A Golden Cure for World-wide Deflation Contagion

February 2, 1998

From Thomas Jefferson, in an address to his fellow 'founding fathers' of the new nation:

 

Thomas Jefferson: "If the American people ever allow the banking system to control their money, first by inflation, then by deflation; their children will one day wake up homeless on the continent their fathers conquered."

The world's financial and monetary systems may be likened to a gigantic teetering circus-tent. An when the tent finally collapses. It will not be the center-post that goes first; it will be the side-posts; and even the stakes."

The "stakes" are the Asian Tiger economies. The "side-posts" are the most important trading partners of the U.S. This includes the strategic national economies of: Hong Kong/China, Japan, Canada, Mexico, South America and Europe. The "center-post" is the U.S. economy, including its stock markets.

The "tent" is the world-economy, built on a mountain of artificial money and credit, created out of thin air, by a politically engineered and dominated central banking system, that has mastered the art of legalized counterfeiting. It has taken generations, to perfect this art and master this tune, that plays to the drum-beat of billions of dollars of false wealth created per week.

Not too many years ago, it was against the law to counterfeit money, including by governments or banks.

And now what: Gold going up?…in the midst of spreading Deflation? How can this be!

I've been visiting the Kitco site for about a year now; and it is evident from the discussions there, that most of us are still deluded by, and caught up in, the artificial Santa-Clause Economy built on the BIG LIE: money and credit created out of nothing. This insures an over-extended, artificial, seemingly benevolent "economic summer" that may last for generations. All the while the masses misperceptions grow, while the money-masters of power, in the world, in control of interest rates, of credit availability, and of the volume of money flooding the world….they thus become economic dictators in hiding….ruling over the ultimate value of the money you earn, spend, invest, and save for a 'rainy-day" or retirement, or the kids'' education.

The world over central banks have evolved with their governments blessings into a quiet, awesome club of collusion and unbridled power. They hold in their hands the destinies of nations, and the fate of millions. Reginald McKenna, a 19th century banker of England said: "Give me control of a nation's money, and I care not who makes the laws."

It is, in fact, very natural, for gold to go up, as deflation intensifies. Just as it is very natural for gold to go up in inflationary times, as well. That is because the inflation and deflation are happening to the paper currency, the artificial money of the realm. Inflation and deflation do not happen to gold. And it is artificial, unbacked money and credit, once it is spawned out across the world, that ebbs and flows by the billions and trillions, thus distorting and manipulating the economies of the world's nations. Once this spreading cancer is set in motion, the economies and countries grow increasingly out of balance, and ultimately out of control. And it almost always starts showing up in an obvious way with with currency instability, which was the root of the problem to begin with - unreal currencies. Just ask the hundreds of thousands of Asians who have just been laid off, or reduced to 30% of their previous income, almost overnight.

The ignorance, misconceptions and confusion grow, because we seem to live in enduringly good times. And the BIG LIE – that artificial money created out of nothing is real money -- has had generations of time to take root: in our institutions of higher learning, in the board rooms of our most brilliant corporations, at the family dinner table discussions of what we studied in school today, and in the not so noble halls of government offices across our fair land. What we have failed to understand, or have forgotten, is that the basic standard, the unit of a nation's money -- the medium of exchange and store of value -- is the foundation of, and the fundamental building block, upon which, a nation's entire economy is built. It is essential for this unit, this standard of money, to be freely, willingly , and universally acceptable because it is stable, real, and can be trusted, by any and every one.

Historically only gold money, or money and credit units convertible to and backed by gold, have endured as real money, immune to both inflation and deflation. Gold is independent and free of manipulation and control by any governmental powers and special interests. John Adams' words of 200 years ago are just as timely and important today: "All the perplexities, confusions and distresses in America arise, not from defects in the Constitution or confederation, not from want of honor or virtue, as much as from downright ignorance of the nature of coin, credit and circulation."

Real money, gold, endures as stable and trusted currency, regardless of governments that rise and fall, and economies that go through there natural, moderate, non-manipulated cycles of economic summer and economic winter. Politicians resist gold-based money, because it strictly limits them, and disciplines their lust for power and control, along with their intimate banking friends. This means that economies no longer remain in balance, and ultimately, over-extended economic summers, are followed by inevitable, and very painful economic winters. All of this excess to excess, is unnecessary, and would be avoidable, if a gold standard money system were established and honored, among the community of nations.

The brilliant Ludwig von Mises, of the Austrian School of Economics put it this way: "The eminence of the gold standard consists in the fact that it makes the determination of the monetary unit's purchasing power independent of the measures of governments. It wrests from the hands of the "economic czar" their most redoubtable instrument.. It makes it impossible for them to inflate. That is why the gold standard is furiously attacked by all those who expect they will benefit by bounties from the seemingly inexhaustible government purse." (The truth and wisdom from this master-teacher of true economics, might help us better understand why there has been so much media coverage of reported central bank gold sales, the last year or two.)

Now, the last several decades of mushrooming credit-creation world-wide, has led to a debt-ridden international economy with careening markets and collapsing paper currencies. This debt-ridden, artificially propped up, international economy is symptomized by over-built real-estate, with grossly inflated values. World-wide, property values are beginning to feel the effects of spreading deflation. The recent deflationary free-fall in Hong Kong property values, will likely spread next to Japan and China. The deflationary world economy is like a Titanic, and their are never going to be enough IMF buckets to bail her out.

Also symptomatic of this international economy beginning to mire in debt and growing deflationary momentum, is the overcapacity of industrial and technological production. This has resulted from first of all, a glut of easy credit for the asking, and now, the world is not only awash in red-ink, but also in a glut of goods and services that most people don't want, and fewer and fewer can really afford. These kinds of glaring symptoms are the recipe for spreading, world-wide deflation, with ominous implications. When desperate Asian nations want to import new cars to sell here at half last year's prices, the protectionism, trade barriers and trade-wars will be looming right behind.

For lifeboats, we best look to the historical lessons of gold: gold unassailable, real money, and gold as a haven of capital preservation in times of economic crisis and currency turmoil. We got ourselves into this mess by allowing our governments and special interests to divorce our money from gold backing and convertibility. At one time, our currency was originally as good as gold, a virtual receipt for real money. It was even printed, right there on each and every U.S. piece of currency: "payable to the bearer on demand in gold". It's enough to make our grandparents generation roll over in their graves.

Deflation happens to artificial currencies and credit instruments at certain times, just as inflation does at other times, because they can be controlled and manipulated by the powers that be. Naturally stable economies, based on real money, are immune to inflation and deflation, and the powers that be -- their hands are tied, by the immunity of, and independence of gold. I have an early 1930s' chart of HM overlaying the DJIA. In 1973, I was giving economics seminars in the SF Bay Area entitled: "What Makes the U.S. Economy Tick…and Why it is a Ticking Time-Bomb." The economy's turned out to have a longer fuse than I'd figured/surmised, at that time. But now, the fuse is, indeed, running out. From early 1930 to 1932 Homestake Mining appreciated approximately 500% while the Dow was crashing in wave after deflationary wave, wiping out the livelihoods and fortunes of millions who never knew what hit them……sort of the way growing numbers of people are feeling in Asia. And the "Asian Contagion" is spreading, regardless of our self-absorbed, insular, wishful thinking.

Admittedly the U.S. government called in (confiscated) the American people's gold in the early '30s - at the old price at about $20/oz.; and then our President FDR 'pegged' it at $35/oz. He was stuck between a rock and hard-place, and this no doubt helped the HM price along its bull market way. But I wouldn't wait for another confiscation, or another FDR. The new baby bull market in gold is here, now. And before its over, there's going to be quite a stampede. All those mutual fund holders of the '80s & '90s, will not be able to get out of the same 'sell' door at the same time; it could get very messy, interesting, but messy.

Ultimately, after the current painful cycle runs its course, there will be a new dawn, and a new day. The peoples of the nations of the world, their governments and bankers included, will at last return to the discipline and integrity of gold-redeemable money, and gold-backed and defined credit instruments. These will be the basic monetary building-blocks, the life-giving ingredients – like a healthy renewed, purified, economic blood-stream -- that will be the basis for the birthing, the foundation, the building, and creatively flourishing of an economic world in a new millennium – a millennium with a thriving world economy, that will create, produce and flourish in a cooperative international community, committed to the dignity of the human soul, and the inherent freedom of the human spirit; and, where all peoples everywhere, will have an equal chance at life, liberty, and the pursuit of happiness.

Ultimately, after the current painful but cleansing cycle runs its course, there will be a new dawn, and new day. The peoples of the nations of the world, their governments and bankers included, will at last return to the discipline and integrity of gold-redeemable money, and gold-backed and gold-defined credit instruments. These will be the basic monetary building-blocks, the life-giving ingredients -- like a healthy, renewed, purified economic blood-stream -- that will be the foundation for new and flourishing economies. This will come, in a new millennium of economic nation building, in which a thriving world economy will create and produce enough for all peoples, everywhere.

May all peoples, of every nation, creed and color, have an equal opportunity to contribute; and enjoy the fruits of their work, and their entrepreneurial talents. May we all learn to live in a new world, in a cooperative while yet competitive, international community of nations, committed to the dignity of the human soul, the inherent freedom of the human spirit, and the sanctity of human life.

USA has the world’s largest holdings of gold: 8,134 - representing 77% of its Total Foreign Reserves.