Mercy! Mercy! That Dang Nabed PERCY!

A Glitter of Gold, Beneath the Currency Mushroom

A Glitter of Gold, Beneath the Currency Mushroom

I am not an economics professor and my take on what is happening in world financial markets is only an expression of my opinion. However, I have been around awhile and have been watching for some time what is going on. As an average citizen I know what I have seen and common sense tells me where I think all this is heading. Allow me to review the bidding of what has happened in my lifetime and what got us to where we currently are.

During WW2 FDR found himself constrained by a Gold Standard. He wanted to be able to generate more money to sustain war effort and got Congress to relax some of the constraints that tied the dollar to gold.

Notably was to take the coinage in Gold and replace it with coins of less intrinsic value and paper. The gold was called, in melted down and sent to Ft. Knox. This served to refocus the mindset of the public away from gold as a currency.

Still the notion of gold’s value persisted and a more concerted effort needed to be made to get Americans to see gold as a commodity rather than a medium of exchange. Gold, we were told, is like a lump of coal, or a bushel of wheat…it is good for making jewelry and dental crowns but beyond its value as a commodity has no place as an instrument of modern finance. Still many remained skeptical, particularly overseas, and there remained legislation in place that tied the printing of dollars to the gold reserves that the country maintained.

As time went on these legal limits on the unconstrained printing of money bumped up against the ever-growing needs for big government and they were further relaxed. It seems in the seventies most of the legislation that linked gold reserves to the amount of money that could be printed were set aside. Gold became just another commodity with restrictions of how it could be traded by citizens in the open market.

Indulge me now while I pause briefly and show how a government raises money.

1. Through Taxes: Through taxes both direct and indirect.

2. Through fees for public services.

3. Through the issue of Bonds

4. Through the “Borrowing” from Trust Funds.

5. Through the printing of currency.

Now most understand how the first four work but are a bit fuzzy on the last one.

Once the gold standard was set aside our Government was at last free to print as much currency as it wanted. Over time they had discovered that most of this paper just sits around bank vaults. A dollar is an IOU for goods and services and if that IOU is not being used in exchange it does not really count fully against its circulated value. So how much of this paper is actually free value for our government? I submit that there is a whole lot sitting out there that has been sold and never been called upon in exchange.

For example in Iraq we found several semi-trailers of US Currency that Saddam Hussein was trying to do something with. As the premier world currency the dollar is used to prop up foreign currencies and we have been huge beneficiaries over the years as a consequence. We get the value and it just sits somewhere not requiring any real form of repayment. It is like in Banking where only a portion of a depositor's checking account is being used at any given moment and the bank can use that percentage for loans always sitting idle. They lend this at ten percent and pay the check depositor less than one. Well this is the way it works with currency and one can only speculate on how much of the yearly issue of paper money sits idle.

We have seen what the politicians did to the Social Security trust fund, how they continuously need to raise the debt ceiling on bonds, and we can only imagine how the insiders drool over the currency windfall. No longer constrained by Gold and its legislative limitations, they have gone into printing currency in a big sort of way and it is easy to see why.

However, in the long run there is no free ride. If the Government thinks they are free of the Gold Standard they can think again. Look at Fox news and see in bold print what gold is selling for. At some point the mind set is swinging away from seeing gold as a commodity and back to seeing it again as a currency. How people see it is important. If you believe it is a commodity like a hula-hoop, a tulip bulb or a bushel of corn, and some investors no doubt still do, then it could be a bubble as they claim that will pop suddenly and comes crashing down. On the other hand if you see it as an alternative form of currency, then while it might fluctuate, you can expect it to remain more stable than the currencies which it measures. Standards are not bubbles...they are enduring. If this doesn’t tighten the spincter of Governements that print currencies, I don’t know what will. Overseas they buy gold by the ton to prop up their currencies and at only a fraction of the total, seems to do the job. Economies are reassurred when they see this shoring up of their currencies. Another possibility currently being advanced is that some country, with a lot of gold, will suddenly dump a huge amount on the market…. If they do they face immediate inflation and a ripple of other effects that are not economically enhancing. If it does take place, there is a huge global market out there salivating to absorb it... and the more gold is traded the more it becomes entrenched as the benchmark. As gold ascends it becomes a believable standard of gauging the true value of the World's currencies. Two years ago it was selling for a thousand dollars an ounce. Today it is selling for seventeen fifty-eight. Is there a message here?

Despinte the Government's, efforts to underreport inflation, there is no way they can continue to ignore the market price of gold. No longer is gold being defined by the dollar but now the dollar is being defined by gold. Several years ago commodity traders couldn't get more that $250 an ounce. As a currency it has surged to nearly ten times that amount. What we are seeing is a much more believable measure of worth, and if you look at it's surge since the last change in administrations it will suggest that that problem of inflation is much worse than the point two percentage points reported by the government and my conservative estimate of ten percent.