One of the most compelling arguments made by deflationists is the “pushing on a string” argument. During the 1930s for example, the Fed did what it was supposed to do in terms of providing liquidity to the banking system. However, that policy was not effective, because lenders wouldn’t lend and borrowers wouldn’t borrow. That is what happens when confidence is lost, and as is the case now, confidence is being lost for some very good reasons. Mal investment, which flows from the kind of permissive monetary policy we’ve had for the past number of decades, has resulted in massive

insolvencies. And the U.S. economy outside of the financial markets has been in a huge decline for quite some time. So as more and more borrowers are not creditworthy, lenders won’t lend to them. And as confidence is lost, borrowers won’t want to borrow either.

If our policy makers were committed to retaining a free-market capitalist system, I think this argument would hold considerable merit. But clearly the so-called “pragmatic” politicians and policy makers do not care to retain free-market economics. Their view is decidedly short-term oriented, so what works in the near term as opposed to retaining the greatest economic system known to man—free-market capitalism—is what drives policy decisions, not only from government but also from the people our government “sleeps with” in the banking industry.

Let me explain. With a willingness on the part of policymakers to destroy the capitalist system, it isn’t necessary for credit to grow through the banking system to avoid an immediate implosion of the economy. Indeed, that is what Ben Bernanke’s helicopter money is all about. The government can, and I think will, simply distribute money to the masses in order to keep the deflationary spiral from occurring even if that means sending out checks to everyone American citizen in what ever amount deemed necessary by policy makers. Of course, this will, in the end, result in hyperinflation. But in the

meantime, this policy will not only have bought more time for the ruling elite, it will also have enabled them to reallocate even more wealth from what is left of the middle class to themselves. Last thing they will do I predict, is buy gold and silver and other tangibles before the currency becomes absolutely worthless.

If you want an example of policymakers doing this kind of thing, you need only revisit the Katrina hurricane trauma. You may recall seeing on TV, lines of people waiting to receive their $3,000 checks. At present we have a storm in the real estate markets that should send us into a depression. But not to worry. Money can be created out of thin air by the Fed and sent to folks who are about to lose their homes or who have whatever problem our socialist/communist policy makers choose to “fix.”

But won’t these kinds of policies lead to bigger inflation problems? And won’t that lead to foreigners dumping the dollar? The answer to both questions is most certainly “yes,” which is how more wealth will be siphoned from the middle classes to Wall Street and Washington. Fewer and fewer people will get richer and richer, while an expanding bureaucracy of lower-class workers will fill the halls of Washington and state capitals. As this parasitic trend continues, the wealth of the U.S. will continue to decline.

Regarding the matter of foreigners dumping the dollar, I think Richard Maybury has it figured out when he suggests in his February 2008 issue of U.S. & World Early Warning Report that the U.S. is likely to set up two currencies, one for domestic use and one for foreign use. The foreign currency will be a strong dollar currency. It will have to be, to keep

foreigners from dumping their U.S. Treasuries. The domestic dollar, however, is likely to be inflated and as such represent a hidden tax from the understanding of most Americans, who have been kept stupid by our educational system. We have noted that the U.S. and the West in general are in decline, with Asia rising. Robbing Americans of their purchasing power

without them being aware of how it is happening—through a weak domestic dollar—is one way this process is likely to play out, in my view. Unfortunately, more and more Americans will have a hard time making ends meet. In fact, this currency could very well hyper inflate.

Many countries have floated dual currencies in the past and some are doing so right now. The U.S. in effect did that from the time of Roosevelt until 1971, when foreigners could exchange their paper money for gold while Americans could not do so. More recent examples of nations using a dual currency are South Africa, which did it from 1985 to 1995 (the commercial rand and the financial rand), and Pakistan, Jamaica, Jordan, Lithuania, and the Philippines all use their own currencies plus the U.S. dollar. China has triple currencies—the renminbi (yuan), the Hong Kong dollar, and the Macau pataca.

As Maybury notes, “such schemes are ridiculously complicated, and there are huge currency black markets, but they work, sort of; they buy time.” So, what can you do to avoid having your pockets picked by our self-serving policy makers? What you want to do is hold minimal domestic dollars when/if a two-currency system is put into place. Owning tangibles will be better, starting of course with gold and silver. And at some point, even real estate will become a good place to put your money again—that is, as long as our government allows you to own your own home. I don’t see that changing immediately, but as you listen to the rhetoric of some of our politicians and remember that the tax rate during the Roosevelt years hit as high as 92% on the wealthy, I don’t see how you can rule out America going communist, especially if, as I anticipate, our markets are ultimately decimated, most likely via hyperinflation.

March 3, 2006

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