Where’s the Inflation?

June 28, 2010

In 1792 for the first time the US Congress authorized the creation of money. Gold, silver, and copper were designated as the only true money and Congress stated that $20 would be the price of one ounce of gold. As a result the US had a stable, inflation-free currency for 141 years. That ended in 1933.

1933 is the single most important date in US financial history. That was the year Franklin Delano Roosevelt (FDR) did the unthinkable when he made it a crime to own real money. In a desperate act to end the great depression, FDR signed Executive Order 6102 without any vote of congress and eliminated real money from the US public. The provisions of the Executive Order confiscated all US gold coins and gold bullion owned by US citizens, and required them to turn it over to the government. It was then replaced by Federal Reserve paper money. Any one failing to comply was subject to a $10,000 fine and 10 years in prison. Only one exception was allowed: Rare gold coins were exempted from the order.

The US constitution provides that only the US congress has the power to create money. The act of 1933 was, and to this day remains, unconstitutional. The Federal Reserve has no constitutional power. This decision in 1933 began the US history of rapid inflation that we now accept as "normal". Since 1933, the purchasing power of the dollar has declined 96%. Put another way, a 2010 dollar will buy 4 cents compared to what a 1933 dollar bought.

If you look at the US Treasury website under frequently asked questions, it clearly states, "Federal Reserve notes have no backing of any kind". Federal Reserve Chairman Ben Bernanke in a speech once stated when asked about the ability of the US to pay its debts, "The US government has a technology called a printing press that allows it to print as many dollars as it wishes at essentially no cost." What he is basically saying to US citizens is that their money is worth nothing, because the Federal Reserve can print as much as it wants for just the cost of the paper!

1971 is the second most important date in US financial history. While the US public had been cut off from convertibility of dollars to gold in 1933, the international community of US trading partners had not. Other nations could still demand payment in gold and were doing so at an ever increasing rate in the late 1960's and early 1970’s. This ended in with the act by President Nixon in 1971 which permanently ended convertibility of the dollar to gold.

It had been the policy of the US to back the dollar 25% by gold from 1933 to 1971. Once the US completely went off any type of a gold standard, it was now a total fiat currency. Since 1971 the M3 (the measure of the money supply) has risen more than 20 fold. This rapid increase in the money supply has also caused a rapid increase in the price of gold. There is a direct correlation between the amount of paper money that has been printed and the decrease in the real buying power of this paper. This causes gold to increase in price.

The US then discovered a new way to convince the world of the high value of paper. A deal was struck to price oil in dollars, which led to the creation of the "petro dollar". While not as stable as the gold backed dollar of the past, the new petro dollar has allowed the US dollar to maintain its "world reserve currency" status.

What exactly does the phrase "world reserve currency" mean then? This is a special status whereby the world's major economies have agreed to make the dollar the universal currency through which most international business is carried out. This also means that most commodities are priced in dollars and that commodities trading done in other currencies requires a conversion to dollars.

Over the past year the calls from heads of state and finance ministers around the world have been getting louder and more frequent to supplant the dollar with a new world reserve currency or just abandon the dollar all together. This push for change comes as a direct result of what other leaders in the world are calling the irresponsible rapid dilution of the value of the dollar through unrestrained extremely excessive printing of new dollars.

The Zimbabwe dollar experienced an inflation rate of 2 million percent last year! The reason why Zimbabwe could not keep the printing presses rolling like the US does without immediate hyper inflation is directly attributed to the fact that the US dollar is the world reserve currency. Should the US dollar lose this status the dollar could hyper inflate into worthlessness almost immediately.

Fully 10% of the world's modern economies have experienced hyper inflation, according to Wikipedia. The US is on a fast track to join this list. In 1980, carried by a tidal wave of voter fear, Ronald Reagan was elected president in what was called the "Reagan Revolution". Reagan campaigned on a platform that pledged to pay off our dangerously high National Debt. This revolutionary talk centered around a frightening $900 Billion National Debt.

Just 30 years later, the US National Debt has ballooned from the $900 Billion level that sparked a "Revolution" to $12.8 Trillion. And to make it even worse, in our current year 2010, with no financial emergencies, the US will have a new record annual deficit of $1.6 Trillion. In just this current 12 month period, the US will borrow more than in its entire history up to the time of Reagan's election!

What happened to the "Revolution"? US citizens are blindly unaware of the coming hyper inflation. Have you ever watched Jay Leno's "Jaywalking" and marveled at the stupidity of the average person? Not only is the annual deficit for 2010 projected at $1.6 Trillion, but the Congressional Budget Office (CBO), which is a non partisan official government body tasked with projecting the US National Debt, is presently forecasting that the US National Debt will DOUBLE again in this decade. Furthermore the CBO states that "the debt level will reach 82% of the ENTIRE economy by 2019, threatening US financial stability". This is not some far right wing radical sounding the panic alarm, but the current US administration.

John Boehner, the Republican leader of the House of Representatives stated, "How many alarm bells have to be set off before Washington Democrats get serious about tackling dangerous budget deficits"?

Judd Greg, the Republican leader of the Senate budget committee stated, "This is clearly a scenario where the country's going to go bankrupt".

And most important of all, the most senior budget democrat in the Obama administration, White House Budget Director Peter Orszag, stated "We are on an utterly unsustainable fiscal course."

In his testimony before Congress just two weeks ago, Fed Chairman Ben Bernanke used the same word when he warned that Congress must prepare to address an "unsustainable level of debt in the federal budget.”

These alarming statements by our top government leaders are giving us a critical ADVANCE WARNING to get our financial house prepared ASAP. There is no time to wait. We must prepare now, because sadly there is no political will by our President to do what is necessary to bring this rampant printing of paper money under control.

In an op-ed piece in the Wall Street Journal last week, Alan Greenspan, Bernanke’s predecessor as Chairman of the Fed, was also sounding the alarm about inflation runaway spending and the National Debt. He made it clear that the Adminstration is dreaming when it believes that we can grow the economy fast enough to save the economy before we drown in debt: “The current federal debt explosion is being driven by an inability to stem new spending initiatives. We cannot grow out of these fiscal pressures.”

Complacent people look at the present lack of serious inflation and don’t prepare. But there is a simple explanation as to why there is so little inflation evident at the present time. The rapid expansion of the money supply over the last few years occurred during a recession. Once the recession ends, the calm of the stable dollar will quickly disappear.

Gold is the only true money, used as such since the beginning of recorded time. The US dollar WILL hyper inflate; the CBO has already stated that this is the official plan of the US government. Even without the dollar losing its position as the world reserve currency, high inflation is imminent. Only one class of assets has a nearly 200 year unbroken history of steadily rising in value. Only one class of assets cannot "disappear" due to a sudden act of government desperation such as FDR's executive order 6102. Only one class of assets is acceptable as currency in all parts of the world. Only one class of assets is immune to unconstitutional acts of irresponsible hyper inflation.

Rare gold coins are the safest and most liquid storehouse of wealth in the world.

Copyright ©2010 Greg Halloway

Greg Halloway has made his living trading gold bullion and rare gold coins for over 40 years. He is a world-renowned expert on rare coin grading and valuing, and was one of the six initial shareholders of the world’s largest professional coin grading service. He was also one of the founders of the world’s first electronic trading system for certified coins. His predictions on the prices of gold bullion have been remarkably accurate for dozens of years. Greg resides in Palm Beach and in Europe. To receive a free PDF copy of his monograph on rare European coins (which includes beautiful photographs of ancient coins) or to attend a free educational conference call on Gold, request it in the "Contact" area at www.GoldenArtTreasures.com. 
Visit Greg Halloway's website at www.GoldenArtTreasures.com