Bloomberg: "Gold is acting like the ultimate currency,” said Chip Hanlon, the president of Delta Global Advisors Inc. in Huntington Beach, California. “Central banks are following the same monetary course and trying to stimulate and inflate their way back to growth. Everyone’s concerned about the dollar, but it’s not like you can hate the dollar and fall in love with the euro or the yen.”
U.S. President Barack Obama has increased the nation’s marketable debt to an unprecedented $6.94 trillion as he borrows to spur the world’s largest economy. Goldman Sachs Group Inc. predicts the country will sell about $2.9 trillion of debt in the two years ending next September."
So, what's happening here is that the Federal government has spent the last 18 months engaging in various bailouts, "stimulus" bills, and other types of inflationary policy.
But where does the money come from? And why would it lead to "inflation", or higher prices?
The government works with the Federal Reserve and the rest of the banking system in the U.S. to create new money through a process called "monetization of debt". In other words, for every "dollar" created by the Fed, a corresponding amount of debt is sold in the form of U.S. "Treasury Certificates" (T-Bills) on the foreign markets. Other country's central banks such as China, Japan and Russia, purchase U.S. Treasury Certificates to use as a "reserve currency" in their central banks. This is needed because the world banking system is no longer on the gold standard, and countries need to back their currency with some other form of money just in case their currency loses its value. But we know that Treasuries are valued in terms of dollars, and dollars are nothing more than a representation of Treasury debt.
It's circular logic. The government makes dollars out of thin air, then sells Treasury debt to foreign governments, which implies that our dollars are valued in terms of foreign good will. But we can only pay back our debt in dollars. So if one of the foreign central banks decides to move out of the dollar as its reserve currency, then the value of the dollar plummets relative to the value of goods and services. In other words, goods and services cost more in terms of the dollar.
So, as the federal government creates more paper money (out of thin air) to pay for more bailouts, more stimulus, more wars, cash for clunkers, more tax rebates, more medicare, more social security, and all of the other things that Americans are unwilling or unable to produce for each other but feel entitled to, other countries' central banks are footing the bill. And when the rest of the world decides that it's had enough of our hollow promises to repay them, and when they realize that they will be paid back in yet more paper money that was made out of thin air, they'll decide to dump U.S. Treasuries, or at least not to buy as many of them. This causes the "value" of the dollar, or its purchasing power to fall, and correspondingly, causes prices to rise.
There is a limit to the amount of debt we can accrue as a nation, before we destroy the dollar altogether. This is not a partisan issue--both parties have stood by and watched the Federal Reserve steadily diminish the buying power of the dollar for the last 80 years. Since 1930, the dollar has lost 95% of its value.
You used to be able to buy a Coca-Cola for a nickel, and college cost 600 dollars a year.
Ultimately the question is this: how, in a nation where the governors of the federal banks can literally make money out of thin air, can minorities ever hope to compete with the ruling class? Every dollar they print makes your dollar worth a little bit less.
Gold broke into record highs today, and the value of gold is a true inverse metric of the strength of the dollar. As gold rises, the value of the dollar falls. With gold go all other commodities such as food, water, energy, heat, gasoline, all of the things that cannot be made out of thin air.
They get richer, and the rest of the world, including us, get poorer. Even if this doesn't make perfect sense, know that it is factoring into the debate in Washington about health care reform.
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