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April 01, 2006

Central Banks, Weimar Germany and Gold
by Richard Greene

The man on the street is increasingly beginning to figure it out that the Government has been lying to him and, in effect, stealing from him. The retired person is finding out because after his cost of living adjustments he is just not making ends meet. The purchaser of inflation-adjusted securities is noticing that after his return of capital the capital does not purchase what it once did. The sender of a Federal Express letter can find a fuel adjustment charge of $4.13 now for just a single letter! Even producers of gold and silver, the ultimate defense against inflation, notice the price of steel and fuel are rising even faster than their end products. These are all dead giveaways that inflation is higher than reported and the masses are waking up in larger and larger numbers that it is a matter of survival to keep pace with inflation.

All of the government manipulations have largely worsened the situation by not only deceiving the masses, but also the allocators of capital which has resulted in serious misallocations of capital. Do we really need more retail stores or housing? Would we even come close to needing what we already have if it weren't for free and easy money? (In real terms money has in actuality been less than free unless you believe the ridiculous measures of low inflation that have been bandied about over the past few years.) The credit-based emphasis on consumption and asset bubbles to drive economic growth has gutted the longstanding, self-sustaining infrastructure of the US economy that had been its greatest strength.

The differences between our economy today with the centrally-planned economies of Russia in the past are less decipherable every year. The neglect of savings and investment that is crucial to a solid foundation for economic growth has been replaced by central planning of the economy by economic illiterates. While paying lip service to free markets and free trade, markets are manipulated and consumption is now entirely dependant on foreign capital. On top of all of this the foreign capital is precluded from investing in assets of its own choice but rather are directed toward more US debt; debt that is unlikely to be repaid in real terms. It is becoming obvious that the free money phase has played out, and as foreigners refuse to provide more capital except with higher compensation for the increasingly necessary monetization, more and more monetization will become necessary. The seeds of hyperinflation have been sown.

The US economy is heavily dependent on keeping asset bubbles from deflating. Just think how many people are employed as real estate agents, mortgage brokers, stock brokers, and other paper shuffling activities, not to mention the huge employment in the retailing industry that is totally dependent on the US continuing to consume more than it produces. Unemployment probably already exceeds 10%, yet, again government statistics assure us everything is sound. With such a heavy dependence on stocks and real estate never going down again, it makes sense to look at the Weimar experience and the great inflation in Germany in the early 1920's. Wall Street and the Government have the masses fooled that everything is just fine since the market never goes down. Yet if we look at the German experience the stock market went from under 100 to over 26 Billion in five years' time. A lifetime of savings and retirement funds were wiped out in a matter of months and people were forced to live from hand to mouth. With $50 trillion in present value of future benefits promised to workersm do Americans really believe they will get anything close to that in real terms? They may get it in nominal terms but it will probably not buy a bologna sandwich.

So, what to do to protect yourself from this cataclysmic possibility? Our recent administrators of the financial system are incredibly similar to John Law, a notorious financial alchemist that resurrected the economy of France before bringing it to its knees in the 1800's. The difference is that today's charlatans are equipped with much more powerful weapons through computerization and financial derivatives which in the end merely allow for vastly higher degrees of leverage and obfuscation. This has prolonged the day of reckoning to an incredible extent yet also guarantees the unwinding will be ever more painful. The typical financial planner today should be completely ashamed of his lack of knowledge and ability. While it is not surprising that bus drivers, plumbers, and the bulk of society are not conversant in the dangers prevalent today, it is totally unacceptable and disgraceful that financial people whose business it is to know are so completely in the dark. For example, it is common to hear advisors recommending municipal bonds as completely safe to investors while the municipality has huge deficits, debts, with a need to raise taxes that will kill the local economy. The land mines out there are clear to see with stocks like; FRE, FNM, GM, GE, F, JPM and a host of others. Don't be surprised if one of these firms is used as a toxic dumping ground to bury as much of the defaults as possible. All of these problems lead back to the same thing; the replacement of real money, gold and silver, with fiat money that is in the early stages of failure. "The Rude Awakening", an in-the-know free daily economic commentary, posted the following chart showing how in real terms gold has barely taken off.

Comparing yesterday's gold price to todays is apples and armadillos.

Don't be impressed that the Dow is closing in on all-time highs. The charts above from Robert Prechter's "The Elliott Wave Theorist" show a much truer picture. If measured in a stable measure of value such as gold, the Dow hit a new six-year low early this year. Do the recent multi-year highs in some of the major indices mean everything is strong and running smoothly as the talking heads on Bubblevision proclaim? We should soon see. The wisest defense in this environment is to have the bulk of your assets in gold and silver yet the vast majority as yet have none. What are YOU waiting for?

Richard J. Greene CFA
Thunder Capital Management

More articles by the author can be accessed by the "Research Articles" choice at: www.thundercapital.com

Copyright © 2004-2009 Richard J. Greene

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