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Taylor on us Dollar & Gold

May 28, 2002

Drowning in U.S. Dollars

The last time we had a secular bull market in gold, starting at the end of the 1960's and through the entire decade of the 1970's, its arrival was signaled and to a certain extent triggered by foreign selling of the dollar. With one ounce of gold unrealistically fixed at $35 per ounce, cracks and strains began to develop in the international monetary system from about the-mid 1960's onward. Why? Because to fund the Marshall Plan, the U.S. began to create massive amounts of money out of thin air with increasingly less concern about holding the ratio of paper money constant to the amount of gold in the U.S. Treasury.

So, even before he U.S. began to print more money to fund Vietnam and the Great Society programs, our trading partners were already becoming saturated with dollars. Our elected officials, from President on down, did not possess the political courage or moral fiber to finance these enormous programs honestly, namely by raising taxes. So they set out to impose an invisible tax on the American population in the form of inflation. Rather than raise taxes to pay for Vietnam, President Johnson began to run the U.S. into debt. To ensure a sufficient amount of currency was in circulation to fund this debt and thus obscure the cost of these programs from the American people, and to allow the private sector to survive along side a continuously more dominant socialist government, the Federal Reserve Bank created huge amounts of money out of thin air.

After the financing of two World Wars, in 1970 the U.S. money supply as measured by M-3 stood at approximately $615 billion. Thanks to the funding of Vietnam and the Great Society programs, by the end of the 1970's our money supply had tripled to 1.82 TRILLION! Thus the money supply grew by a compounded rate of just under 10% while GDP during the stagflation 1970's grew at an anemic rate of around 2%. Still, the U.S. government was very successful at least for a while in secretly picking the pockets of the American people to fund Vietnam and the Great Society without the voting public having a clue about why their purchasing power was being eroded. That was the major inflationary episode during the 1970's, which Ian Gordon has identified as the Kondratieff summer of the current Kondratieff cycle that began in 1950.

During the 1930's President Roosevelt succeeded in passing a law that would put Americans in prison for attempting to preserve their personal wealth and financial stability by owning gold. Although Americans were forbidden by their own government from protecting themselves, foreigners were allowed to own gold to achieve that end and the global financial system required countries to provide gold on demand for paper upon demand.

But, as the U.S. cranked up its printing presses to fund our massive move toward American socialism during the 1960's, as more and more dollars found their way overseas, foreigners increasingly had more of those paper bills than they knew what to do with. American politicians may have successfully deceived the American population into thinking gold was not necessary. But our government did not fool foreign leaders like France and Germany into buying that lie. As Europe began to drown in dollars, they increasingly turned their paper money over to the U.S. for real money, namely GOLD! The problem became so bad that confidence in the U.S. monetary system was threatened. As a result, President Nixon simply defaulted on the U.S. obligation to pay foreigners gold for dollars in 1971.

The closing of the gold window by Nixon in 1971, paved the way - at least for a while longer - for the U.S. to print as much money as it wanted to finance its socialist programs, without worry of its gold supply dwindling and a resulting loss of confidence in U.S. paper money. In other words, the U.S. was free to increase its policy of deceit and theft via the printing press. And it did!

But Nixon Couldn't Fool Mother Nature for Long!

The closing of the gold window solved the U.S. governments financing problem for only a little while. With gold no longer convertible into paper at a fixed rate, it became free to trade on the international markets. And hence it quite naturally it price began to rise because the number of dollars in circulation relative to the number of ounces of gold that existed at that time, grew with extreme rapidity. As people began to realize that their dollar denominated wealth was in the process of evaporating away, they began more and more to buy gold and other tangible assets rather than allow their wealth in be stored in financial or dollar denominated assets. And demand for wealth preservation became so great that the prohibition against owning gold was overturned and signed into law by President Ford. The prohibition against gold was of course a ridiculous encroachment of a free people. As Congressman Reuss, Chairman of the House Banking Committee who supported the legislation to make gold ownership legal told me, "I couldn't understand why owning gold should carry a penalty equal to being caught with crack cocaine."

But back in the 1970's Americans began to realized that unlike paper money, endless amounts of gold could not be created out of thin air as the politicians and bankers were doing with the dollar. As Americans opted for gold over paper money, that presented a huge problem for the Federal Government because people opting out of dollars made it increasingly difficult for the U.S. government to fund its socialist policies.

So the U.S. government tried first to talk down gold and then to manipulate its price by announcing its intent to dishord it, and then by actually dumping it on to the market. That policy did not work for long. In fact, the sale of gold seemed eventually to have the opposite effect by making liquidity available in the market and by convincing Americans that the dollar would become even more worthless. Gold eventually triumphed over paper when it exploded to $850/oz. by January 2, 1980. Despite the efforts to destroy gold in the hearts and minds of Americans, the laws of nature prevailed and the misdeeds of America's politicians and bankers were thwarted. The politicians and bankers had undermined fiat money by printing so much of it that it almost did not survive. In order for the established fiat money system to survive, extremely high interest rates and the most sever recession since the Great Depression were required. The stage was then set for the greatest bull market in history that lived from 1982 through March of 2000.

The Stage is Set for a Dollar Drowning

The tight money policy of the late 1970's combined with supply side economics bought more time for America's form of socialism. But unfortunately, the pathological underpinnings of the system were not changed. Not only did the fiat money lie live on, but the new form of political deceit grew into something much more virulent and clandestine than that of the 1970's. Not only did America's politicians not learn the lessons of the 1960's and 1970's. They actually accelerated the creation of money out of thin air during the 1980's and 1990's.


No President has been more supportive of our demise toward a collectivist government than President Clinton. And so, it should come as no surprise to learn that the Clinton Administration fostered the enormous increase in the money supply while this man occupied the White House. During Clinton's Presidency, M-3 increased from $4.1 TRILLION to $7.2 TRILLION! And this took place despite the fact that the cold war had ended!

We have written extensively in past about how Bob Rubin and then Under-secretary of the Treasury, Lawrence Summers along with the Federal Reserve Bank set out to clandestinely manipulate the gold price to lower and lower levels starting with the 1994 Mexican crisis. The information is available for any truth seeking individual who wishes to gain a leg up on the masses who rely on main line media accounts of "the news." Visit or

Lawrence Summers in fact co-authored a paper while at Harvard that argued for the need to cap the gold price if monetary bailouts were to be successful. And so, starting with the Mexican bail out and then the Asian, Russian, Long Term Capital Management and Y2K bailouts, there was a constant "need" to "cap" the gold price in order to keep the Clinton interventionist and collectivist endeavors alive and well.

From his academic studies, Summers understood that if massive amounts of money were printed and the gold price was not capped, the dollar would decline and interest rates would rise sharply. Monetary bailouts by a rapidly declining currency could not long be effective. Under such an environment, economic growth a bubble economy, like that of the late 1990's could not have developed. Also, Clinton and his Treasury boys understood from the lessons of the 1970's that a transparent policy of intervening in the gold market would backfire. So the Rubin Treasury and the Fed set out to clandestinely manipulate the gold market by silently dumping gold out onto the market in the form of gold loans via sweetheart gold loans available to crony capitalist friends at major banking institutions like Goldman Sachs, J.P. Morgan Chase, Deutsche Bank, and Citibank. These loans typically were granted to these privileged political insiders at a rate of around 1% p.a., sold for dollars which were then invested in U.S. Treasuries at between 5% and 7%. Not only did this provide a terrific return on investment for Rubin's friends at Goldman Sachs, but it also helped drive interest rates lower. Moreover, these special friends of our political leaders could also count on not needing to worry about covering their short position (repaying with higher priced gold) because Chairman Greenspan assured them that "central banks stood ready to lease gold in increasing quantities, should the price begin to rise."

And so, by dishording gold in this manner, and by propagandizing the largely false notion of enormous productivity gains in America during the 1990's, the Clinton Administration created a phony "Strong Dollar" Policy that conned foreigners and Americans into buying American financial assets at enormously overvalued prices. This resulted in the greatest financial bubble of all times. But the con job worked for Wall Street and for the Clinton Presidency. With booming stock prices he managed to escape removal from office by trial and conviction of impeachment by the Senate.

Because Americans were then and still are largely unaware of the deceit that underpinned the booming 1990's, Clinton was able to claim credit for the good times though in fact he laid the final foundation for the tragic times we are now beginning to encounter. Blame for that will not doubt be doled out to President Bush. The problem is, the rigging of the gold markets led to lower interest rates even as the Fed created more and more money out of thin air. But alas, as was true during the late 1960's and 1970's, foreigners are once again showing signs of the signs of drowning in dollars. Thus the stage appears to be set once again for a foreign led exit from paper money to gold and other tangibles assets starting with real estate. Once again, we can expect the laws of nature to prevail over the lies of our politicians as told by the tell tail signs of dollar debt asphyxiation. The correction this time however, is likely to make that of the 1970's look like child's play because dollar excesses and imbalances are far more excessive.


Trashing gold not only assisted in inflating the U.S. financial bubble, but it also lead to a number of very significant economic bubbles that threaten to send the global economy into the second Great Depression of the last 100 years.

The current account imbalances continue to worsen year after year after year. Had the gold price been free to rise to its equilibrium price, most likely to around $600, the U.S. would never have experienced the irrational exuberance of the late 1990's that has subsequently led to imbalances like the following:

  • Major domestic debt the likes of which we have not seen since the 1930's and which is far greater in terms of national income.
  • $2.2 TRILLION of debt owed to foreigners, making the U.S. by far the largest debtor nation on earth.
  • The evaporation of trillions of dollars of stock market value leaving Americans ill-prepared for retirement.
  • An overvalued dollar that is now leading to U.S. led trade wars.
  • A housing bubble that will soon lead to personal bankruptcies on top of record bankruptcies already.
  • The demise of basic industry in America (mining, manufacturing and agriculture) without which we will become an impoverished nation as other nations rise in relative terms.
  • A stock market that remains hugely overvalued and still sucking unsuspecting investor money into that rat hole. No doubt trillions more of equity valuations remain to be lost as the existing secular bear market remains in its early stages.

What is most concerning to your editor is the fact that globalizatoin on top of these problems along with huge supply side excesses continues to put downward pressure on the profit margins of American companies at a time when share prices remain extremely inflated. There is in fact no way you can paint a realistic picture of growth in the U.S. economy required to generate profit levels sufficient to justify current equity prices for stocks listed in the major U.S. indexes. At the end of this week, the S&P 500 had at the end of this week an EARNINGS YIELD of only 2.25% (same as last week). Of this yield, about 1.4% is in the form of dividends with the remaining portion in highly suspect retained earnings. In other words, for every $100 you invest in the S&P 500, you get $1.40 in pre-tax cash returns and another 85 cents in "maybe" value. By comparison, if you buy the 10-Year U.S. Treasuries, you get a yield of 5.14% or $5.14 in CASH for every $100 invested plus you get favorable tax treatment from state and local government.


Morgan Stanley's Stephen Roach voiced more concerns last week about anemic corporate profits. He worries that companies will, for the sake of their survival may soon need to aggressively cut back on labor costs. This factor along with extensive indebtedness, he worries may well finally lead the consumer to stop his spending binge in which he has been living well beyond his means. With the consumer so important in the U.S. economy finally cutting back out of concern for his own balance sheet and survival, and with corporate profits not permitting a revival of the capital goods sector of our economy, Roach worries that we will enter into a double dip recession.

He also worries about the weak dollar and the global imbalances we spoke of above. He seems deeply worried about increasing trade wars, such as those gleaned from the following headlines of this past week:

  • "China Puts Stiff Tariffs on Imports of Steel" - Financial Times 5/23/02
  • "Four More Nations Join Attack on US Restrictions."- Financial Times - 5/23/02. (Japan, South Korea, Brazil, New Zealand, and the European Union are all fighting the U.S. on this issue. WTO sanctions will kick in automatically in three years if the U.S. does not remove steel tariffs).
  • "Central Bank in Japan Acts to Put Brake on Rising Yen" - Financial Times - 5/23/02.

As we continue to look at the headlines and read between the lines, rather than rely on CNBC for our information, we see that the Kondratieff winter outlined by Ian Gordon for our readers back in 1999 is coming more clearly into focus every week. Excessive debt, global economic imbalances and "beggar-thy-neighbor" currency devaluations were a major part of the economic landscape of the 1930's as was an attempt to expand the money supply to avoid a depression. And despite the knowledge of all this, it seems we are inevitably falling back into the same pit as Hoover and Roosevelt fell into in the 1930's. In fact, rather than a double dip as expressed by Stephen Roach, we may be in for something more akin to a dip and a plunge into a replay of the 1930's. And amid signs of growing global tension, we can only hope and pray to our Creator that these economic imbalances will not lead to another World War.

Gold Summary

The stock market is definitely in a primary bear market that still has many years to run. Stocks remain hugely over priced and there are signs now that foreign interests are finally getting their fill of an enormous supply of dollars that were created out of thin air during the Clinton years and before. In my view, there just isn't enough economic justification for foreign wealth to keep pouring into the U.S. That means the dollar is likely to weaken and as that happens, gold is likely to become the most important store of value for international investors.

"Gold and silver continue to trek higher in picture perfect fashion. The technicals are a "10" for a giant bull move. The gold fuse is sizzling as we approach $325, which means the gold derivative neutron bomb could go off at any time. This is not a market to be caught short in. These are exciting times!"

Gold weighs 19.3 times as much as an equal volume of water.
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