To stop the bleeding, the Fed more than doubled the cost of currency in the U. However, was an election year. Three long years into the Depression people were desperate for a change, and in November, Franklin Delano Roosevelt was elected president. Again gold flowed out of the vaults as foreign governments, foreign investors, and the American public lost even more faith in the dollar, and the most devastating bank run in American history began. A month later he signed an executive order requiring U.
On April 20, he signed another executive order, ending the right of U. On the same day, the Thomas Amendment was sent to Congress, authorizing the president, at his discretion, to reduce the gold content of the dollar to as low as 50 percent of its former weight in gold.
But there was still one major hurdle to overcome before Roosevelt could devalue the dollar: the infamous gold clause. During the Civil War, President Abraham Lincoln had to come up with a way to pay the troops and introduced a second purely fiat currency to the country, the greenback dollar. When it first appeared, the greenback was worth the same amount as gold notes.
But by the end of the Civil War they had fallen to just one third of the value of the gold-backed dollar. Many people who had made contracts or taken out loans before the war in gold notes paid them back in depreciated greenback dollars. Of course this was cheating the creditors and many lawsuits were filed. The big problem for Roosevelt was that most government contracts and obligations also had this clause written into them.
So devaluing the dollar would also increase the cost of government obligations by the same amount. So at the behest of President Roosevelt, Congress passed a joint resolution on June 5 defaulting on the gold clause in all contracts, public and private, past, present, and future. This great government, strong in gold, is breaking its promises to pay gold to widows and orphans to whom it has sold government bonds with a pledge to pay gold coin of the present standard of value.
Roosevelt gladly obliged. As far as I can tell, no one seems to know exactly who penned these proclamations and executive orders. But one thing was now clear. The government was no longer a government of the people, by the people, and for the people. Instead it was a government of the bankers, by the bankers, and for the bankers. But there was still one more dastardly deed to be done. Weight Watchers On January 31, , Roosevelt signed an executive proclamation effectively devaluing the dollar.
But now, since the dollar instantly had This also meant that, with regards to international trade, the government had just stolen That is the power of fiat currency. The worst part of this whole situation is that people who followed the rules and turned in their gold as decreed were the ones who suffered the most because those who illegally hung on to their gold realized a Less than 22 percent of the gold in circulation was turned in, however, and it seems not a single person was arrested or prosecuted for hoarding.
But despite the efforts of the U. By forbidding the U. By declaring the claim checks on gold held by U. Chart 2 shows the accounting that gold did of the U. The gray line is U. The black line is the total value of the U. By devaluing the dollar from one twentieth of an ounce of gold to one thirty-fifth of an ounce, the value of the gold held by the U.
Treasury now exactly matched the value of the monetary base. This meant the dollar was once again fully backed by gold. It also meant that there was no reason for gold to continue being illegal since there was now enough gold to pay out against every paper dollar in existence, and the dollar could have been fully convertible into gold once again. Chart 2. Monetary Base vs. Gold Reserves, — Source: St. Louis Federal Reserve Bank Gold had once again revalued itself, not with the knockout blow and the death of the currency as in previous chapters, but this time by a technical knockout.
To halt the implosion of the U. Gold was still the undefeated heavyweight champion of the world. But all the pain and suffering could have been avoided. Gold and silver require discipline and constraint from banks and governments, and both banks and governments resent gold for it. Numerous factors contributed to the Great Depression, but there was only one root cause. Governments around the world, along with the Federal Reserve, foreign central banks, and commercial banks, all tried to cheat gold.
What got us out of the Great Depression was the tremendous influx of gold from Europe. Remember, thanks to the Roosevelt administration, the dollar was devalued by over 40 percent. So its purchasing power overseas fell by the same amount, slowing our imports dramatically. But countries buying from the U. Also, when a country fixes its currency to gold, it has to buy or sell as much gold as is offered or demanded to maintain that currency price. Suddenly, all of the gold mining companies around the world were selling their gold to one buyer, the U.
So this, plus a tremendous trade surplus, accounted for most of the gold inflows from through But in , a new dimension was added. And there was a transfer of wealth from European investments to U. European consumer goods factories were used to produce guns, ammunition, airplanes, and tanks.
Thus most Europeans had to obtain everyday items from the U. So, in reality, gold inflows, foreign investment, and war profiteering, not social programs, were what lifted the U. At this point, the United States held approximately two thirds of the world monetary gold reserves and had a thriving economy.
Structurally, the U. Very quickly world leaders realized the dire economic situation they were in. This huge trade imbalance meant that at the end of the war the world monetary system would be in shambles. About a year before the end of the war, representatives from forty-four countries met in July of at Bretton Woods, New Hampshire, to figure out how they were going to make the world of international trade and finance work again.
They needed a system of international payments that permitted trade without the wild fluctuations in currency exchange rates or the fear of sudden currency depreciation that had crippled international trade during the Great Depression. It was decided that all countries would peg their currencies to the U. This meant that, from World War II on, all foreign central banks had to hold dollars instead of, or in addition to, what was left of their gold reserves.
But there were two big flaws in the Bretton Woods system. Actually the flaws were more like big gaping holes. First, there was no reserve ratio set as to how many dollars could be created for each unit of gold, allowing the U. Second, even though U. This truly was a deficit war. And on top of that, he added his Great Society programs, enacting a guns and butter policy that borrowed heavily to fund wars abroad and social programs at home.
But while we were waging a deficitfunded war in Vietnam, Charles de Gaulle, the president of France, was using the loopholes in the Bretton Woods system to quietly launch a full-blown assault on the U. De Gaulle vs. Nor had anyone of such stature made so sweeping a criticism of the international monetary system since its founding in The Federal Reserve announced that the U. Then Great Britain devalued the pound in November , causing a run on gold.
The pool was stretched to the breaking point, and the outflow of gold increased twenty-fold. By the end of the year more than 1, tons of gold had left the vaults. For years Gold Pool sales had averaged five tons per day. By March of sales were heading past tons per day! Take a look at Chart 3. You can clearly see the rampant currency creation through the mid- and late s. You can also see that from to , more than 50 percent of the U. Chart 3. Louis Federal Reserve Bank The Gold Pool was closed and the parallel free market for gold was allowed to find its own price.
Gold had the dollar on the ropes and delivered a one-two punch! Gold had won this round, but the fight was not over yet. The Collapse of the Bretton Woods System By the Bretton Woods system had been completely overwhelmed by the will of the public and the free markets. For the first time in U. This was tantamount to the United States declaring bankruptcy. Gold had won this match, and it was now free to set its own value on the open market. At this point most countries and central banks were now on a dollar standard, and were using dollars for international trade instead of gold.
So with the end of the Bretton Woods system, in , the dollar was freed from any fiscal constraints, allowing the U. A power it still holds today. No other country has this hidden advantage, and now U. This advantage gives the U. It also gives the U. Inflation of a currency supply respects no borders. Therefore, every new dollar that is printed devalues all other dollars everywhere in the world.
Yes, the dollar was free from the fiscal constraints of gold, but gold was also freed from the dollar. On August 15, , gold became its own free-floating international money, no longer bound to any country. The Golden Bull After the collapse of the Bretton Woods system, all the debt that was created in the s monetary inflation to fund the Vietnam War and the Great Society came back with a vengeance in the form of price inflation in the s. Coincidentally, on August 15, , the same day Nixon took the U.
History was once again repeating itself; Diocletian had committed the same folly centuries before as the Roman economy collapsed. I remember seeing peach farmers protesting on the evening news by dumping their peaches on the roadside and leaving them to rot because the price they could legally sell them for was below their cost of production. Shortages ensued and store shelves were bare. Once again, it was proven beyond a shadow of a doubt that governmentmanaged markets do not work.
Most people think that this was a key factor leading to the inflation of the s. Again, they are mistaken. Even though the Arab states were meting out punishment to the West for supporting Israel, the bigger picture is that the purchasing power of the dollar had been falling since the United States started flooding the world with dollars in the mids, and the price increases in oil only served to bring the value OPEC received for a barrel of oil back up to the levels they had received under the Bretton Woods monetary system.
In , the Shah of Iran, one of the U. You increased the price of wheat you sell us by percent, and the same for sugar and cement. The rising dollar price of oil, back then, just as today, was only so that the producers of oil could recover the lost purchasing power of the dollar.
But it was still illegal for Americans to own gold. He held press conferences while brandishing illegal gold bars, publicly defying the federal authorities to throw him in jail. He worked tirelessly lobbying Congress to get bills introduced, and his reward came on December 31, , when President Gerald Ford signed the bill that made it legal for U.
Even though gold was now freely traded, it was not traded as a currency; instead it was traded as a commodity. People had been using paper currency for so long that most had lost interest in gold and put their faith in paper.
It was once again acting like a currency. America had gold fever. But the mainstream was wrong. The gold fever was now turning into a twentieth-century gold rush. In cities throughout the U. This dealer was located in the center of the block, on a major city street, and the line of people went out the front door, down the block, around the corner, and up the side street. The lines were being compared to those for Star Wars and Apocalypse Now! I was twenty-four years old and wrapped up in a business I had just started.
But my father did, and so did the fathers of all of my friends. They were part of the masses of unsophisticated investors that were buying with the herd. The strategy is simple: Buy low, and sell high. How many years does it take the Dow to triple?
With gold, you could have done it in little more than one year. If you had bought at the bottom and sold at the top you would have realized eight and a half times your investment in less than three and a half years. And if you bought outside the U. Throughout history, governments and the banking system start with a certain amount of gold and silver. But the trouble is that they never stop printing. Chart 4 is, once again, the same as charts 2 and 3, but this time with a little twist.
It runs longer, until And the black line is still the value of the U. The lower gray line is the same U. I would argue that credit outstanding adds to the currency supply. Even though credit card dollars are phantom dollars, which sprang into existence with a signature, and are owed to the bank, they purchased a good or service when they sprang into existence. Once the seller of the good or service has that dollar it becomes a regular dollar that is not owed to a bank.
It can therefore go on to purchase other goods and services and so becomes one of the drivers of price inflation. That phantom dollar circulates in the currency supply until someone earns it back and pays off their credit card debt with it. As long as credit outstanding is growing, so is the currency supply. In this amazing chart you can see that gold once again did the accounting it has been doing for more than 2, years, since it did its first accounting in Athens, in B.
Chart 4. Gold Reserves — Source: St. Louis Federal Reserve Bank Yes, gold did what it has always done. In a move that saw it rise more than twenty-four times 2, But the most amazing thing is that, once again, for a short while, the United States of America had the opportunity to go back on the gold standard. Because if they had, the greatest wealth transfer in the history of mankind would not be happening, and so the opportunity to have wealth transferred toward you would also not exist.
But it is happening, and the wealth can be transferred toward you. Read on. One thing is for certain; the crash of was the largest one-day crash in history. The most popular explanation was computer selling by program traders; others say it was a correction due to overvaluation, or blame it on lack of liquidity. Rumors spread, and the dynamics of herding and mass psychology took over.
The real cause of the crash probably goes back to the late s and early s. Paul Vocker took over as chairman of the Fed in August of and realized the need to raise real rates interest rates minus inflation into positive territory to get runaway inflation and the price of gold under control.
The higher rates only served to make a really bad recession worse, and by the time Ronald Reagan took over the White House in the economy was in bad shape. So, in March of the Fed goosed the economy by eliminating the reserve requirement on time deposits of thirty months or more, and in September changed it to eighteen months.
In the two-year period from January of to January of , the currency supply increased by a whopping 21 percent. On top of this vastly increased currency supply, the Fed reduced rates from over 11 percent in late to about 6. All that currency had to go somewhere. In a very short period of time, the index went from extremely undervalued to extremely overvalued in terms of earnings.
The investing public was caught up in a contagious euphoria similar to that of any other bubble and market crash in history. This euphoria made people believe, once again, that the market would always go up. However, due to extremely strong economic growth, inflation was becoming a concern. The Fed raised short-term interest rates to temper inflation.
This had a negative effect on the markets. On Wednesday, October 14, a sell-off began. By Friday the Dow had plunged more than 10 percent. Then on Monday, October 19, , the majority of U. The Dow lost Fearing the crash might cause a worldwide depression, banking crisis, or both, the Fed intervened by increasing the currency supply, which had the side effect of taking the real estate booms that were happening in different pockets of the country and turning them into mini-bubbles.
By , all that new currency that was created after the stock market bubble had popped just a year earlier was causing home prices to shoot up. People in her area were trading homes like crazy. All through and the first quarter of the Fed raised rates from just over 6. The Fed accomplished its objective, the property boom went bust, and a recession started on the East Coast, sweeping west across the country.
Home prices slid further and the country fell into recession. In response, the Fed cut the reserve requirement on time deposits from 3 to 0 percent, and in it cut the reserve requirement on transaction deposits from 12 percent to 10 percent. Over the same period, interest rates were slashed from 8 percent to less than 3 percent. But this time these measures had little immediate effect, and the economy continued to drag. Ironically, at the time of the writing of this book nearly twenty years later we again have a Bush as president George W.
Real estate prices in her neighborhood fell dramatically. One of her neighbors was a contractor who was building fourteen homes in the neighborhood. When homes stopped selling and prices started falling he was forced into bankruptcy, and all fourteen homes were foreclosed on. So his bank put them all on the market at the same time, pricing them enough below the comparable properties in the neighborhood to insure their quick sale.
Then, within the next couple of months, two other banks had a wave of foreclosures that hit the market. Nothing was selling and everyone was trying to price their home just a little below the next guy to make sure their home was the next one that sold. Her house had a larger lot and a view, but still, it was worth less than half a million. Home prices in her neighborhood had plunged by 60 percent.
Now, this home was almost considered a teardown. I saw it; it had peeling paint, a dead lawn, and had never been remodeled since it was built in the early s. Unfortunately for him, the prices for housing dropped dramatically and quickly. He was underwater for ten years until his home finally exceeded the purchase price in Anyone who bought income property during the early s, however, could easily get property that cash-flowed well, and soon after, real estate values appreciated more than anytime in the past.
All that fiddling the Fed did with reserve requirements and interest rates back in and finally kicked in with a vengeance in In the currency supply exploded and never looked back. In the decade from to the currency supply increased about percent. That means that in those ten short years, more currency was created than in all the preceding eighty-three years. In fact, more currency was created than the entire previous history of the United States, and it resulted in the biggest real estate boom in history, as well as a whole bunch of bubbles in bonds, derivatives, consumption, debt, and once again, stocks.
Dot-Bomb But the bubble of all bubbles—with maybe the exception of the recent real estate bubble—was the tech bubble of the late s. Their quick rise and huge profits attracted other companies to jump on board the tech train. As that train accelerated, the masses lost their collective mind and threw money at companies of no substance. So basically, anyone with an idea could get together, incorporate, go public, buy Ferraris, install a golf course in their backyard with the proceeds, and issue stock like toilet paper.
Finally, in order to prevent a market meltdown from the Y2K bug, the Fed, with Alan Greenspan at the helm, pumped so much liquidity into the markets that they started to rise at an amazing pace. The frenzied speculation sucked in so much capital that it eventually became a pyramid scheme, requiring an ever increasing mountain of currency to maintain its upward trajectory.
Essentially, the dot-coms turned into dot-bombs. The financial fallout included the popping of the dotbubble, the collapse of companies such as Enron, WorldCom, and Global Crossing. Many investors lost their retirement funds, houses, and savings.
In the case of the Nasdaq, there were fourteen years where you could have bought your tech stocks while the index was under 1,, and you had about a year to sell stocks over 3, If you timed it really well and were able to sell your tech stocks at 4, or 4,, good for you. In the end, the bubble burst and lives were ruined. It requires a lot of education and investigation to find an undervalued asset class at the beginning of a new bull market. Those opportunities only go to the very few who do the work required, and those that are able to think for themselves.
Most investors get their advice from the same place as everyone else. They do things the easy way and wait for advice to come to them from the TV, the big investment firms, and their friends and neighbors who are already getting rich. During the dot-com rush, most investors who bought into the mass media advice also bought into the pitch.
But remember, in times of financial upheaval, wealth is not destroyed, it is merely transferred. The opportunities this creates for the educated investor are enormous. The price means nothing. Since the end of the Bretton Woods system in the s, the dollar has been a dirty, double-dealing, back-stabbing liar, and it still is today.
As I write this chapter, the Dow is at 13, and is trying to push north toward its highs of just over 14, It also appears that we have just witnessed the end of the greatest real estate bubble of all time. Man, that was a long time ago. Boy, those were the good old days. Regardless of their price in terms of dollars, in terms of value, both the Dow and real estate have been crashing for years.
The Dow Is Crashing! This is a blind spot investors must be mindful of, and guard against, if they are to prosper. The only reason the Dow looks like it is going up is because the Fed has pumped so many more dollars into the currency supply that all asset classes are rising. If everything is going up getting more expensive , that means the dollar is going down. Under these conditions, the only way to see where true value lies is to eliminate the dollar from the equation.
You have to measure each asset class, not with the dollar, but against another asset class. To do this I took the Dow and divided it into the price of the other asset I am measuring it against. The result? By measuring the Dow in terms of purchasing power it is clear that stocks have been tanking for quite some time, even while their price has been rising relative to the dollar. All of the following information is current as of April Since January , the dollar has plummeted negative This has caused money gold to rise measured in currency dollars as more and more investors move out of their currency and into real money.
In Chart 7, I measure the Dow the way you are used to seeing it, in dollars. But in Chart 8, I measure it with real money, not currency. It took almost 45 ounces of gold to buy one share of the Dow in As I write this it takes less than At the writing of this book, the proceeds would only buy you So measured in real money, the Dow has lost two thirds of its value, and crashed by 67 percent.
Chart 5. Dollar Chart 6. Gold Chart 7. Dow in Dollars Chart 7. Dow in Dollars Chart 8. Dow in Gold I like Charts 9 and 10, because they show you just how much real stuff on the average the Dow will buy you. Commodities are the stuff you buy, or the stuff that goes into the stuff you buy, while the Agricultural Index leans more toward the stuff you eat and wear. These charts include everything from copper and steel, to natural gas and heating oil, to livestock, grains, cotton, sugar, and orange juice.
What these charts are saying is that you could buy three times as much stuff if you cashed out of the Dow in as the same number of shares will buy as I write this. Here is probably the most important chart. Chart 11 shows you how many barrels of crude oil our proxy for energy you can buy with your proceeds from the Dow. If you sold one share of the Dow in early you could buy barrels of oil. As I write this it only buys Since , the value of the Dow has plummeted It is the single most useful commodity there is.
Chart 9. Dow in Commodities Chart Dow in Food Chart Dow in Crude Oil Chart Dow in Industrial Metals Speaking of cars, along with plastics, cars are made of metals like steel, zinc, copper, and lead. And believe it or not, this is one of the reasons the U. Just take a look at the stocks of GM and Ford over the same time frame. In Chart 13, I show the relative performance of the Dow bottom line , gold middle line , and silver top line. As a starting point, I selected the beginning of the precious metals bull market in All three start on the left-hand side of the chart grouped together on the zero line.
The chart shows the relative performance in percentage gains. As you can see, measured from , the Dow has risen only 15 percent, while gold shot up percent, and silver rocketed percent! Chart Relative performance of Dow, gold, and silver Call the Cops. Why is this happening? Why does everyone think the Dow and real estate are going up in value, when they are actually going down in value?
The answer is inflation. According to the Minneapolis Federal Reserve, total inflation from to , using the Consumer Price Index, was just about 22 percent. But, unfortunately, the CPI is an unreliable measuring stick. In calculating inflation, the Bureau of Labor Statistics BLS takes a basket of goods and services and tracks their prices throughout the years.
This worked just fine when they would track the actual price of the same items year after year. The problem is the BLS no longer uses the actual price, and they no longer track the same items year to year. For example, if the price of an item has changed dramatically from one year to the next which as you might imagine might make whoever is in the White House look bad the item can be dropped from the basket of goods deletion , substituted with another item substitution , or simply assigned a new price hedonic adjustment.
For an example of deletion, you need look no further than the BLS and the mainstream media. The argument is that food and energy prices are volatile and seasonal, and removing them makes a more consistent measure of inflation. This altered the treatment of housing costs by shifting the costs for homeowners to a rental equivalent basis. It took out the cut of choice top sirloin beef that it had been tracking since , and substituted chicken breast, because it was cheaper, which makes the CP-Lie lower.
When it comes to hedonic adjustment, nobody says it better that Adam Hamilton of zealllc. In other words, if the car you bought this year cost you 5 percent more than the car you had last year, but the new car has stability control, then they figure the price increase was offset by the quality improvement, so the cars actually cost the same, according to the BLS. One might ask, Why is the Bureau of Labor Statistics doing these calculations?
Labor really has nothing to do with it. Indeed, it would be much more appropriate for these statistics to come from the Bureau of Statistics or as I like to call it, BS. They have painstakingly re-constructed the pre-propaganda version of the CPI. CPI vs. Rising prices are not inflation, but the symptom of inflation.
Every newly created unit of currency dilutes the pool of currency already in circulation, thereby reducing its value. This happens because the increased quantity of currency is still chasing after the same number of goods and services, thereby bidding up prices.
The Federal Reserve has different ways of measuring the currency supply. But on March 23, , the Fed decided to hide M3 from us, and they stopped publishing the data. Do you think it could be because they intend to significantly inflate the currency supply?
Thus, any investment that has returned less than percent over this time period is underwater. This means that the Dow would have to be above 25,, not 14,, to have the same value it had back at the turn of this century. And now it is estimated that M3 is inflating at a rate of about 18 percent per year and rising.
I would expect that prices could follow suit within a couple of years. Note that in Chart 15, the rate of currency creation today has already exceeded the rate of currency creation that kicked off the great precious metals bull market of the s. This is only the very beginning of what I believe will turn out to be the greatest bull market in history. It shows cumulative inflation in the United States from to Note that back when we used real money, inflation netted out to zero.
As you can see, with the inception of the Federal Reserve the official inflation rate became significantly lower than the actual Source: ShadowStats. The point at which the two lines diverge is when they began fiddling with the CPI. The line on the bottom is the CP-Lie. The dark line on the top, which has the trajectory of a rocket to the moon, is the real CPI. M3 Growth with ShadowStats. The inflation tax is of the second kind. The greatest advantage an investor can have is to understand that fact and exploit it.
Just to drive the point home, here is a chart Chart 17 of the Dow black line from the year , when the Fed opened for business, showing the crash and the spectacular bull run from through today. Note that when you account for the stealth tax of inflation, in the Dow began a long, slow crash that would see it lose value over the next sixteen years. Chances are you never heard of the crash of , but I assure you it happened, and it resulted in the raging price inflation of the s eating away at investor profits.
The Dow failed to sustainably surpass 1, points from to That represents a 66 percent loss in value. That is how the inflation tax can cause an invisible crash. Many who invested in the Dow between and felt they were making a safe and prudent investment decision. They bought into the pundit hype that investments in stocks do well over long periods of time.
All the while their currency was losing its value at an average rate of 6. As we will see later in the book, a smart investor would have recognized the ravaging effects inflation was having on their portfolio, and would have moved their money into investments that exploited the weakness of the U. Any guess what those investments might be?
Dow vs. Inflation Adjusted Dow Source: Minneapolis Federal Reserve Bank Beyond the shadow of a doubt the general equities markets aka stock markets are crashing, and have been since as early as and as late as , depending on how you measure it. Even though the Dow is going up in price, its value is falling. If everything else is going up in price faster than the Dow, then it stands to reason that the Dow is crashing in relative terms.
Just as there was an invisible crash from to , there is an invisible crash happening now, as I write, and just as it was last time, the hidden tax of inflation is the cause. It requires a rapidly expanding currency supply to obscure the fact that an overvalued asset class is correcting and reverting to fair value, or less. It cannot happen on a gold standard with conservative fractional reserve banking practices.
But it has happened numerous times throughout world history when a country leaves an asset-backed currency for a fiat currency. Those are just two of many throughout history. The pattern is always the same. It never changes. Therefore, if you understand the pattern, you can use it to your advantage.
Value Versus Price So this discussion begs the questions: Can an investor prosper under such conditions? Is there a way to beat inflation? In fact, a smart investor can achieve superior results under these conditions. Any investor that does reasonable due diligence, takes a position early, waits for the masses to wake up, and hangs on for the ride, has an extremely good chance of making boatloads of money. Question: So how do I see what the value of something truly is?
How do I see past the lie of the dollar? Answer: You must stop measuring value with the dollar. Stop thinking that way! So how do you measure true value? Most people know what other homes are selling for in their neighborhood, so just make a guesstimate of the price of your house.
Measured in value, everything just zigzags sideways throughout time. Once you learn to recognize the patterns of value cycles, then information is worth everything. You might be thinking to yourself, What causes things to go from over-valued to undervalued? Value shifts when the public rushes from one asset class to another. The public generally chases whichever asset class is the hottest, is on the cover of Time and Newsweek, is on late night infomercials advertised as the best way to get rich, and is the one that everyone is jumping onto the bandwagon for.
Those are the asset classes that are sucking capital away from other asset classes. From the end of World War II to , the hot assets were stocks and real estate. From to it was commodities and gold, once it was no longer our currency. From to it was stocks and real estate. And, at this turn of the century, the hot asset class became gold and commodities once again.
Those who are truly financially intelligent are able to not only recognize these cycles, but use the information to capitalize on them as well. Believe it or not, I wish I could just skip this chapter. There are a many doomsday books out there, and I wanted to keep this book upbeat. But that would be irresponsible of me because it is the trends covered in this and the next chapters that will be the main drivers for the amazing future increase in the true value purchasing power of the precious metals.
I have to admit that when I first started researching this chapter it scared me, and I developed a bunker mentality. Then I met Robert Kiyosaki, and he changed my attitude in a matter of minutes, pointing out that bigger crises lead to bigger opportunities. I could hide in my bunker and emerge after the destruction to come, or I could profit from the impending storm. That is why I have so much respect for Robert and what he does. Rather than take his knowledge and wisdom, and profit for himself, he believes in educating everyone he can.
His desire is to see lives changed for the better by his message of financial education and intelligence. And by golly, that is a message I can get on board with. He might suggest that you move your livestock to a safer place, lock the barn doors, and secure the storm windows. These problems also add up to the potential death of the dollar. This means that a baby born as a U. What about all the reckless deficit spending promised to future generations like Social Security and Medicare?
They are promises made to our citizens that will have to be paid for someday in the future. Former U. Comptroller General David Walker says that U. In the U. So, the economy grew 25 percent over this period, but the unfunded liabilities grew by percent. The unfunded liability monster is growing six times faster than the U. It now totals more than 95 percent of the entire household net worth of the United States and is expected to exceed household net worth within just a few short years.
Hodges has gone even further in analyzing debt than just unfunded liabilities. Instead, he has taken all of the state and local government debt, household debt, business sector debt, plus financial sector debt, U. The total outstanding U. How big is the problem according to Hodges? If you took sixteen onedollar bills, laid them on the ground, side by side, and then kept stacking more dollar bills on top of them, by the time you stacked trillion of them all sixteen stacks would reach the moon.
Have our politicians in Washington gone crazy? Have we all gone insane? The answers are, yes, yes, and YES! He believes U. Like most industrialized nations, the United States will have fewer full-time workers paying taxes and contributing to federal social insurance programs. At the same time, growing numbers of retirees will be claiming their Social Security, Medicare, and Medicaid benefits.
Unless we reform Social Security, Medicare, and Medicaid, these programs will eventually crowd out all other federal spending. Otherwise, by our government could be doing little more than sending out Social Security checks and paying interest on our massive national debt.
I print out a copy every year and keep it on my desk for reference. The following charts are taken directly from the report. The solid line is how much income the government expects to take in to pay for it, and the broken line is how much the government expects it to cost.
The next graph Chart 19 shows the projections for the George W. It surprises me, however, that Walker would use this graph as a baseline because the baseline is based on fantasy numbers in the first place. Notice that the graph starts in the year with a surplus. The notion that there was a surplus at the end of the Clinton years is another lie. There was no real surplus because the federal government uses a cash accounting that allows a little room for monetary magic.
There was actually a deficit in , because the debt grew. My political bashing is completely nonpartisan. So, we actually started with a budget that was nowhere near being balanced in That means that in the chart of the balanced bud-get projection, you have to imagine the projections lowered down so that it begins at the zero line.
With one stroke of the pen, Congress and George W. Bush increased existing Medicare obligations nearly 40 percent. Both parties provide bountiful amounts of idiotic fiscal policy. In fact, this accounting apparition began under Ronald Reagan Chart Then in , projections were made showing that the Social Security Trust Fund would be insolvent by the following year. Then in , Social Security expenditures crept up at their normal pace, while revenues started to skyrocket.
Treasury began borrowing the assets and replacing them with bonds IOUs. The borrowed assets were then added to the general fund and spent. Basically, they took from one cookie jar to stock another. So the federal masters of illusion cut our income tax, increased our Social Security tax, and then stole the assets to help make up for the deficit caused by the tax cut.
And they call this a trust fund? Good luck! Oh yeah, this was also the act that made Social Security benefits which are nothing more than a tax that you have paid being returned to you taxable. That, my friend, is called double taxation, and it was signed into effect by a conservative icon. Then add the increase of intragovernmental debt, and the increase in future liabilities that they conveniently forgot to fund, and there you are.
This is what should be reported to the public. When you use generally accepted accounting principles GAAP , the standard to which all public companies are held , which includes future liabilities, our national debt is some twenty times higher than the government tells us.
Listen to the Prophets, and Profit Robert Kiyosaki points out that when Social Security was created in there were 42 workers for every retiree, whereas today there are 3. This is a by-product of the aging of the baby boomer generation. Another effect it will have on your finances is that the same law that created the Individual Retirement Account IRA also mandates that the biggest stock market crash in history is yet to come, because as the baby boomers begin to retire, they will be required to pull money out of their IRAs, which will result in high stock sales volumes and not enough demand for the stocks being sold.
Another person who has a deep understanding of the subject is Congressman Ron Paul. I had the honor of interviewing the congressman at length you can see it at GoldSilver. I asked him some very tough questions about the economy, and he answered with an honesty and candor that was astonishing. It is into the many, many trillions of dollars. But we will always fudge on what the real rate of inflation is.
Current Account Deficit. People think that the excess dollars that go overseas due to the U. This is not entirely true. So where does all that extra currency that purchases all those U. Treasury Bills to fund a large part of the deficit come from? The countries that are the U. When someone in the U. The Chinese businessman then deposits those dollars into his checking account at his local Chinese bank. The bank then converts the dollars to yuan. As long as the trade between the two countries is in equilibrium there is no problem.
But when one country is running continuous trade deficits and the other continuous surpluses, as the United States and China currently are, a problem arises. In the case of China, because there is more currency flowing into China than out, the PBC ends up with a huge glut of U. Under the rules of the game of international trade and currency exchange they are supposed to sell those excess dollars on the Forex foreign exchange market and buy yuan. But that would mean that there would be a glut of dollars and a shortage of yuan, which would cause the dollar to fall and the yuan to rise.
Chinese goods would then become very expensive in the U. So, to get around the international trade and currency exchange game, China bends the rules. The PBC takes the extra dollars and neutralizes them by buying a dollar-denominated asset, most often some sort of interest-bearing investment instrument, like U.
This keeps the yuan from rising and the dollar from falling. The funny thing is that the U. So, if the PBC used the excess dollars to buy U. Richard Duncan, in his excellent book The Dollar Crisis, explains it this way: There is a widespread misconception that the United States relies on the savings of other countries to finance its current account deficit.
This is incorrect. During recent years, at least, the U. Therefore, it is not a matter of the U. And, for their part, Asian central banks, in particular, have consistently demonstrated their ability and willingness to create money in order to finance the U. As I said, the U. When Europe paid the U. This was hugely deflationary. As the rest of the world bought cheap American goods, gold would just disappear into the black hole of the Federal Reserve and the world money supply would contract.
For every excess dollar that China neutralizes by buying U. Treasuries, the PBC has to conjure up a commensurate amount of yuan out of thin air. Price inflation is heating up big-time, with workers complaining about the cost of living, and causing Beijing to ask local governments to raise minimum wages, which is a cost that companies will have to pass on to consumers in the form of higher prices, which will cause workers to complain about the cost of living, and so on.
I recently interviewed a job applicant who, along with her husband, has owned a successful import business since , which imported goods mostly from China. China pegged its currency low to keep exports cheap. To maintain the low peg it had to create currency. The extra currency is causing the cost of living to increase. Then the increased price of Chinese goods in the U. And this will continue until the trade imbalance is corrected. As a result of all the games that can be played under a fiat currency system, the total cumulative U.
These deficits are sustained by fiat currency from other central banks around the world. All the while, these banks are hoarding ever increasing mountains of U. Much of our debt cannot be repaid, and if our trade partners begin to dump U. Treasuries on the world markets, the whole credit bubble will implode, resulting in a worldwide depression.
The longer governments and central banks try to cheat the free markets, the greater the pain will be when the correction occurs. Like the precious metals, the free markets always win. Trade Balance Source: U. In an effort to turn the economic tide, Japan embarked on one of the grandest currency creation experiments since World War II. In January of , Japan actually took his advice. Over the next fifteen months the Japanese created 35 trillion yen, which they used to buy billion U. They then used those yen to buy U.
Once again, just like during World War I, the world currency supply is exploding. And some countries seem to be printing currency just for the heck of it. Treasuries U. I used to have a hard time trying to comprehend the world monetary system.
Chances are you find the system a bit mystifying as well. Thankfully, an analogy came to me one day that helped me connect the dots. Picture a very large room. In this room are the heads of the U. Then picture them all frantically making out IOUs and passing them back and forth to each other as fast as they can. But when a country wants to create some currency, the government sells a bond to their central bank. The central bank writes a check against a zero balance in their checking account for however many dollars, euros, yen, or whatever the government wants, and it buys the bond.
The currency has now sprung into existence, and later can be used to redeem the bond. Therefore, the bond is an IOU for the currency. But since the currency is also a claim check to redeem the bond when it matures, the currency is an IOU for the bond. Get it? Mike Maloney educational video on YouTube titled " the hidden secrets of money" is a great way to understand about money why investing in gold and silver is important Investing in gold and silver Great book for understanding gold and silver as investment.
Mike Maloney educational video on YouTube titled " the hidden secrets of money" is a great way to understand about money why investing in gold and silver is important. You learn how central banks rigs the system and how to protect yourself from their wealth theft. Surprisingly, the book doesn't recommend buying silver and gold at certain times.
It's more of a book of how to obtain wealth in general, not just obtain wealth through gold and silver. Although it does a good job of explaining that too. This book was written in , with a few update notes in each chapter for All the information in the book from holds up I learned so much from this book. All the information in the book from holds up well in , when I read the book. I can't recommend this book enough. It really opened my mind. I was looking for diversify my portfolio but a wasn't not sure how.
After reading this book , I feel more comfortable about investing in gold, now I have a ' save ' place where to put my profits. Thanks so much for sharing you knowledge Michael P. S I also watched the youtube series he made and, i helped clarify things a lot. Very open mind This is an outstanding book. Very open mind In very easy way explain how economy system works. Mike has gift to explain people difficult thing in simple way.
Unfortunately establishment care about people don't understand how monetary system works and try to make it intricate. IRegarding to another comment: I can't agree author wrote this book for money because of simply reason, book is available for free from his website.
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