September 21, 2006

There are several possible scenarios for the world's and US economies. They involve currencies quite naturally, because it is the various currencies which are used to buy stuff around the world. Some have already gone bust and become worthless, and others will follow. The minor ones come and go, and Zimbabwe's will be next to go I think, since they are having 1,000% inflation, which means the presses are going night and day. In Germany in 1924, they didn't print more, they just printed over existing Reich marks, and they became a million marks, rather than a hundred. That meant the whole thing would collapse pretty quickly, and it did. They had to pay for the huge damage they caused in WW I didn't have any money, so they printed to pay, just like all governments do.

The strength of the currency is dependent upon how much of it there is around and in circulation. If there are dollars around the world by the trillions, an extra million a day, will make inflation fairly slow. The Fed meets as I write this to determine if interest rates will go up, down, or stay the same. (As if they have the right to do such a thing!). If an island in the Pacific with a population of a thousand, has a million currency units in circulation, and it increases in number by a million, there will be 100% inflation, or 50%, depending on how you figure it, but at any rate, prices will double for everything.

If there are ten trillion dollars around, a million a day increase won't make a noticeable difference in prices or inflation. The dollar is still the so-called "reserve" currency of the world, but anyone who keeps their own "reserves" in them, to me are nuts. Keeping one's surplus assets in dollars is similar to buying ice futures in July. Same with other currencies. So the future of a currency depends on the percentage of its increase, not the numbers of its increase. No currency today, is linked to or backed by anything, be it gold, silver, barrels of oil, tons of steel, acres of land, or palm trees. With no physical linkage or backing of a currency, it is at the mercy of the issuers of it, because there can be no limits to its increase.

Politicians everywhere give the folks back home what they promised them by buying whatever it is, be it a new ball park, bridge to nowhere, or a highway, by using paper currencies to pay for it. They also get re-elected by doing the same thing. Everywhere, not just in the US. In lands where there are elections at any rate, which brings us to another factor. If there are no elections or democracy, and what the ruler says, is what goes, he may not have to print, so his currency may be stable. If he desires to become a world ruler or seize a neighbor's land, he may have to print, and debauch his currency.

The more of a currency there is, the less it will be affected by print runs. This means that, as an example, the euro may be a better buy than the dollar, because supposedly anyway, a nation cannot use or adopt the euro unless it has a satisfactory credit rating and fairly low debt. There are also fewer euros than dollars, but then the euro is a far newer currency, and has less recognition than does the dollar. There are, it is rumored, a few euro nations which would like to go back to their old currency, as they resent being grouped into one mass, with no distinction between one nation and another. A German might resent being in the European Union, and would rather be a German with German currency, and the same with Italians, French, etc.

No one knows what will happen in the future…exactly…but we can all know for sure that politicians will never change, and with the entire world full and running over with pieces of paper with various colors of ink and engraving on them, passing as "money," they will all fail eventually. Money must have value, other than legal tender laws, or it is unsafe to invest in or use to store one's surplus assets. People say they are "diversified" in their investments, and brag that they have stocks, bonds, T-bills, CD's and a checking account. They are all the same! They are all dollar denominated. Whether it is Swiss, Bleu, or Cheddar, it's CHEESE. Whether it's Fords, Chevy's, or Mercedes, they're all CARS.

What can happen in the future, besides all currencies going to zero? A lot! Which one will take a dive first? I am sure it will continue to be small currencies with unstable governments, and this happens all the time. Will the euro or dollar collapse first? I don't know, but I do know that the dollar will buy about 1% of what it bought 75 years ago. It's all comparative, because all currencies have inflated themselves, and as a result continually buy less. Will plunging real estate prices cause the dollar to grow stronger? Slightly maybe, but the effect won't last long. Will a depression cause the dollar to go higher? Possibly, but the un-ending wars in Iraq and Afghanistan will counteract any strengthening of the dollar, because no one knows a way out, and unlike Vietnam, America hasn't decided to pull out and declare victory.

Could the dollar or other currencies gain in value, thereby making it a safe place to store ones surplus assets? Only if the printing of them stopped, and in history that has never happened. Historically, as inflation sets in, it always increases in velocity because the destruction is feeding on itself. The lower in value the currency becomes, the more of it is needed to buy things, and the more that has to be printed. This is why saving in government bonds and T-bills is foolish, because the government will have to print to redeem them, and when a government prints to pay its debts, as all governments in history have done, this only hastens the currency's demise.

Can government do anything to stop the inevitable? Can pigs learn to fly? There is something very intoxicating about Washington D.C. An elected politician, when he first gets there, is full of patriotism and honorable goals and ideals. He then gets a taste of the glamour and prestige, and all the best of intentions go straight to hell in a handbag. This happens in 99% of the cases, and the remaining 1% who maintain their honor and good intentions can never salvage a sinking ship. It then becomes "When," not "If." And I don't know the answer to 'when.' Currently, government and politicians are valiantly struggling to keep the ship afloat as long as possible. They are doing incredible things to save it or prolong its life, and maybe 9/11 was one of them.

9/11 gave government the excuse to enlarge itself by means of "homeland Security", which has and will continue to cost billions, while providing thousands of government jobs. Doesn't that term annoy you? It does me. Shouldn't if be "American Security?" Government then took on itself to make war, and that gave jobs to thousands plus immense profits to giant corporations, which war always does. FDR got us into WW II to get us out of the great depression, and it worked. But then the buck was backed by gold and the coinage was silver, neither of which exist now, so I don't think war and defense will do it, but they're trying. What else can the do to keep the ship afloat? Maybe by lowering interest rates and huge "liquidity" injections, (printing more trillions of dollars), but that will make all goods go up in dollars, and screw the public at the same time. Then the public may grow weary of the whole thing and withdraw their dollars from bonds, savings accounts and the like and buy gold and silver, which would outrage the D.C. Gang, even though there would be nothing they could do about it.

Correction, they could make gold and silver illegal, but that would be like the war on drugs. Silver and gold would then command huge prices and be sold on street corners just like drugs; and holders of gold and silver would reap huge bonanzas. Confiscation? Not hardly, as they wouldn't know who has it, and even if they tried to find out, there are no serial numbers on Krugerrands, unlike guns, so tracing them would be impossible. We're doing just fine with the recent price drop in metals, which is a huge buy opportunity. They can only manipulate physical things so long, as opposed to the probability of continual manipulation of paper things. We're fine! Protect yourself!


September 21, 2006

Don Stott has been a precious metals dealer since 1977, has written five books, hundreds of columns, and his web site is www.coloradogold.com

In 1934 President Franklin Delano Roosevelt devalued the dollar by raising the price of gold to $35 per ounce.

Gold Eagle twitter                Like Gold Eagle on Facebook