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Adrian Van Eck's Hotline On Money

September 15, 2005

And The Economy - September 15, 2005A few new readers have asked whether I realize how dangerous it can be to have the Central Bank print too much money. Yes I do, as I will prove in a moment. But as you will see, there are other factors too that must be faced.

The problem is that more and more People have become aware of the work we are doing here, and are starting to quote from our hotlines in places such as Richard Russell's bulletin board or the remarkable and popular site, Folks are seeing our material for the first time, and jump to conclusions. I understand that.

One of them wrote this: "It seems that Mr. Van Eck has forgotten there is no such thing as a free lunch. Mr. Greenspan can't simply print us into prosperity. He certainly can continue to debase the Dollar as he tries to hide the fact through fraudulent economic reports, PM manipulation and currency interventions. But he can't hide its inflationary effects on the consumer pocketbook. Together with inflation, his continuing measured rate increases are a barrier to debt expansion, and their effect of flattening the yield curve will certainly kill the carry trade, the mechanism through which their new money is getting into the system." The new reader goes on to make other statements which are just as filled with false notions as the above. But that will do for a quote.

Now let me offer my own comments about money creation and inflation: Those who have been reading me for months or even years know that I most definitely do know how dangerous it is to print too much money. The Roman Republic was the most powerful force on the face of the earth until it created too much money. There were no printing presses then and no checking accounts. But the rulers of Rome - especially after the Republic gave way to the Empire - found ways to create money and provide free bread and entertainment to the rabble that flocked to Rome.

They had coins of three values - copper, silver and gold. The State began covering copper coins with a thin layer of gold, allowing them to purchase food from outlying farms and to pay the Roman Army, which kept the peace across a wide swath of nations. But one of the emperors had a bulbous nose, and through usage the phony-gold coins wore away enough where the nose was to reveal the copper underneath the gold. The emperor became known to the People as "old copper nose." That is when the habit began of biting a gold coin to make sure is was REALLY GOLD, ALL THE WAY THROUGH. When the State realized that the People, especially businessmen and farmers, had gotten wise to their deception, they changed the rules.

They decreed that henceforth the silver coins and the gold coins would be worth the same amount. But there was to be one difference. The State could use the Silver coins to pay merchants and soldiers. But all farmers and businessmen had to pay their taxes to the State with Gold coins. There was a lot of resistance to this rule. So Rome went to a whole new level of tax collection. They sent soldiers with cold steel bayonets to collect taxes. Rome slipped from greatness and far too early they collapsed, with savage barbarians invading and seizing the City. Meanwhile, the Eastern Roman Empire stayed on a firm gold standard and lasted for several more centuries, with no inflation. If you also read the Money Forecast Letter, you will see in the latest issue how Greenspan responds when asked if we should go back to the gold standard.

NOW COME WITH ME TO THE LATE 18th CENTURY, THE TIME OF THE FRENCH REVOLUTION. The new French Government seized the estates of the rich and then cut off their heads. It did not take long to go through their money. So the rebels began printing paper money. At first the new money brought prosperity to the nation. Then prices began to rise. In due course, prices were up 100%, then 1,000% and ultimately 10,000%.. A wheelbarrow of Money was needed to buy food for one meal but a few days later even that would not do. No one wanted to accept the money. What amounted to a second revolution occurred. An army officer named Napoleon Bonaparte ended up in charge. One reason for his emergence was that he sensed the mood of the Public and responded. He announced: "I shall pay in Gold or I shall not pay at all." He ordered the paper money burned. Gleeful citizens tossed all their useless paper money into big bonfires all over France. At first everyone was exuberant. Then the gosh-awful shortage of Money became apparent. Part of the reason was summed up by the old adage that "bad money drives out good money." During the time of rampant paper money creation, much of France's gold had either fled the Country or gone into hiding.

This same kind of inflation happened in Germany after World War One. The allies demanded reparations so huge that Germany could not afford them. So they began printing paper money. In due course the German Mark, which had been worth one U.S. Dollar, fell in values to a small fraction of one U.S. penny. People were desperate and very angry. A man named Adolph Hitler attempted a coup in 1923 and almost succeeded. He was ordered jailed. But there were many who supported him and his so-called jail time was almost a triumph. He was fed well and allowed a constant stream of visitors, some of them important people. It was ten years later when he was elected to take power legally. That was the beginning of National Socialism, which we call NAZI.


Now that we have that out of the way, I want you to come with me to a far different set of ideas and ideals. The best way I know to spell them out is to quote from the official biography of a well-known and highly regarded member of Congress, Dr. Ron Paul:

"Congressman Ron Paul of Texas is the leading spokesman in Washington for limited constitutional government, low taxes, free markets, and a return to sound monetary policies based on commodity-backed currency. He is known among both his colleagues in Congress and his constituents for his consistent voting record in the House of Representatives: Ron Paul graduated from Gettysburg College and the Duke University School of Medicine, before serving as a flight surgeon in the U.S. Air Force during the 1960s. He and his wife Carol moved to Texas in 1968, where he began his medical practice in Brazoria County. While serving in Congress during the late 1970s and early 1980s, Dr. Paul served on the House Banking committee, where he was a strong advocate for sound monetary policy and an outspoken critic of the Federal Reserve's inflationary measures. He also was a key member of the Gold Commission, advocating a return to a gold standard for our currency. Dr. Paul consistently voted to lower or abolish federal taxes, spending, and regulation. Today he serves on the House of Representatives Financial Services Committee. Rep. Paul serves as the vice-chairman of the Oversight and Investigations subcommittee. He advocates a dramatic reduction in the size of the federal government." End quote.


In fact, his ideas underlay the big tax cuts that have been passed in the past five years and also the big tax cuts that are being pushed for passage today. A substantial number of Administration officials and Congressional leaders believed that if they cut taxes sharply they would starve the Federal Government for Money and it would shrivel in size. It is this thinking (plus a naïve determination to see Red China as a peace-loving commercial partner) that justifies the aggressive unilateral disarmament now being successfully forced on America in the middle of a war by Defense Secretary Donald Rumsfeld.

There is no secret about the goals of these anti-Government advocates. They would reduce the size of the Federal Government back to the time of Calvin Coolidge in the 1920's. If it seems to some that the initial response to Hurricane Katrina was "too little and too late," it is because the Federal Government was paralyzed in the first hours by an internal debate between those who would rush help and those who honestly believed the Federal Government had NO role there. If you question that statement, I suggest you do some digging into the rather horrendous flood on the Mississippi Rover in 1927. Thousands were killed. Unbelievable property damage resulted. President Coolidge and Congress investigated and agreed it was not a matter for Government, especially the Federal Government. Today there are many who would agree.

NOW COMES THE MOMENT OF TRUTH. This is not 1927. A great any changes have taken place since then. People have come to regard government at every level as a servant, one expected t solve problem and make life easier. Take a look at big cities today, especially older cities. Once upon a time these cites had millions of factory jobs for uneducated workers. Now many of these factories have been closed down, with their jobs shifted to China or Japan or Korea. There is a very powerful business lobby led by giant retail chains and international corporations that likes the way things have changed. They want to keep what they have achieved and transfer even more jobs out of America. That leaves a growing underclass - uneducated, unemployed and unmotivated. It is this sub-culture that you saw exposed in parts of New Orleans early this month. But other cities have similar underclass communities.

The folks who have slowly squeezed down spending on welfare believe in their gut that members of this underclass can find jobs if forced to do so. But what they did not ask themselves is whether their power in the voting booth in 2006 can and might alter today's balance of power. You might be surprised how few seats in the House would have to change hands from one party to the other to rip Congress out of the grasp of the Administration and its allies. This is why allegedly conservative members of both houses of Congress continue to vote for ever-more spending far in excess of shrinking Federal revenues, and why Tom DeLay said yesterday he cannot find a single Dollar in federal spending to cut…and why an Administration devoted to smaller government has never vetoed a single spending bill. The urge to keep Power trumps ideas of small government.

The result, of course, is that the Federal Government is now spending tens and even hundreds of billons of Dollars on a war in Iraq and Afghanistan. At the same time it has voted for some $60 Billion as a down payment in rebuilding the Gulf Coast, with the understanding that the total tab will hit $200 Billion. There are three ways to pay for all this spending. One is to cut other spending. That is given lip service. But GOP leaders in the House say that not one member seems willing to cut so much as One Dollar from a budget affecting them and their voters. A second way is to raise taxes. There is even less support for this choice, although there are indications that this year's round of tax cuts is fast losing support. A third way is to muddle through and hope everything works out. This is the route being chosen. The result is a Federal Budget Deficit now heading up towards the rate of a half-Trillion Dollars a year. I said Trillion, not Billion!

If Alan Greenspan and the Fed choose to create new Money at the fastest pace in memory to supply the funds for this deficit, then I suggest we cut him a little slack. After all, no one wants to raise Federal taxes a half trillion Dollars, and until a better way is found to pay the bills being run up by the Federal Government, printing money seems like the one alternative with the fewest critics. Actually, it appears to me that a blanket has been thrown over this money creation. By slowly raising short-term interest rates yet keeping them low on an historic basis, the Fed has completely kept the money build-up hidden. This fiscal and monetary story is still developing. Stick close to me as we track it and discern where it is taking us all, and how soon. More next week. Adrian Van Eck.

The melting point of gold is 1337.33 K (1064.18 °C, 1947.52 °F).
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