Bob Hoye published that quote in his latest issue of Pivotal Events. (www.institutionaladvisors.com). I think it is a very timely quote, because in my view, we are approaching the crossroads at which time our manipulative fiat monetary system is nearing a breakdown point. Every imaginable effort will be employed by America's version of Pravda-namely, CNBC, to convince you everything is alright. But the surefire sign that things are not alright can be seen by a gold price that is getting away from the manipulators.

Long-time subscribers will recall that a couple of years back I talked almost every week about gold market manipulation. I stopped talking about it because it had become so clear to me that it was going on, that there really wasn't anything more to talk about. Besides, my good friends Bill Murphy and Chris Powell at www.gata.org and www.lemetropolecafe.com do an excellent job of beating the drums of this awful social injustice-the injustice of rigging the gold markets so that the establishment can "protect the euphoric episode," which is represented by the ongoing overly-inflated equity prices, housing prices, and debt valuations.

But gold's rising price is telling a story. It is telling us that the big lie-that paper is better money than gold-cannot be perpetuated by our government and Wall Street forever, because the abuses of our fiat money system are now leading to a breakdown in the world monetary system. Like Pinocchio's nose, this big monetary lie just keeps getting bigger and bigger and bigger with each successive lie. Every time Ben Bernanke fires up his money printing helicopter and creates more debt money, we come all the closer to a monetary meltdown, because the lie he tells-namely, that printing more money will result in prosperity-is leading America into such indebtedness that the end is all the more obvious.

Just as the Soviet Communists were, in the end, unable to keep economic reality from their population by defying the natural workings of markets, so too is it becoming increasingly apparent that our monetary dictatorship-the Federal Reserve-is also unable to keep the truth of our self-destructing monetary system away from central banks and investors around the world. And by the way, we Americans may be willing to buy into the big monetary lie, but that isn't necessarily true of others, such as the Argentines who have been hosed down so badly by U.S.- and U.K.-dominated global banking institutions that they are literally giving our ruling elite the middle finger by buying gold. Recall a year or so ago when the Argentines refused to apply all the dollars they had to repay loans from the IMF? They took a small portion of those dollar reserves and announced to the world they were buying gold.

One of the most unique analysts I have met is Bob Hoye. You will recall we interviewed Bob in these pages several months ago, and I have since had quite a number of conversations with him. I love people like Bob who think independently and do not simply regurgitate pap they have heard time and time again like so many monkeys making funny noises in search of their next banana. We hear these well-dressed empty suits repeat on CNBC, like absolute morons, new words given to them by a highly esteemed trendsetter like Alan Greenspan. It is amazing, for example, how suddenly the word "conundrum" has crept into the uttering of these well-programmed mouthpieces of the establishment after Alan Greenspan used that word to describe what for him was the unexplainable. How could long rates go down while the Fed was raising short rates?

The sudden use of the world "conundrum" suggested it was as if these folks could never have come up with that word themselves to describe what to them, in their very curiosity and experience, was the unexplainable. And by golly, if Greenspan, that god among mere mortals, doesn't have the answer to this "conundrum," who in the world could? But Greenspan wrongly suggested it (the conundrum) has never happened before. Bob Hoye pointed out it in fact has. For example, it happened in England (which then owned the senior currency) when long rates fell from 3.40% in 1870 to 4.20% in 1873, the year when a major financial mania blowout occurred. That, by the way, marked the beginning of the second Kondratieff winter in the history of the United States, according to Ian Gordon's work.

As Bob Hoye observes, the "conundrum" happens because people foolishly continue partying like the orchestra playing on the deck of the Titanic as the ship was sinking. At some point, partying becomes so ridiculous that not even the senior central bank can continue sponsoring the party. As Bob stated in his latest missive, "At any speculative extreme, this natural rationing of credit (by risk) has eventually overwhelmed the senior central banks' ambition to keep the party going."

What are the signs that the Fed in this case may not be willing to keep the party going? Bob points out that the two signs that are most important to watch with respect to the party ending are: (1) widening of credit spreads between risky and the safest credit, and (2) a change in the yield curve from an inverted or at least flat shape to a steeper shape. Wider spreads indicate the issuers of credit are getting worried about not getting paid back, thanks to rising defaults. A steeper yield curve indicates a rush away from illiquid assets to more liquid assts. In other words, a trip down John Exter's inverted pyramid from highly illiquid assets like real estate, especially second homes and investment property, toward cash and gold, with gold being the most liquid and dependable asset in time of stress.

It is at this point in time that the margin clerks become boss. Assets, any kind of assets, are forced to be liquidated so that debt can be repaid, thus setting off a chain reaction like so many dominoes that affect the momentum of each other down the line.

Are we at that point or close to that point now? I think we might very well be. There have been growing signs that foreign creditors are getting their fill of dollars and that tiny bits of their dollars are being exchanged for gold. I believe Greenspan's choice to continue raising interest rates post-Katrina when Wall Street's highly conditioned Pavlonian dogs began salivating in response to what "should have been" a pause, suggests the pressure is now on our policy makers to shift toward manipulating markets to change our behavior from consumption to saving. I think that may be especially true now that gold is apparently getting away from the commercials and thus from the policy makers. The last thing the establishment can afford is for gold to rise, because that will ultimately mean they lose their privilege of robbing society for their own political and material gain.

But now the Fed will be faced with a different conundrum. If they raise rates and tighten money policy (the Fed has raised short-term rates but it has retained a very accommodative monetary policy, still), they will throw the U.S. and perhaps the global economy into a recession and quite possibly the K-winter. The enormous amount of indebtedness in this country, which is losing income to service debt, thanks to our loss of international competitiveness, sets the stage for a major economic depression. Greenspan seems to be between a rock and a hard place. Although this Great Houdini of the central banking world has worked his way out of trouble by printing money in the past, one wonders how many more times he can go back to the well to create even more debt (the raw material from which money is created) to "cure" our problems. Yet, if he continues to print money, as he has done with every other crisis since he took over at the Fed in 1987, that $3 billion per day that we need so folks can keep buying SUVs and more expensive houses may reverse direction in a very quick moment, not unlike what happened in the 1970s when flight of capital from the U.S caused Volcker to implement draconian monetary and interest rate policy then.

At that time, very high interest rates killed gold as people sold tangibles and invested in U.S. government debt that was paying double-digit interest rates. This time, that kind of move would, in my view, given our enormous indebtedness and place in the Kondratieff cycle, most certainly lead us into a depression. As it was, the tight monetary policy of 1980 pushed us into the steepest recession since the 1930s depression. Now we have much more debt and much lower earnings to service the debt than we had in the early 1980s.

What is likely to happen this time is that commodity prices will be smashed (perhaps even oil and gas) by drastically reduced macroeconomic demand, while gold rises dramatically in real purchasing power terms as people scramble to sell illiquid and non essential assets to raise cash in order to stay solvent. At the same time, banking institutions will become increasingly suspect, such that whatever currency folks hold will be in the form of cash (Fed notes) under the mattress, thus further reducing the ability of banks to lend, even if they find credit-worthy borrowers willing to borrow.

At first, the margin clerks may hit senior mining stocks and possibly junior stocks too, although at this juncture the juniors have not taken off much. But as gold in real terms rises, the scramble will be on to find real money-gold-because the paper variety of money, now being mistrusted, will not be accepted as a medium of exchange by the population who will have gotten badly burned by debtors. The scramble for real money-gold-should set off a furious quest for gold exploration that will make all other manias for gold discovery, like the one I lived through in the 1970s, look like child's play. In other words, I believe our day has come, or nearly so.

So, thanks to Bob Hoye, we know that what we really need to keep our eyes on is the credit markets. From there we will see signs of deterioration that will be super good for gold but rather ominous for nearly everything else.

September 25, 2005

Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com