3 Minute Gold News
A Quick Read for Busy People
Federal Reserve Wrong Model
Winners and Losers
Devaluing the U.S. Dollar
Jim says that, in a way, his career has mirrored the monetary system.
He started as a commercial banker in the 80s, and then switched to investment banking, working for a primary dealer.
When the Federal Reserve (FED) prints money they do it by buying bonds from the banks, which Mike Maloney illustrates very well in the video series “Hidden Secrets of Money“.
The FED won’t do that with any bank, you have to be on an approved list.
There are only about twenty banks on the list and these are the so-called “Primary Dealers“.
Jim was the Chief Credit Officer and General Counsel for a primary dealer, and had many, many meetings at the FED.
FEDERAL RESERVE WRONG MODEL
When people look at the FED response to crisis they say:
1. They never saw it coming
2. Then they underestimated the magnitude
3. Then they underestimated the duration
4. Then they applied the wrong remedy
How could they always be wrong in policy? They’re not stupid — they all have 160 – 170 IQs.
The answer is that they are using the wrong models.
If you have the wrong model it doesn’t matter how smart you are. You’re going to get the wrong answer.
This is the early stage of money printing before inflation becomes apparent.
It has a feel good aspect to it.
It’s like a drug addict — it feels good at first, then you get addicted, then you end up in the gutter, then you end up dead of an overdose.
Inflation is sort of the same. When it starts out it feels good but then it takes off and gets out of control and wealth is destroyed — it always ends badly.
Right now we’re in the money illusion phase. Stocks are going up. Housing is going up.
When the FED prints money it has to go somewhere. It’s not showing up in consumer prices yet, but it is showing up in asset prices. The asset prices are just bubbles.
In Chapter 7, Jim talks about how money printing started around 1966-67 to pay for the war in Vietnam. But the public wasn’t alarmed by inflation until 1973.
It took six years of monetary ease, and it felt good for a while, before the inflation suddenly looked like it was out of control.
It spun out of control from 1977 – 1981 where inflation was 50%.
Volcker raised interest rates, and Reagan came in and cut taxes and regulations, and then the U.S. became a magnet for savings around the world. We paid high interest rates for savers and low taxes for entrepreneurs — that was a great combination.
It took until 1986 before inflation was back under control.
So it took twenty years for it all to play out — inflation from 1.6% up to 13% and back down to 1.6%.
Money illusion is the early phase where it feels good but it’s heading to something bad.
Jim’s problem is that the smart money can take advantage of this while the everyday person is stuck on the back end, and loses by paying inflated prices for things.
WINNERS and LOSERS
Since the creation of the FED people say that the U.S. dollar has lost 95% of its purchasing power, but that other things, salaries and dividends for example, have also gone up in value, so on average everything is fine.
Jim says that people are not averages — there are winners and losers.
The inequality leads to social unrest.
The rich get richer and the everyday citizen gets left behind.
Jim believes the everyday citizen doesn’t have to get left behind. They can have some gold and that will help them preserve wealth just like the big guys do.
DEVALUING THE U.S. DOLLAR
In a currency war, the U.S. tries to devalue against other currencies.
Two currencies cannot devalue against each other at the same time — that’s a mathematical impossibility.
The U.S. has been trying to devalue and say to the BRICs and China that they have to let their currencies rise in value, which hurts the BRIC’s and China’s exports and jobs. This is what the currency wars are all about.
It’s a zero sum game.
This happened in the 1920s and 30s. When you can’t devalue against other currencies, because everyone is trying to devalue at the same time, the one thing you can devalue against is gold.
Gold can’t fight back.
Another currency can fight back by printing more.
You can’t print gold.
You can’t pull gold out of thin air.
When countries are desperate and worried about deflation, and you listen to the Central Bankers and listen to the IMF, they’re more worried about deflation than inflation.
When you are desperate and worried about deflation and you want inflation, the one thing you can always do is devalue your currency against gold, by raising the dollar price of gold.
Don’t be suprised when at some point gold goes to $5,000 an ounce, or more, which Jim expects.
Don’t be surprised if it’s the government doing it rather than the market, because the government can be so desperate to get inflation that they’ll actually devalue the dollar against gold.
Which means a much higher price for gold.
Mike says that’s the type of scenario where we could wake up one morning and it’s already been done.
Coins and Crowns
words and music Elaine Diane Taylor
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from the album Coins and Crowns