized what was mostly likely a sarcastic comment by Milton Friedman).  Ben was thus perjoratively labelled, "Helicopter Ben." (Think about how disgraceful it  is for a tenured professor from Princeton to be known by well-educated people as either "Helicopter Ben" or "Banana Ben").

The problem is that Helicopter Ben could ultimately print dollars to the point were the value of each marginal dollar is equal to the marginal cost of printing that dollar. In the case of our modern printing press technology, in which the marginal cost of printing dollars is close to zero,  theoretically the supply of dollars can be close to infinite, conversely inflation can theoretically approach infinity - and, tautologically, the value of the dollar can approach zero.

When you have the ability to print up the pieces of paper which are legally mandated to be used in exchange for goods of intrinsic value - oil for instance - the issuer of the pieces of paper can theoretically render that oil worthless.  That being the case, rest assured that the producers of goods with intrinsic value - oil for instance - will eventually deny the ability to trade those printed pieces of paper in exchange for oil.  In fact, I would bet that ultimately those producers of oil will eventually require any exchange for oil to involve either gold, or a piece of paper unequivocally backed by gold, which means the holder of that paper can turnaround and exchange the paper for gold from the issuing coutry's Central Bank.

Apparently there has been much ado about nothing over comments made by a well-followed blogger in which said blogger claims, using remarkably vacuous examples, that having reserve status of one's currency is irrelevant.  I'm not sure why anyone has given that commentary anything more than a good laugh.

(1)  Ben Bernanke, Remarks to the National Economists Club,  Washington, DC, 11/21/2002

The Beginning Of The End For The U.S. Dollar

The Independent, a British newspaper, is reporting that discussions are being held among Gulf Arab Countries, China, Russia, India, Brazil, Japan and France to end the use of U.S dollars in global oil trade. The 1944 Bretton Woods Treaty established the U.S. dollar as the world's reserve currency.  A primary reason the Treaty was accepted was that, at the time, the U.S. dollar was backed by the Country's gold reserves. When BW became operational in 1945, all global trade  - most important, all oil trading - was transacted using U.S. dollars.  Now, there is a global movement to replace the U.S. dollar as the currency used to settle oil trading: 

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars. The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years.  (Article Link)

This development should not come as a surprise to anyone paying attention to public statements being issued by China and other economically powerful countries.  Ever since Nixon dislocated the dollar from its gold-backing in 1971, the U.S. Government and the Federal Reserve have embarked on 38 years of extraordinarily reckless - ultimately catastrophic - fiscal and monetary policies.  Policies which allowed the middle class to feign prosperity, while the business and political elite have engaged in years of escalating fraud and corruption, culminating in the consolidation of wealth and power into the hands of very few people and have completely sabatoged our Constitution and system of democracy.  Policies which furthermore have inflicted a continual and insidious devaluation of the U.S. dollar currency reverves being held by every other country in the world, especially the massive dollar reserves held by China and Japan.

It was the recycling of these petro/export-based dollars back into the U.S. via Treasury bond purchases by the OPEC countries, Japan and China that allowed the U.S. to run its now trillion-dollar spending deficits and 12 trillion dollar Treasury debt outstanding.  It should have been clear to everyone long before we reached this tipping point that this behavior by the U.S. was unsustainable.  And now it looks like the rest of the world is going to force the issue by pulling the rug out from under the U.S. dollar, thereby ultimately ending the U.S. system as we've known it since the end of World War Two.

This could well be the event which precipitates the escalation of "quantitative easing," aka monetary printing press policy, by the Fed.  In the 2nd quarter of 2009,  Bernanke's Federal Reserve purchased 50% of all the Treasury bonds issued by the Government.  If our trading partners no longer need to recycle their dollar reverves back into our financial system, we could well see the monetary hyperinflation that a small but growing number of financial commentators have warned is inevitable, as the Fed would be forced to print even more money in order to finance U.S. spending deficits.

The bottom line is that, while Americans are being well-fed by Bernanke and Obama with the illusion that the recession is over and economic prosperity is right around the corner, the rest of the world is preparing funeral arrangements for the U.S. financial system.   Anyone who wants to preserve some modicum of their remaining wealth would be advised to shift as much money as possible into gold, silver and mining stocks.  Do not be the last one out of the dollar.

This Sums Up Where We Are Now in the U.S...

"When you see that trading is done, not by consent, but by compulsion — when you see that in order to produce, you need to obtain permission from men who produce nothing — when you see money flowing to those who deal, not in goods, but in favors — when you see that men get richer by graft and pull than by work, and your laws don’t protect you against them, but protect them against you — when you see corruption being rewarded and honesty becoming a self-sacrifice — you may know that your society is doomed" … Ayn Rand

Why Gold?

For roughly 90% of the 5000 years of recorded history, gold has functioned as civilization's primary transactional currency.  One of mankind's perpetual questions is, "why gold?"  Jim Grant, of "Grant's Interest Rate Observer" dug up this quote from one of the foremost authorities on the pricing and role of gold over several centuries in national and world economies (kudos to zerohedge.com for posting excerpts from Grant's newsletter today):

"Gold has two interesting properties. It is cherished and it is indestructible. It is never cast away and it never diminishes, except by outright loss. It can be melted down, but it never changes its chemistry or weight in the process. Its price has been remarkably similar for centuries at a time. Its purchasing power in the middle of the twentieth century was very nearly the same as in the midst of the seventeenth century" (source:  Jim Grant via http://www.zerohedge.com/).

I'm guessing that it's a given that the fine people at Zerohedge have nary a clue as to who Roy Jastram was. Jastram was an economics professor, among other things, at UC Berkely from 1946-1983.  Jastram's signature work on the subject is a book entitled "The Golden Constant," which earned him many accolades of distinction, including election to the venerably aristocratic Athenaeum Club in London.  I have not read this book yet but it is near the top of my reading list.

Just as a point of reference, Jastram's empirical work on the value of gold through the centuries goes all the way back to 1343 A.D.  For an excellent numerical example of how gold maintains its value against the dollar, see my post here from September 30:  LINK

What Does AIG Have to Hide?

Clusterstock.com reports that: 

AIG's computer network blocks employees from accesssing the governement's financialstability.gov site, according to a person at AIG. The site explains and tracks TARP and other financial bailout programs.  According to AIG's network, FinancialStability.Gov is a "malicious website" (here's the AIG blocks access to the truth )

And here's the link to the website AIG is blocking from employees:  financialstability.gov

I suppose that this isn't really a big deal, since any employee at AIG can go have some fun with this website when they go home at night.  Given that this is the case, we have to wonder why the upper management at AIG would do something like this, especially when the only end that it accomplishes is to have this action brought to the public's attention.  Clusterstock.com wouldn't have even known about this website if it didn't make the news like this.

The REAL issue here is WHY would AIG's big brass, all of whom have participated in paying themselves millions in bonuses funded by the Taxpayers, want to prevent people from looking into what kind of information is available on this Government website?  Perhaps the only "malicious" content on this website is the information that tracks down just how much money went into the pockets of the people running AIG and the Big Banks who were bailed out as a result of AIG's failure.  I suspect eventually that this website might mysteriously disappear?

From The "Just Unbelievable" Department:

Obama Administration Approves $10.5 Million Pay Package For AIG Chief - here's the link: What A Tragic Waste

Is Obama a Robin Hood in reverse?  A Robbing Hood, perhaps?  I guess you could call this Obama's "Trickle Up" Theory - socialism for the wealthy.

Let's think about this for a moment.  AIG should have been allowed collapse from the beginning.  But it is being used as a thinly veiled conduit to transfer billions from the the Taxpayer to the big Wall Street banks - first and foremost Goldman Sachs - in order to cover Wall Street's derivatives exposure to AIG.  And it owes the Government (i.e. the Taxpayer) $120 Billion that will NEVER be repaid: Link to AIG invoice

To me it's absolutely insulting to my intelligence that Obama and his gang keep this charade going, dressing up this corpse with a CEO, who is being paid millions in taxpayer dollars, and waving it around in front of us in an attempt to convey the illusion that AIG is alive.  Why not just bury AIG and give Obama's Wall Street supporters the same kind of guarantees that stand behind Fannie Mae and Freddie Mac, and soon the FDIC and the FHA?  At least we, the Taxpayers, would save the expense of operating AIG. 

When will this fraud and corruption end?

Will the wind ever remember
The names it has blown in the past
With its crutch, its old age, and its wisdom
It whispers, "No this will be the last"
And the wind cries Mary (James Marshall "Jimi" Hendrix)