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December 04, 2004

Gold - and the US Savings Bomb
by Alex Wallenwein

Americans aren't saving anymore.

The US personal savings rate has gone out the window. Already decried as "too low" in 1996, when it still boasted a (relatively) healthy 4%, it has dropped almost to the floor at the current near-zero rate of 0.2%. You can almost hear the mechanical voice over the loudspeakers: "Impact in zero point oh-three seconds!"

KABOOM!!

Why?

Why did this happen? The reasons are so many, it's hard to count them all, but here are the two most important ones:

1. Americans have been suckered (forced) into drawing down their savings accounts and throwing money at the stock market.
2. Americans have been suckered (forced) to live beyond their means in order to keep their own (and thereby the world's) economy going.

These two reasons have one - and only one - undeniable, inevitable consequence: there are natural limits to these excesses, and when these limits are reached, there will be hell to pay!

The limits are being reached as you read these lines.

To make point number one, it is not even necessary to waste a lot of words. All it takes is a quick look at a chart appearing in a Federal Reserve Bank of San Francisco publication from 2002:

To make point number two, we only need to read news reports on the 'euro vs dollar' situation. Points made by analysts in gold investment circles two years ago - which were promptly ridiculed or ignored by the financial media as "extreme" - are now commonplace. Here are two examples:

Example 1: The current account deficit problem. Until only a few months ago, it was reported and greeted with an extensive yawn by everyone. The dollar continued to have occasional up-ticks in its mid-2004 bear rally. Nobody talked about it - except in gold-analyst circles. Today, you cannot find a news report on currencies that does not mention the problem, and they go on and on about it.

Example No. 2: US consumers are consuming too much - but, oh shucks! The entire world economy depends on them continuing to do so, so we'd better leave it alone - lest we rock the boat to much and have to start treading water!

Well, now everyone is writing about it as if only ignorant boob-heads could be unaware of it. I would like to ask the gentlemen and women of the press: why didn't you write about it earlier? Were you an ignorant boob-head then, or did you know - and were told not to write about it?

The real reason for all of the dislocations we are witnessing in the world financial system must still be searched for in vain in the mainstream press. That reason happens to be that a world-wide, centrally mandated fiat currency regime that is dependent upon a purely fiat "reserve" currency can result in nothing less.

The reserve currency issuer (the US since Bretton-Woods) was literally forced to print more and more dollars to accommodate the tremendous demand stemming from a developing globalized trade system. This function, which used to be fulfilled by gold for centuries, needed a substitute. Hence the US government's smoke-screen that the dollar was "as good as gold."

At first, the dollar was at least internationally backed by the US stash of public gold. When a wolrd-wide dollar-glut developed in the late sixties, the French got smart and decided to cash in their dollar-claims for gold, which promptly threatened to bankrupt the US Treasury, so Nixon closed the gold window in 1971.

But the simple fact that the dollar was now literally worth"less" didn't dissuade the world from needing it, precisely because there was now no gold available to back it (thanks to the IMF countries agreeing that no member-currency shall be tied to gold in any way). The world still needed a commonly accepted medium of international trade and an international "reserve" currency upon which other countries could pyramid their own inflation schemes.

And the US was only too happy to oblige. Being able to print the world's trade and reserve currency without fear of excessive demands on US gold reserves freed the US to basically write uncovered checks for whatever it needed - with the only promise implicit in the deal being that this reckless check-writing shall continue in perpetuity.

All of these hot checks written by the Fed, and the world's lack of a viable alternative (not true, but we'll get to that later) guaranteed the US a free lunch if there ever has been such a thing in the history of the world.

But the world itself didn't make out too shabby, either. As a result of American profligacy, the other countries of the world were able to print their own monies to their heart's content, knowing that there would always be enough dollars floating around the system to be able to cash their own currencies in, exchange them for dollars, and buy and sell goods they produced and exported and imported to each other.

And whom did they sell to? They sold primarily to the bad, wasteful, arrogant Americans, who imported and consumed a high percentage of what the world put out in terms of raw materials and consumer products. This was especially true with the exports of Europe and Japan, and more recently also of the other Asian exporters - and most recently also of China.

So, the oft-decried spend-happiness of the American consumer (you and me) was directly responsible for the success of the Asian-Rim exporters and the general increase in world trade and prosperity. But that artificial prosperity came at a high price.

In the process, Americans had to reach deep into their pockets. On top of that, and in order to perpetuate this phenomenon past its usual short-lived life-span, the US Fed had to drive interest rates lower ... and lower ... and lower still, and pump up the US money supply higher ... and higher ... and higher still.

The direct result of lower and lower interest rates was a booming stock market that left American consumers no other choice but to liquidate their savings (which now yielded less and less interest) and throw them at the stock market (which went ever and ever higher as all of the excess money-production by the Fed was looking for a natural "home"!)

In addition to that, foreigners saw no reason to invest much money in their own economies during the nineties and invested in "Amerika" as well, driving stock-valuations ever and ever higher still.

Especially since the 9-11 massacre, it has become very clear to all that the very last thing, the only thing that still held the US economy up was the US consumer's spending - and borrowing - and spending even more.

No wonder the US savings rate went to crap.

And now we are five milliseconds before impact, and we're wondering what to do.

Hand-wringing abounds in (knowledgeable) investor and financial circles.

The Hatch Has A Catch

They know that this situation is untenable. They know that the pressure cooker is about to blow. They know that this dollar-reserve system cannot stand the pressure for much longer. They have built themselves an escape hatch - but the escape hatch has a catch. (That's almost Dr. Seuss-like poetry, isn't it?)

The catch is that these Asian export giants like Japan and China can't afford to just liquidate their dollar-holdings and exchange them for euros. If they do, the US goes under, and all of their (predominantly dollar-denominated) foreign currency reserves lose most of their value.

So, with each round of liquidation, two things would happen: (1)their dollar holdings would lose value and (2) the much-desired euros would eventually become prohibitively expensive. That would leave them with less and less buying power to buy what is becoming more and more expensive over time - the euro.

On top of that, their liquidation of US treasuries would drive US interest rates sky-high, crushing the US consumer (who powers their economies) under the weight of his debt-servicing costs.

A bad deal, all the way around.

So they all thought: "Well, if we can just "smooth this process out" and prolong it as much as possible, maybe, just maybe, we can avert this terrible disaster."

That's what they tried this summer when the dollar jumped and the euro slumped and gold was pushed down the drain pipe - for a while.

But it didn't work.

The Empire Fights Back

The US, being pushed to the wall by the impending transition to the euro and the accompanying threat of losing its reserve-currency-printing-privileges, started to fight back.

The US elites know that the world wants off the dollar. They know that the euro is capable of "taking over" - so they did what nobody expected: they are letting the dollar fall faster and harder than anyone is comfortable with in an attempt to kill the economies that support the euro - and so the euro itself. No more competition - problem solved. Or is it?

Nope. This gamble isn't working, either.

The problem is not the euro.

The problems is not even the dollar.

The problem is a world-wide, mandatory fiat system built upon nothing but debt - and on the assumption that centralized government and banking power will be able to balance that inverted debt-pyramid forever and ever.

Fat chance.

Right now, the world fiat-system is stuck!

Foreign central bank potentates are graciously admonishing the US consumer to start saving more to help balance the current account deficit.

But US consumers cannot, will not, increase their savings rate unless interest rates on savings accounts, CDs, and government bonds become more attractive than (hoped-for) stock market gains.

When that happens, they will stop spending - which we all know is the only thing holding this world-wide inverted debt-pyramid up as we speak.

When that happens they will stop investing, and the Dow, that pop-idol-like symbol of American economic might, will collapse.

When the Dow collapses, the world will stop sending us money to prop up the Dow. They will see the writing on the wall and either stop investing or pull out every other kind of US investment they own.

When that happens, the US economy will collapse even further, and the US "engine of global economic growth" will simply blow up.

This will leave the Japanese and Chinese to exporting their wares to each other and to Europe - but we all know what kind of shape the European economies are in. So the Chinese "wonder-economy" will blow up, too. That will set up a chain reaction that will blow out every single economy on the face of the globe, just like a string of Chinese firecrackers at a Lunar New Year's celebration.

And all that will happen because some stupid world bankers thought they could control the assets of the entire world by making us dependent on their hellish spawn: a purely debt-based, world-wide fiat monetary system.

There is only one antidote.

We must run away from this debt-based system and go back to real value - value that does not depend on someone else's promise (or lie). And the only real value capable of functioning as a currency is represented by gold and silver. Like it or not.

There are many arguments why the world could not possibly go back to a classical gold standard.

Those arguments are, in fact, correct.

But there is nothing on earth (or in Heaven) that prevents the world from going forward instead, to a 100% Bullion-Weight Standard.

So what if there isn't enough gold around to exchange all of those outstanding paper-claims into it? Just toss out the paper claims altogether. No matter how little gold there is, everything in the world can be set in a price determined only in pure bullion weight, not in "dollar", Francs", "Lira", or even "Euros" or "Yuan".

And the price of silver in terms of gold (or gold in terms of silver) can be freely set by the market. No central banks needed, here! No artificial government pronouncements or decrees are necessary to do this.

The market may not be infallible or all-knowing, but it is the only truly efficient price and interest-rate-setting device that has existed in human history - and it is not dependent on centralized control by a super-computer somewhere (or Alan Greenspan's precarious synaptic activity)!

The problem with all of modern world finance is that the concept of a "Money-Unit" has never been properly defined. This has allowed the bankers (i.e., usurers) of the world to grab hold of all value (which they could previously not control) and turn it into something they could control: debt and its issuance.

Or, at least they thought they could. Turns out now that these sorcerer's apprentices don't know how to stop all those brooms from bringing water into the house. The only thing is that, in this real life story, there is no "sorcerer" who's coming home to save the day and bail out the apprentices.

But you can help by bailing yourself out. Let the manipulators of the world fend for themselves when the day comes. You have your own family to take care of. And the only way to do that is to return to using real gold and silver, and maybe copper, as currency. And that currency had better be a private issue. Letting the "apprentices" back in on the game would be inviting disaster all over again.

Got gold?

Alex Wallenwein
Editor, Publisher
The Euro vs Dollar Monitor

Just like driving your car, investing only makes sense if you can see where you are going. The Euro vs Dollar Monitor is your golden windshield wiper that removes the media's greasy film of financial misinformation from your investment outlook. Don't drive your investment vehicle without it!

Copyright © 2003-2008 Alex Wallenwein

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