Wednesday, November 18, 2009

The Return of the Gold Standard

Waiting for the Dow Jones to implode has been a long and frustrating process for those who have been anticipating financial Armageddon since long before most people in the U.S. had ever heard the terms “credit default swap” or “derivative”. While there definitely was a sudden and steep drop in the market’s valuation from October of 2008 until about mid-March of 2009, as steep as that correction was, it was very brief and the resulting rise that followed has stubbornly defied the law of gravity. This correction or over-correction if you will, from the March lows has not been supported by much of anything substantive.

Since March, employment has continued to crater; housing sales have largely consisted of foreclosures picked up on the cheap by vultures or first time homebuyers taking advantage of an $8,000 tax credit; and retail numbers have failed to improve significantly, yet retailer stocks have been bolstered - not by improving sales, but by cost cutting and overhead reduction that has come most often in the form of layoffs.

In this same time frame, banking has also been salvaged. Again not because of its own decisions and practices, but because of the government’s willingness to utilize Fannie Mae and Freddy Mac to purchase banks’ toxic assets at close to, if not full, face value despite the lack of any realistic market for these products. To support these purchases and to reload banks’ vaults, the Fed has resorted to printing money. The actual dollars in circulation have nearly doubled in the last 12 months, yet the government insists that inflation is low.

And despite all the propaganda spewed by the government, the media and all the parroting talking heads who have worked tirelessly to convince the American public that “all is well”, fewer and fewer people outside the U.S. are acting as though they believe it. Foreign interest in U.S. debt, specifically in U.S. treasuries, has waned enough that the Fed has been purchasing its own treasuries for the better part of the last year when they have failed to generate sales at auction. This is akin to someone writing themselves a check from their own empty account and expecting it to clear.

But the curtain that has shielded the wizard, as it were, is being pulled back.

Watching gold climb to new records on a near daily basis has tipped the government and Federal Reserve’s hand. They have been printing money like demons and since it has to go somewhere, it inevitably finds its way into the stock market. This sets people up to think all is well, but our creditors know the score. They don’t think we have done anything other than debase the dollar and so they are starting to bet that we will default on our debt.

Think we won’t? You’d better think again. The U.S. economy, one that is more than 70 % based on consumerism, is still in very real trouble. We went from the largest creditor nation on Earth to the largest debtor nation in less than fifty years. Our economy has moved away from manufacturing and production and moved into consumption and consumer debt servicing. The wall we have hit, largely a production of our spiraling debt and declining incomes, is not one that will be easily remedied.

And our creditors, with reality staring them in the face, have begun to hedge their bets on a medium that has been around far longer than any other currency – gold. While the precious metal’s price has been climbing to new highs, the Dow has followed suit and continued its march back toward unrealistic levels. The difference being that when the Fed is done printing in its desperate effort to maintain civility by preventing a panic in the U.S., the dollar won’t be worth the paper it’s printed on and gold will again be the world’s baseline currency.


  1. Best post you've written yet, John! You're right on the mark. Figures like the GDP from a few weeks ago, which the government insisted improved (while consumer spending and corporate production are down--only government spending prevented it from tanking), are not only misleading but deceitful. Citizens who read the news at face value are in for a rude awakening.

  2. Perhaps our leaders are thinking: "It's better to have a few very rich and powerful friends than millions of poor ones if the system crashes."

  3. I just loved the way Obama begged Chinese president Hu to continue investing in US treasury bills......pathetic for several reasons: we are in debt up to our ass and Obama meakes us look weak to other countries......