September 2008

A 10-Year chart of dollar-gold prices would clearly illustrate an increasing level of volatility. Although, most markets have become more volatile in recent years, as we have noted for some time, for reasons of technology, dollar inflating, number of participants, derivatives, etc., gold’s volatility illustrates further the mounting uncertainties with regard to our position on the world economic and monetary stage. The overt disregard for spending restraint and maintaining a strong dollar vis-à-vis our trading partners is a dangerous path previously taken, lesson forgotten. The current credit-crisis did not develop “out of the blue.”

It is mind-boggling to listen to our elected leaders in Washington explain away any knowledge of being able to foresee the current financial debacle and their surprise that finger-numbing spending would have any adverse consequences. The current credit crisis has been brewing for years and will not be resolved overnight. For the past dozen years or so, the money supply in the United States has grown at twice the rate of GDP growth. It should be a surprise to no one that artificially low interest rates for extended periods of time together with monetary inflating, or currency debasement, creates unsustainable bubbles. As the housing bubble deflates and investors seek safety, there is another bubble forming in fixed-income markets.

Excluding unfunded liabilities, the U.S. is nearly $10 trillion in debt. We are additionally spending about $1 trillion a year in our overseas endeavors. Now, taxpayers are asked to divvy up another $1 trillion dollars (which will likely turn out to be a low estimate) to bailout the poor judgments of financial institutions that pocketed hundreds of millions of dollars from investors by trading near-worthless paper back and forth over the past decade. This represents an unbelievable transfer of wealth from the productive sector of the economy to the financial (non-productive) sector… not to mention, given the “urgency” of the situation, the possibility that Mr. Paulson, a former Goldman Sachs exec, may just be attempting to lend a helping hand to his cronies on Wall Street.

The floodgates are wide open at the Federal Reserve and the Treasury (now apparently working closely together although claiming to maintain clear independence) and paper pennies are flying out the door at almost every request. Although the stated attempt of the “bailout” bill is to free up the frozen credit environment and encourage banks to begin lending to each other again, the real goal is to support precipitously falling housing prices which are attached to mortgages, which are attached to trillions of dollars in questionable derivatives within the financial markets around the world. Many point to the lessons of the 1930s in an effort to avoid the same errors that prolonged the Great Depression, namely keeping prices from falling. But, the man who has been called “a student of the Depression” apparently draws fewer similarities between then and now.

The U.S. dollar is backed by faith, wishful hopes, and the kindness of others. Faith in the dollar and the coordinators of monetary and economic policy is more easily endured with a satchel of coins.