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Explosive Money Growth won't Work

January 29, 2001

Sensing that our economy was about to overheat, Mr. Greenspan began to tap on the monetary breaks ever so lightly, during 2000. As a result, the 52-week growth rate in M-3 fell from over 10% toward the end of 1999 to around 6% at the end of 2000. However, even this slight slowdown in monetary growth began to cause big problems evidenced by a 50% decline in the grossly inflated NASDAQ. With that sharp decline a major plunge in consumer confidence began to take place.

Other problems too began to crop up such as a sub-par Christmas season for retailers, the closing of the 90 store Montgomery Ward, rumors of the Bank of America's possible insolvency related in part to the California energy debacle.

The Fed clearly panicked when it recently decreased interest rates not by a mere 1/4% but by 1/2%. That is so unlike Mr. Greenspan's gradualist approach that it suggests some real fear within the Fed itself.

I have recently begun tracking M-3 on a rolling two year basis. Despite the recent brake tapping by Mr. Greenspan, M-3 over the past two years is growing at slightly over 10%. From an historical perspective, this is a very high number. About the only time M-3 has grown so rapidly this past century was during World War II when massive amounts of money was printed to pay for the war and during the 1970's when money was printed to fund the so called Great Society and Vietnam. Some of us remember what happened during the 1970's as a result of this rapid monetary growth. We had a major inflationary episode at that time that was capped by a move out of the dollar to stronger currencies, gold and other tangible assets like real estate.

Deflation Threatens as Debt Burden Pulls us Down

I believe Ian Gordon is right in predicting the new explosion of money being created by Mr. Greenspan will not end in an inflationary blow-off given the position we currently find ourselves in the 60 to 70 year Kondratieff cycle. In fact, what we are likely to see is a growing deflationary problem because as Ian points out, late in the Kondratieff cycle, the amount of money and debt that must be created to generate an additional dollar of GDP grows very rapidly such that the system to collapses under its own weight.

In an excellent article titled "Lies, Damned Lies, Wall Street" dated January 12th, 2001, the dynamics of our self condemning fiat currency system is illustrated with data from the U.S. economy. (This article is available at Over the past 5.5 years, since various crises prompted Alan Greenspan to print money at a furious pace, debt has exploded in growth compared to nominal GDP. According to the author of this article, Dr. Kurt Richebacher, during this time frame, nominal GDP increased by $2,720 billion. However, Total debt creation grew by $8,900 billion. In other words, debt (and debt servicing requirements) are increasing 3.27 times faster than income!

The most simple fact forgotten by almost everyone these days, including economists is that the creation of money by passing some bookkeeping entries, does not create wealth. Yet, people who hold an ever increasing amount of money treat it in an "easy come, easy go" fashion. So what you see is the really stupid and irrational investment behavior on a society wide basis such as we recently witnessed in the dot com markets. More and more, a bubble emerges as a result of this very immoral act of creating money and a false perception of wealth that is detached from reality. At the same time this false perception of wealth emerges, debt grows and the ability to service it declines. The eventual outcome of such a system cannot be in doubt any more than the outcome of a family budget. Of course government's can continue their legalized counterfeiting activities, but history is full of examples of the outcome of such behavior.

Old Bull Markets Die Hard. Avoid the Bear Market Trap

Now, Wall Street has done its best to perpetuate the notion that in the long run you can only make money in stocks, without defining "the long run." As Dr. Richard Appel pointed out in his latest letter, Wall Street has also perpetuated the myth that a 20% decline is all you need to suffer in order to qualify as a bear market. This misconception combined with an eighteen year unbroken rise in stock prices has convinced most investors that it is time to get back into the market. Indeed a sharp reversal of outflows from mutual funds has, over the past two weeks taken place. According to the latest AMG Data Services report. $7.2 billion of new money went into equity funds for the week ending Wednesday, January 24th. That contrasts with an average weekly outflow of about $12 billion at the start of 2001.

However, it is my sincere belief that the re-investment of these funds back into the equity market via mutual funds are misguided. I believe a bear market trap has been set that will destroy a huge number of Americans who are not able to think beyond the pap that is given to them by a self serving Wall Street and the media it so strongly influences through advertising dollars. Now, more than ever before you need to pay attention to what those on the outside of Wall Street are saying.

Wall Street Has No Plan for a Systemic Collapse

One of the major problems with relying on the main stream media and Wall Street is that they provide no advice as to how to deal with a SYSTEMIC COLLAPSE. In fact, they are adverse to suggesting any insurance against a systemic collapse lest people begin to think in those terms and thus make their job of holding the system together all the more difficult. Yet, as the chart published in my November 2000 issue points out, every 60 or 70 years we have these enormous systemic breakdowns. Most people on Wall Street will tell you "this time it is different" just as the folks said in 1929 and 1930. I am not automatically buying that line.

It is my sincere belief that we are most likely nearing the next major breakdown which prompts the need to own gold, the one monetary asset that is immune to a systemic collapse. Why? Because it has been shut out of the monetary system and because its value is not dependent on the willingness and ability of others to repay their debts.


A Rigged Gold Market has Made Our Predicament Worse

Were gold permitted to trade freely, rather than being rigged at ever descending prices by the past administration in quest of the political benefits of a strong dollar policy, no doubt we would not be in the dire straits our economy is currently in. If the price of gold had not been rigged at lower and lower prices through the use of the gold carry trade mechanism, a warning sign would have been issued to investors and policy makers that all is not so well with the economy as a continuously declining gold price suggested to folks like Lawrence Kudlow who has continually harped on that theme throughout the Clinton years.

Had the gold price not been manipulated since 1994 so that it could have moved toward a level where we think it rightfully belongs, namely $600 or higher, it is doubtful the new paradigm myths that led to huge does of money creation and an insanely priced stock market could have occurred such that President Clinton avoided removal from office. Instead, investors and policy makers would have been in tune with economic realty to a much greater degree than they have been in which event the huge debt burden we now face and which threatens to catapult us into the first depression in 70 years would not have occurred.

The gold manipulation measure can be compared to a simple medical analogy. My 15-year old son is currently experiencing a viral infection of some kind. This morning his temperature spiked up to 103 degrees and he felt absolutely terrible. Two Advil tablets and one-hour later his temperature fell to 99. He felt so good that he began walking around the house and went on his computer to go on the Internet. Though he felt much better, nothing of an intrinsic nature had changed as far as his viral condition was concerned. But he felt good so rather than rest, which would have been better for him, he became active presumably to the detriment of his illness.

So it has been with gold during the Clinton years. As well documented at and in Reginald Howe's law suit against Mr. Greenspan, the U.S. Treasury Secretary, the BIS and several large bullion banks, the gold price has been pushed to artificially lower levels so as to disguise basic and fundamental weaknesses in the American economy and in the process create a sense that things are much better than they in fact are. The eventual price we will pay for these false readings will be much more severe than if an equilibrium gold price had been permitted to provide an accurate "temperature" reading for global economic participants.

GATA Denounced by Doug Casey & Others

One of the big disappointments for me at the Vancouver Venture conference came at the end of the show when Doug Casey and a couple of other speakers on the "World Outlook" panel at the end of the show talked about GATA in a disparaging manner. Without giving any reason other than to say that you can't get two or three people to agree on anything, Doug laughed off GATA's gold conspiracy message and said the folks at the conference should "get a life." Clearly Doug nor another speaker who spoke against GATA had ever seriously considered the charges of Reginald Howe's suit against Alan Greenspan and other heavy weights nor have they looked seriously at the 119 page document titled the "Gold Derivative Banking Crisis." The impression I had was that these panelists were simply too busy being politically correct to appear to even entertain the notion that our government would or could do anything wrong. One wonders what world these guys are living in.

Also being politically correct was Bob Bishop who also went on record saying that he did not subscribe to the manipulation theory. However, he did at least point out that some big bullion companies were making huge profits from involving themselves in the gold carry trade.

But I am really puzzled as to why Doug Casey and a majority of the gold mining industry itself is being so stupid about this issue. An unspoken policy of aiding and abetting the short sellers of gold was obviously made when, during the Asian crisis and Long Term Capital Management crises of 1998 Alan Greenspan said, "....Central banks stand ready to lease gold in increasing quantities should the price begin to rise." How can anyone see those words as anything but a statement aimed at keeping the bullion banks borrowing gold at say 1%, selling the gold for dollars and re-investing it at 5% to 7% in U.S. Treasuries? Why on earth would they continue not to do so, if uncle Alan assured them that they did not need to worry about a rising gold price when they covered their shorts? Are we to believe the great financial engineers at places like Goldman Sachs, JP Morgan, Chase, Citigroup and Deutsche Bank would not take those words to heart and profit from them?

Ok, so if you don't like the "M" word or the "C" word, call it what you like. Mr. Greenspan by his words has instituted a policy based on a guarantee from central banks to the heavy hitting gold bullion banks most closely aligned with our political process by guaranteeing them huge profits by continuing to sell gold short. That my friends is "crony capitalism" American style. The policy ensured that the buddies of then Treasury Secretary Robert Rubin could continue to reap huge profits without facing normal risks in this business because of protection from the Fed. Indeed, it was Goldman Sachs who most heavily benefited from the gold carry trade business during Rubin's tenure at Treasury.

A Growing Belief in Manipulation from the Main Stream

Casey's stupidity notwithstanding, there are those who are examining the GATA's charges with an open mind and some of them are concluding that GATA is right. A couple of weeks ago, the CEO of Freeport McMoRan said on CNBC that "Central banks are the OPEC of the gold markets and that they will keep the price of gold down as long as they want." Then this past week, Richard Russell, editor of "The Dow Theory" who is certainly no card carrying member of the "Gold Bug Society" said, "I don't as a rule, believe in manipulation in the markets, but if there are two areas of manipulation they are (1) gold - every time gold sticks it's little yellow head up, someone, somewhere - brings a hammer down on that poor head. Ouch! (2) The Dow and the S&P - watch the last 15 minutes of every session. Someone, probably a fund or a brokerage house, moves in and buys just enough to move the Dow up 15 to 25 points and the same in percentages with the S&P. I understand the SEC is investigating this strange and really naughty action. You can always count on a little upward pop in the average near the close. Hey, it's just not fair to the shorts."

JAMES MOFFETT is Almost But not Quite Right

Where I differ with James Moffett is in his suggestion that "the OPEC of the gold markets" will keep the price of gold down as long as they want to. It is my contention that they will keep the gold price down AS LONG AS THEY ARE ABLE to do so. Policy makers will never wish to see gold rise because that will represent a bad report card for their handling of the economy. But, at some point, attempts to suppress the gold price will fail because faith in paper will disintegrate at which time there will be no stopping people from trading dollars for gold short of totalitarian means.

With the money supply (M-3) now at 7.2 Trillion vs. 1.8 Trillion when gold hit $850 per ounce in January 1980, the potential for gold to rise substantially above that old high is very obvious. It is for that eventual move out of paper and into gold, representing a systematic breakdown, that we hold steadfastly to our allocation of gold in our model portfolio. We continue to recommend investors place up to 20% in gold shares and 2% in gold and silver coins as "emergency" money.

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