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All gold bugs
have fond memories of the year 1979. In that year, the price of gold
rose from $250/oz. to $600/oz. The reason was not hard to find.
Prices in the U.S.
that year rose by 13.3%. The newspapers were screaming, “Double
Digit Inflation.” Gold was going up sometimes as much as $50 per
day.
This
was solid confirmation of what everyone knew. Gold goes up when prices
are on the rise. Of course, the gold bugs of 1979 overdid things a
bit. They more than tripled its price between Jan. 1, 1979 and Jan. 21,
1980 while the general price level only went up 13%. But it certainly
did make the point. And this tells us that, if there is another panic
about prices in this country, the price of gold will take a trip to the moon.
All
this is apropos of Obama’s 10 year projection for the budget
(2010-2020). It is something not to be believed. First, let us
look at budget deficits for the previous 10 years (2000-2009)
It
is hard to remember, but 10 years ago the U.S.
had a budget surplus. Bill Clinton told his staff, “We are
Eisenhower Republicans, and we are balancing the budget.” Bush
spent money like a drunken sailor. And Obama is simply not to be
believed. The period 2010-2020 shows a deficit starting at $1.5
trillion and then estimates it at about an average of 1 trillion per year.
Of
course, budget projections tell us a lot more about the image the
Administration wants to present than about reality. What Obama is
saying (by his actions) is that he does not care about what is going on in
this country and expects that he can lie his way out of any problem.
The
importance of this for the price of gold lies in the fact that any deficit of
any size in any democratic country is not financed by borrowing the
money. It is financed by printing the money.
This
began in 1693 in England.
England
became a democracy in 1688 with the Glorious Revolution. A good, new
king (William and Mary), who would cede power to Parliament, was brought in
to replace the bad, old king. The new king had been a Dutch prince who
was fighting a war with the French. Beyond his war he did not care
terribly much about running the country. All England
supported his French war. Parliament ran the country, and the King
fought the French.
Then
the war took an unfortunate turn for the worse. The King needed more
troops and equipment. He went to Parliament and said, “Give me a
tax increase to fight the war.”
Hey,
this was no fun. The people loved the new king. The people loved
to fight the French. But the people did not love to pay taxes.
Parliament voted down the tax increase.
What
to do? The King wanted the money. The Parliament did not want to
give the money. Stalemate.
Then
along came a man named William Patterson and said, “I will lend the
money to the King.” Patterson gathered some friends together who
put up £72,000. However, the King needed, not £72,000 but
£1,200,000, 16 2/3 times as much. What to do?
“No
problem,” said Mr. Patterson. “I will issue bank notes
[pieces of paper saying they were redeemable in gold] for £1,200,000
and lend that to the King.” The King said,
“Hurray.” The Parliament said, “Hurray.”
And Mr. Patterson said, “Hurray, hurray, hurray.”
Unfortunately,
Patterson had promised to redeem all £1,200,000 of his notes for gold,
and he had less than 1/16 of the money needed to do so. He could keep
his promise only if people did not ask him to do so. Soon people came
to Mr. Patterson (who had ostentatiously named himself and friends the Bank
of England) and asked him to redeem his notes in gold. Patterson could
not pay.
Faced
with a crisis, Parliament and the King had to bail Patterson out. They
declared Patterson’s notes to be money just as valuable as the gold
which the notes had promised.
And
that is the story of every democracy since that time. When the
Government ran an unusual deficit, the legislature was afraid to tax the
people. So it allowed a central bank to create money out of nothing and
lend this to the Government. In the pre-democratic period, when the
people were ruled by kings, whenever the king wanted money, he just took
it. The way that England became a democracy was that they got fed up
with this system, and they killed the (old, bad) king. From then on the
king needed the consent of the legislature (elected from the people) to take
their money.
So
the system of central banking and paper money invented by William Patterson
was an end-run around democracy. It was a way for the government to get
wealth from the people without the consent of their elected
representatives. It was a way to defeat the principle of no taxation
without representation. The government would print money (or empower a
central bank to print money) and would then seize the people’s wealth
in the same manner as a counterfeiter. Counterfeiters, as you know, do
not steal money. They make the entire community poorer, not by stealing
its money, but by using their newly printed money to buy up most of the
wealth of the community and take possession of it for themselves. This
is the policy which the New Deal introduced in 1933 when it said that its
program was to rob and when it gave the power to create money to the
commercial bankers in conjunction with the central bank. From 1933 to
2009, U.S. money fell to 1/17 of its original value.
It
is this basic program of robbing from the people which Obama has now put into
high gear. His projected budget deficits for 2010-2020 average about a
trillion dollars a year. As was the case with William and Mary and
every occasion since, paper money is used as an end run around the people’s
refusal to vote the funds which the government wants.
A
good example of this is the War of 1812 in the U.S. The pro-war party
only secured enough votes by assuring the country that taxes would not be
necessary. And the money for the war was raised by loans from the
nation’s private banks, who printed up bank notes for the
purpose. Then, when the British burned Washington in 1814, the holders
of bank notes of these private banks ran to their banks and demanded gold and
silver. The banks could not pay. (Of course, when you cannot pay
the bank what you have promised, you are in deep trouble. But the banks
had the government on their side and thus were allowed to continue in
business without paying their obligations.) Senator Daniel Webster
declared at this time that Washington, D.C. bank notes had declined in value
to 75¢ while Boston bank notes were still at $1.00. This is
because the Washington banks had printed money and lent heavily to the
Government. But Boston was anti-war, and the banks there refused to lend
to the Government.
With
their bank notes depreciating in value, the banks realized that they could no
longer lend to the Government. What was the result? By February
1815, there was peace.
With
the above as background, let us address the question of just how much money
Obama will be printing over the next few years. The estimated deficit
for this year is $1.5 trillion. It gets smaller as we go further
out. However, this is usually an attempt to manipulate public
opinion. In almost all cases, the actual deficits turn out to be worse
than the estimates. Let us assume an average deficit of $1 trillion
each year for the period 2010-2014. This would mean the creation of $5
trillion dollars out of nothing.
The
raises the question, what is the current U.S. money supply and how does the
coming $5 trillion compare with it? In years past, that would have been
an easy question to answer. Economists have known what money is for a
long time. It is that economic good which is used to buy things.
If you can buy typical goods which are for sale in our society with it, then
it is money, and since its founding the Federal Reserve System has published
data on the U.S. money supply. However, a few years ago the Fed changed
its method of computing money. Certain demand deposits (which have
always been counted as money) were reclassified as time deposits (which are
not money). The owners of these deposits were told that they were still
demand deposits, but the public was told they were time deposits. That
is, the Fed has been caught red handed. However, they will probably
rely on their ace in the hole to get away with it. When the Fed was
created, the original gang around Paul Warburg and J.P. Morgan knew that they
would have to make things as complicated as possible. Money is a very
simple subject. Above I defined money as that economic good which is
used to buy things. But modern “economists” will tell you
that there are 13 different moneys (M-1…..M-13).
In
an honest money system, the basic unit will be a physical quantity of some
monetary metal, such as silver or gold. You have undoubtedly heard of
the pound sterling. That is because a few centuries ago British money
was a pound of sterling silver. Under the U.S. gold standard act of
1900, a dollar was defined in law as 25.9 grains of gold (about 1/20 oz.),
9/10 fine. When you exchanged money for an economic good, you gave a
physical quantity of gold or silver for the good. No problem, no
complications – and the money system which led to the greatest wealth
the world has ever known.
Back
in mid-2008, before the Fed began seriously lying about the money supply, it
reported the money supply as $1.4 trillion. From that time to today,
the monetary base has more than doubled, (from $0.9 trillion to $2
trillion). Prior to mid-2008, the monetary base had never been above
the money supply. Indeed, since the monetary base is high-powered
money, i.e., that money which is used to create additional money, it is
impossible for the base to exceed the total money supply. So when the
Fed reports that it does, it has to be lying.
Assume
that the true money supply has more than doubled since mid-2008 along with
the monetary base. That would put it at about 3 trillion today. If
Obama increases it by another $5 trillion by monetizing deficits, as above,
over the coming 5 years, then the U.S. money supply will multiply by a factor
of 2 2/3. Since Obama is too busy making pretty speeches on the theme
of it’s not my fault, he will not have time to create any additional
economic goods. Therefore, the 2 2/3-fold increase in money will have
to lead to a 2 2/3-fold increase in prices. A gallon of gas will cost
close to $8. A cup of coffee will cost over $3.00. Perhaps we
will have a national median home price of $500,000 (new homes).
With
this idea in mind would it be surprising to see a price of gold at #3,000 to
$3,500? Of course, for precise predictions it is better to use
technical considerations. The fundamentals give us the basic why.
The technicals give us confirmation and more precise timing.
Alas,
dear reader, you live in an evil age. America’s Founding Fathers
were great men. They put America on a gold standard and made her
rich. But the leaders of the early-to-mid-20th century were
liars and frauds. They are a group of counterfeiters who rob from the
poor to give to the rich. Are you going to listen to them or their
minions telling you to buy stocks? Or are you going to listen to me and
my fellow gold bugs telling you to buy gold? Your life, your
choice. To discuss this issue in more detail, I publish a fortnightly
economic letter, The One-handed Economist ($300 per year) analyzing
the various financial markets (mostly gold) and telling you what is likely to
happen and what actions to take. You may subscribe via Pay Pal by visiting my
web site, www.thegoldspeculator.com and
pressing the Pay Pal button ($300), or you may subscribe by sending a check
in the mail for $290 ($10 cash discount) to: The One-handed Economist, 614
Nashua St. #122, Milford, N.H. 03055. OHE is written every
two weeks on Friday and posted (password protected) on my web site the next
day. Thank
you for your interest.
Howard Katz
The Gold Speculator
Howard S. Katz is
the editor/publisher of the One-handed Economist, a financial letter which
combines fundamental and technical analysis. He was a bug on gold in the
1970s and became a bug on gold again in late 2002.
Subscribe to the Gold
Speculator (the One Handed Economist)
You can subscribe
to Howard Katz’s thoughts on commodities, stocks, bonds and real estate
are available in a letter entitled The One-handed Economist and published
every two weeks giving specific advice on trades in stocks and futures. This letter
is available (both electronic and paper copy) for $300/year with a 3-month
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