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September 25, 2005 - For over
four decades, observant and open-minded individuals have become deeply
concerned about the future of our great nation. They refused to accept the
rosy official and media testimony regarding our nation's fiscal and monetary
integrity. Similarly, they did not believe the negative rhetoric directed
towards gold. Just as these independent thinking and far-sighted people
recognized that one plus one would always equal two they also knew that no
one, nor no nation, could create something from nothing. Throughout this
period they witnessed the U.S. government and the Federal Reserve banking
system work together to create U.S. dollars from thin air, in order to
finance our growing national budget deficits. It was not only obvious to
these people that inflation must result from our government's actions, but
that numerous economic and financial distortions would occur and likely
ultimately spawn a serious economic decline. They had learned from history of
the damage that accrued to the lives of the common man, whenever a nation
debased its currency.
Stable prices within an
economy are produced when there is a balance between the purchasing media in
its financial system, and the amount of goods and services offered on its
markets. However, when the dollar value of the available items and services
remain essentially constant, but a country's money stock is increased, the
additional monetary units will over time act to bid up their domestic prices.
This is what has occurred in America during the past six decades, since the
U.S. left the Gold Standard. It is the underlying cause of the loss of the
dollar's purchasing power.
According to extensive
research performed by the outstanding American Institute for Economic
Research (AIER, Great Barrington, Massachusetts), "For roughly 150 years
after the Mint Act of 1792, by which Congress established and defined the
Nation's currency, the purchasing power of the dollar fluctuated in a
relatively narrow range. At the end of World War II, the price level was
close to the peaks (and the purchasing power close to the troughs) reached
after the War of 1812, the Civil War, and World War I".
During the preponderance of
this period the dollar was defined as being worth a fixed amount of gold.
Under the Gold Standard, dollars could not be created unless there was
sufficient gold held by our government to redeem them. Further, during most
of this era gold and dollars could be readily exchanged for one another by
our government. This all changed with the signing of the Bretton Woods
Agreement in1944.
After 1944, the dollar's
purchasing power began to decline. This accelerated after President Nixon
"closed the gold window" in 1971. With the stroke of a pen he
severed the final link of the dollar to gold. Later, in the words of the
AIER, "By 2000, the dollar had lost more than 90% of its original
purchasing power."
The term "doom and
gloomers" was likely coined by a member of the Establishment. It was
done in an effort to discredit those who recognized this condition as well as
their beliefs. This occurred because the "doom and
gloomers"recognized early that the excessive issuance of dollars
effectively cheapened those that already existed, and would lead to a number
of damaging results. First, it would create inflation. Next, the higher
prices and inflated money supply would excessively stimulate the economy.
These events, in turn, would foster a number of other economic and financial
distortions. Businesses and individuals would make poor economic and
financial decisions. They would base their actions upon an economy which was
artificially stimulated by excessive monetary creation. Their judgements and
actions would be predicated upon fleeting, exceptional business conditions
that were largely created as the newly issued dollars worked their way
through the system. Businesses would expand their workforces, factories and
products. Additionally, they and individuals would enter into far greater
debt than was truly warranted because they believed that the "good
times" would last longer than they should. The excessive monetary
creation, in turn, would ultimately destroy the dollar's value on the world's
markets, and further exacerbate the price inflation within our borders as the
cost rose of imported goods.
Now, conditions have worsened
to a far greater extent that anyone could have dreamed possible prior to the
1990's. Each recession since the Great Depression was met with greater
amounts of monetary and fiscal stimulus in order to extricate the economy
from any economic reversal. Whenever the economy began to flounder, the money
supply would be rapidly expanded and interest rates would be cut by the Fed,
while the government enacted tax reductions and spending increases.
Importantly, during the past several years, the Fed appears to have become
hell-bent upon creating as many dollar credits as are necessary. This, in
order to prevent the economy from lapsing into any sort of extended or even
minor recession, for fear of it snow-balling into something of far greater
consequence.
Finally, the "doom and
gloomers" are being joined by other voices. However, now they are
emanating from the Establishment! Comments and declarations are now being espoused
by those who are not only highly respected and authoritative, but who also
hold among the most powerful positions in the world's governing and
cooperative bodies.
This morning's New York Times
contained an article entitled "I.M.F. Warns of Imbalance in World
Consumption". The piece contained quotes from a recent IMF report. It
began with "The United States is likely to experience slower economic
growth next year, and its rapidly rising foreign debt is at the heart of
dangerous global imbalances...". The Times then continued and stated,
"The fund said that global economic growth had become too dependent on a
handful of countries, led by the United States, that consume far more than
they produce. That imbalance, it warned in its semiannual World Economic
Outlook, could lead to a wrenching correction".
For the International Monetary
Fund to use phrases such as "dangerous global imbalances" and
"wrenching correction" when referring to the possible outcome of
today's global economic and financial condition, is truly unprecedented! They
could have used far more subtle terms, as they have in the past to get their
point across, if they did not deeply believe that the world's economy was at
great risk.
The Times article went on:
"In an evident reference to the United States, with its big budget
deficits and relentless consumer spending, the I.M.F. warned that the world's
consumption is 'fueled by increasingly unsustainable fiscal stimulus, as well
as housing prices that are ignoring the laws of gravity".
With these strong statements
of concern, if not outright fear, I believe that the IMF is sending a
scathing message. It is not only to the United States but to the rest of the
world, that the worst fears of the "doom and gloomers" not only
have validity, but that they may come to fruition if major structural changes
in the U.S. do not occur. This stern warning was for the United States to
limit its dangerous monetary expansion, increase its taxes, and force its
consumers to reign in their wonton spending. Or, not only the U.S. but the
world would suffer the consequences.
These alarming statements by
one of the world's preeminent organizations followed a similar statement by
the president of the Federal Reserve Bank, Alan Greenspan. In a recent
speech, Mr. Greenspan discussed the historical precedent that resulted
whenever investors became overly excited about certain investments. This
occurred when buyers threw caution to the wind and ignored the risks produced
by their actions, by driving prices to unsupportable high levels. He stated ,
"Thus, this vast increase in the market value of asset claims is in part
the indirect result of investors accepting lower compensation for risk. Such
an increase in market value is too often viewed by market participants as
structural and permanent. ... But what they perceive as newly abundant
liquidity can readily disappear. Any onset of increased investor caution
elevates risk premiums and, as a consequence, lowers asset values and
promotes the liquidation of the debt that supported higher asset prices. This
is the reason that history has not dealt kindly with the aftermath of
protracted periods of low risk premiums."
Greenspan, with his statement,
"vast increase in the market value", is referring to the current
enormous overvaluation of the housing market and, I believe, stock prices. He
appears in total agreement with the IMF statement that, "housing prices
that are defying the laws of gravity". Do you remember Greenspan's
famous 1996, "irrational exuberance" speech regarding the stock
market? At that time, the Dow Industrials were in the mid-6000 range. Do you
believe that he views the market as being less overvalued and less dangerous
with the Dow today in the mid 10,000's?
Greenspan's reference to
"history has not dealt kindly with the aftermath of protracted periods
of low risk premiums" is his "fed-speak", sugar-coated fashion
of addressing the likely severe and damaging economic fall-out when price
levels return to normal.
I believe that these unnerving
observations by Alan Greenspan and the IMF are likely the tip of the iceberg!
As time passes, I feel that similar statements will be espoused by more and
more conventional economists and government officials. They will be preparing
the world for a potential economic melt-down that was created by our nation's
prolonged, egregious, deficit spending campaign, and the creation of the
enormous amount of dollar credits that they fostered.
The voices of the "doom
and gloomers" will be increasingly joined by those emanating from mainstream
America. They will be vindicated! However, just as all Americans benefited
from the higher standard of living generated by the decades-long artificially
induced boom, we may all have to suffer the consequences when the business
cycle turns down, and the contrived boom turns to bust.
I realize that my analysis of
the comments by the IMF and Alan Greenspan are disconcerting. However, I
believe that it is better to face the reality and truth of a situation and
prepare for its consequences, than to put one's head in the sand and ignore
its reality and its potential damaging effects. My hope is to help the reader
recognize our nation's precarious condition, and prepare for the difficult
times that lie somewhere ahead.
As the world's citizens recognize the dangerous position that they are in,
they will also understand that gold is their lifesaver. Further, the term
"doom and gloomer" will likely cease to be heard, when people begin
to realize what has transpired, and they finally rush headlong into gold.
The above was excerpted from the October 2005 issue of Financial Insights ©
September 25, 2005.
*******
I publish Financial Insights.
It is a monthly newsletter in which I discuss gold, the financial markets, as
well as various junior resource stocks that I believe offer great price
appreciation potential.
CAVEAT
I expect to have positions in
many of the stocks that I discuss in these letters, and I will always
disclose them to you. In essence, I will be putting my money where my mouth
is! However, if this troubles you please avoid those that I own! I will
attempt wherever possible, to offer stocks that I believe will allow my
subscribers to participate without unduly affecting the stock price. It is my
desire for my subscribers to purchase their stock as cheaply as possible. I
would also suggest to beginning purchasers of these stocks, the following:
always place limit orders when making purchases. If you don't, you run the
risk of paying too much because you may inadvertently and unnecessarily raise
the price. It may take a little patience, but in the long run you will save
yourself a significant sum of money. In order to have a chance for success in
this market, you must spread your risk among several companies. To that end,
you should divide your available risk money into equal increments. These are
all speculations! Never invest any money in these stocks that you could not
afford to lose all of
Please call the companies regularly. They are controlling your investments.
FINANCIAL INSIGHTS is written and published by Dr. Richard Appel and is made
available for informational purposes only. Dr. Appel pledges to disclose if
he directly or indirectly has a position in any of the securities mentioned.
He will make every effort to obtain information from sources believed to be
reliable, but its accuracy and completeness cannot be guaranteed. Dr. Appel
encourages your letters and emails, but cannot respond personally. Be assured
that all letters will be read and considered for response in future letters.
It is in your best interest to contact any company in which you consider
investing, regarding their financial statements and corporate information.
Further, you should thoroughly research and consult with a professional
investment advisor before making any equity investments. Use of any
information contained herein is at the risk of the reader without
responsibility on our part. Past performance does not guarantee future
results. Dr. Appel does not purport to offer personalized investment advice
and is not a registered investment advisor. The information herein may
contain forward-looking information within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. In accordance with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the statements contained herein that look
forward in time, which include everything other than historical information,
involve risks and uncertainties that may affect the company's actual results
of operations. © 2005 by Dr. Richard S. Appel. All rights are reserved. Parts
of the above may be reproduced in context, for inclusion in other
publications if the publisher's name and address are also included for
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