The Binary Circumstance

Charles Goyette, author of the upcoming book, The Dollar Meltdown: Surviving the Impending Currency Crisis with Gold, Oil, and Other Unconventional Investments, wrote an article for CNBC about what the government and the Federal Reserve have done to the dollar and it’s impact on the price of gold.

He explains how our once-strong dollar is losing its status as the world’s reserve currency due to relentless borrowing and printing:

As long as the rest of the world was willing to continue holding dollar reserves, their demand for the dollar would bid its price higher than it would otherwise be.

As long as oil producers were willing to sell their depleting commodity for a depreciating, irredeemable currency, Americans were the beneficiaries of this added dollar demand.

If the world would just continue to go along, the Federal Reserve could accommodate spend-thrift US politicians and create new dollars at virtually no cost.

But to mix our ornithological metaphors, the chickens have begun coming home to roost. There is no reasonable prospect of the federal debt being paid down, at least if both the visible ($12 trillion) and the hidden ($100 trillion?) debt are taken into account. Nor can anyone possibly believe that today’s government bonds can be paid except by issuing new bonds tomorrow.

It is this reckoning that had gold pierce the $1,000 mark in 2008 (while oil soon surged ahead for the same reasons to $147). And despite the scramble for liquidity with the mortgage meltdown last year that drove gold briefly down to almost $700, it didn’t take long for gold to work its way back up and to new highs.

The dollar bubble may not pop suddenly like the dot com bubble or the housing bubble. But like the miner’s canary, the gold price is warning that our monetary system is toxic…

It’s an excellent, short article that does a good job of explaining what has happened to the value of the dollar since Nixon took us completely off the gold standard in 1971.

The World Gold Council has a graph of monthly gold prices since 1971. It shows what happened to the value of the dollar relative to gold once the government and banks had no limit on how much money they could print. The same page shows that this is a global phenomenon, often because other countries used the dollar as their reserve currency. Paper currency around the globe is becoming increasingly worthless.

As I noted in my previous post, the Federal Reserve has debased the dollar so that what cost $.08 in 1913, now costs $1.00.

It’s no wonder that Ron Paul wants to put an end to the Federal Reserve.

I’ve noted in previous articles that no person who works for a living can compete with someone who has a printing press that is counterfeiting money. Government and bank printing presses have enslaved all Americans for generations to come to a massive debt that can never be paid off without enormous pain. And most Americans have gone along willingly.

Jack Rickards, director of market intelligence for scientific consulting firm Omnis, appeared on CNBC and talked about the dollar.

Among other topics, he explains that since the creation of the Federal Reserve, what cost $.08 in 1913 now costs $1.00. He also explained why central banks hate gold and want to keep its price down (it limits their ability to print money) and how the IMF has now become an international central bank, issuing debt (printing money) for the first time. He states that the US can never pay off our debt with growth or taxes, therefore the government must allow the dollar to lose value so they can pay off the debt with cheaper money than they originally borrowed. It’s a backdoor way of cutting our debt in half.

He talks fast and covers a lot of territory, so you might have to watch it more than once, but it’s an excellent piece.

The Federal Reserve, apparently not satisfied with dumping the bad debt held by banks on the taxpayers, has invoked a little-used law to shift the bad debt held by a non-bank to the taxpayers as well.

From Bloomberg.com:

March 14 (Bloomberg) — Federal Reserve Chairman Ben S. Bernanke invoked a law last used four decades ago to keep Bear Stearns Co. from collapsing after the securities firm approached the central bank for emergency funding.

The loan to Bear Stearns required a vote today by the Fed’s Board of Governors because the company isn’t a bank, Fed staff officials said. The central bank is taking on the credit risk from Bear Stearns collateral, lending the funds through JPMorgan Chase & Co. because it’s operationally simpler to accomplish than a direct loan, the staff said on condition of anonymity.

Bernanke took advantage of little-used parts of Fed law, added in the 1930s and last utilized in the 1960s, that allows it to loan to corporations and private partnerships with a special Board vote. The Fed chief probably sought to stave off a deeper blow to the financial system from a Bear Stearns collapse, former Fed researcher Keith Hembre said.

Just three days ago, the Fed promised up to $200 billion in loans to banks also agreeing to take their bad loans as collateral. That news sent the stock market soaring over 400 points. Today’s news sent the stock market and the dollar down and saw gold trading solidly above $1,000 ounce for the first time in history.

In the latest sign that the global credit crisis is probably far worse than governments are letting on, Great Britain is nationalizing mortgage lender Northern Rock and apparently offering shareholders very little in return. That either means that the company really is worth very little, or the government is basically stealing it from private owners.

LONDON (AP) — Prime Minister Gordon Brown’s government faced accusations of mismanagement Monday as it began nationalizing stricken mortgage lender Northern Rock PLC — the first time in 20 years that a private company has been taken into public ownership.

The government repeatedly insisted a private sale was its preferred option. But after five months of intense speculation about the future of Britain’s most public casualty of the global credit crunch, Brown said that nationalization was the best choice until market conditions improve.

“We will, and always have, put the interests of taxpayers first,” he said.

The opposition Conservative Party said Britain’s reputation as a major financial services center had been dealt a serious blow.

“The nationalization of Northern Rock is a disaster for the British taxpayer, a disaster for this government and a disaster for our country,” said Conservative Party leader David Cameron.

[...]

Meanwhile, trading in the stock was suspended to make way for nationalization, leaving shareholders unable to sell their holdings after the government first announced its plan Sunday.

Under British rules on nationalization, shareholders will be offered compensation for their holdings at a level set by a government-appointed panel.

The panel will calculate a figure based on the bank’s value without government guarantees — a figure most analysts expect to be very little or nothing at all.

The stock closed at 90 pence ($1.75) Friday, valuing the company at 379 million pounds ($738 million). The price has fallen more than 80 percent since Sept. 13, one day before Northern Rock revealed it had sought the emergency funding.

It should be noted that Gordon Brown has not shown a talent for timing markets well in the past. In 1999, he sold off half the gold reserves of the Bank of England at the market’s bottom, and by announcing the sale to the world before it began he depressed the market by 10% before he sold the gold.

…But “the timing of the decision was ludicrous,” says Peter Fava, then head of precious metals at HSBC.

“We told them [the BoE] – you are going to push the price down before you sell it.”

That’s just what happened, of course. Gold sank by almost one-tenth on the back of Gordon Brown’s decision to announce his sales ahead of time.

“I was surprised they had chosen the auction method,” adds Martin Stokes, a former vice-president at J.P.Morgan. “It indicated they did not have a real understanding of the gold market.”

Clueless or not, however, it didn’t matter. The Bank of England had no say in the matter. It only got to advise the government on HOW to sell the gold. The fact of the sale itself had already been decided by the Treasury. And since then, says the Times, the government has defied all calls to release minutes and emails written at the time.

The paper says the government is now embarrassed by its decision to sell gold. But you wouldn’t know it from Gordon Brown’s behavior; the guy’s not embarrassed at having destroyed the UK pensions industry, for instance, or taxing dividend payments so badly that sales of mutual funds to private investors have collapsed. Why would he be embarrassed by selling gold at the end of the 20th century? Everyone else was doing it, after all.

Given his past, it’s very comforting to know he’s now working his magic on the global mortgage crisis. (Sarcasm intended.)

I would suggest that he may be a contrary indicator. Forcing the sale of Northern Rock shares might indicate the market has hit bottom. But this is different. He’s not selling Bank of England gold this time, he’s forcing private citizens to sell their shares to the government at a price determined by the government.