If you want to preserve anything you have, you will soon need to own gold. It will be the ultimate flight to safety in a storm of historic proportions.
Many economists have lately taken flight into fantasy instead. They say that governments around the world can create vast amounts of new currency, bailing out each other and the banks without any unintended consequences. In this rosy view, the fact that some prices have not risen to reflect the swelling tides of currency indicates that "inflation is dead."
Nothing could be further from the truth.
Inflation is a monetary phenomenon. It occurs when the amount of money in existence increases relative to the economic output of a country. One effect of inflation is a succession of financial bubbles, as fixed assets are first to absorb the increase of money. We've seen that. Beyond that, inevitably, will come the increase in consumer prices. So why hasn't there been price inflation yet? And what will be the end game to all this monetary expansion?
Although there have been some economic forces involving the influx of cheap Chinese goods into the United States that have helped hold prices down, these economic forces are actually minor (now) compared to the monetary forces currently in stalemate. It is these economic forces which put us between a rock and a hard place.
Very simply, because banks are now engaged in a tremendous carry trade of borrowing from the U.S. Federal Reserve at essentially zero interest and lending to the U.S. government at over 3 percent (by buying treasury bonds), they are not lending into the private economy. They could, thanks to the wonders of the fractional reserve system, lend ten times as much money into existence if they began lending to private enterprises, but this seems risky compared to the sure carry trade profits. Anything that forced banks to start lending to private enterprise would unleash tremendous currency growth, doubling, tripling or more the money supply. The government knows this, of course, and thus despite the lip service paid to "getting the banks to lend," no one in government really has any intention whatsoever of causing that to happen. Rather, they will do what they can to prevent it from happening.
It will happen anyway for several reasons. First, by choking off of credit, the banks are killing American industry, which is howling and will eventually exert sufficient political pressure to change things. Likewise, as long as there is no credit, unemployment will not improve, and the government numbers showing nominal improvements in unemployment are a farce. On a larger scale, economies where there is a flow of capital to industry will increasingly out-compete American industry. Secondly, the carry trade is a huge subsidy of the banks. As people come to understand that the government has set up a three-linked lending operation (to itself through the banks) and is giving the banks a fee to perpetuate the fraud, there will be pressure to end it. That pressure is already growing.
The main reason, though, is the nature of the transaction itself. The government is borrowing half of the money it uses, but because the money is borrowed there is little real pressure to reduce spending. Spending therefore increases, as every expense creates a dedicated constituency determined to continue the flow of federal largesse. These dollars are borrowed into existence at an increasing rate. If anything happens to reduce the influx of foreign money into the equation, or if people ever really grasp what is going on, there will be a flight from the currency. Interest rates will have to increase to allow government to continue to operate.
Current treasury rates are between three and four percent. The way the carry trade works, the banks borrow at short-term rates (measured in weeks or months) and lend back at long-term rates (measured in 3, 10 or 30 years). The banks continually roll-over these short-term loans to keep paying them off. When something causes the short term rates to exceed 3%, the banks will be threatened with an economic collapse which makes anything that has happened over the past several years look like a walk in the park. Specifically, the banks will be locked into loans amounting to many trillions of dollars over a period of many years. They will have to borrow, for example, at 10% to pay back the money they had lent at 3%. That will either force the banks to lend to the private sector or will collapse the banking industry as we know it.
Right now, the death throes of the euro are causing a flight out of the euro into the relative safety of the U.S. dollar. This has caused the reduction of interest rates required to sell the treasury bonds, a result wrongly hailed by economists and stock pushers as an indication of strength in the American economy. It is a temporary fix. Whenever the euro is either stabilized or put to rest, or whenever it at least is allowed to take on a predictable value, the flow into U.S. treasurys will cease. That day will mark the beginning of the end for the largest of all the financial bubbles: government debt and the U.S. dollar.
That's when you better own gold.
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