Fed, Inflation and Gold: Debunking the Misinformation

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KJ Duke
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Fed, Inflation and Gold: Debunking the Misinformation

Post by KJ Duke » Fri Feb 20, 2009 6:50 pm

The amount of money supply within an economy should be controlled such that inflation is minimal, most ecnonomists believe an inflation rate in the 1-3% range is ideal, thus providing a relatively stable backdrop for the economy to function within. The argument for moderate inflation, rather than no inflation, is that some inflation is less disruptive to the business cycle than deflation - thus its better to err on the side of some inflation.



If money supply is too low, economic growth will be stifled because there isn't enough money to purchase the quantity of goods that is being produced by the economy. Deflation will result, since prices will have to be reduced to sell all goods that are being produced. Lower prices will in turn reduce profits, which will lead to production cuts and higher unemployment.



This is what is happening right now. There isn't enough money circulating - because credit is being withdrawn across the board - which in effect takes money "out of circulation". There isn't enough money to purchase the goods that can be produced and as a result prices are falling, profits are declining and unemployment is rising.



To counter this deflationary spiral, the government has two options: (1) fiscal stimulus, aka temporary government spending, to replace reduced spending in the private sector, and (2) monetary stimulus, or increasing the available money supply. Because the amount of credit (in effect money supply) being withdrawn is so monumental in size, they are doing both, more aggressively than ever.



During the Great Depression, prior to Milton Friedman's theory on monetary policy, monetary stimulus wasn't accepted. Thus, when times got tough, rather than pumping money into the system when it was needed, the banking system in trying to protect itself, rather than its depositors, reduced money supply. That turned what may have been a relatively short-lived recession into a more than decade long Depression.



Milton Friedman's view of money supply changed over time. His early views on money supply were that it was the only thing that really mattered, and that we didn't really need the Federal Reserve to "tinker" with money supply and setting interest rates to keep economic growth on a steady path. Simply set targets for modest growth in the money supply, and business cycles would take care of themselves.



For a certain period of time, this would have worked well, but over time it took more and more growth in the money supply to keep the economy going. He was initially against this faster pace of growth in money supply, but in subsequent years acknowledged that he was wrong. The reason being that so many dollars were going overseas (and that it was hard to track exactly how much), that the rate of growth in money had to be higher since a large quantity of new dollars were not in fact circulating within our economy, but rather were circulating in overseas economies. (For example, if we are expanding the money supply at a rate of 3% annually, but 5% of dollars were going overseas and circulating there, we would actually be contracting money supply which would be deflationary and send the economy in recession).



The Federal Reserve's primary function, thus, has evolved to alternately fighting inflation and deflation by controlling the amount of money in circulation. The Fed is controlled by lifetimers in the field of banking and economics, who study economic data with the objective of keeping inflation relatively in-check while allowing the economy to stay on a stable growth path. Fed officials are not elected, nor are they politicians. Thus, they actually can be effective most of the time.



That said, the Fed is ALWAYS subject to criticism for many reasons:

(1) Doing their job is extraordinarily complicated, and like any other market participant, they must rely on their own judgements about an unknown future and even inconclusive current and historical data.

(2) Politicians always need a scapegoat to look good in front of their constituents, i.e., "the Fed is being too restrictive and hurting the economy", or "the Fed is being too easy with money which is causing inflation". The fact that we often are hearing both of these criticisms simulataneously or within short time frames of each other should tell you that they are doing a decent balancing act.

(3) There are goldbugs and other who cling to old theories about "hard money" and the "gold standard". This would indeed keep the value of the dollar high, because the amount of currency in circulation would be limited by the supply of gold, which is finite. It also would severely stifle economic activity, as there isn't nearly enough gold to support the dollar which has become an international currency used in most global transactions across the world, even those not involving the US directly. It also would put our entire economy at risk by those who would seek to manipulate the supply of gold. No one wants to be dependent on foreign oil, how would you like to be dependent on foreign interests who manipulate gold? They could send us spinning into either recession or hyperinflation practically on a whim if we were on the gold standard.



[ February 21, 2009, 02:50 AM: Message edited by: KJ Duke ]

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Fed, Inflation and Gold: Debunking the Misinformation

Post by KJ Duke » Fri Feb 20, 2009 7:19 pm

So, for those who want to abolish the Fed, such as Ron Paul, Peter Schiff and all followers of Austrian economics, and those who bought into Friedman's early views on monetarism but refused to ackknowledge a more global, more complicated evolving world that encompased his later views, what would your options be if the Fed is abolished? I see three alternatives.



1. Maintain a strict policy for controlled growth of the money supply, say at a 2% annual rate. This would be a disaster, as the government would lose its primary tool to minimize the impact of business cycles. Instead, fiscal policy (govt spending) would become the primary tool, meaning all stimulus would be politicized and hard to turn off once not needed (how often do govt spending programs get cut in a good economy?)



2. Move Fed powers to the Treasury. Really? You want all of this power concentrated in the hands of one political official appointed by each new President. Paulson was incompetent and Geithner is overwhelmed already with the power of the office. Triple their power, I'm sure we'll get better results. Even a bigger disaster than option #1.



3. Abolish the "fiat" currency and go back on the gold standard. I'll use the term fiat because I know Fed-haters love the sound of it, like its evil. This would transer control of our economy from a group of top, non-political, trusted economists, to an unknown group of foreign interests who could in effect manipulate our currency, and thus our economy, at will. A yet bigger disaster than options #1 and #2.



So there you have it. Several people have suggested than I am too "trusting" of the Fed. My question is this, which option would you have more trust in:

1) having no control over our currency or business cycle, while giving more control to Congress,

2) have control concentrated in the hands of FAR less competent politicians at Treasury, who would be even more powerful in their combined ability to control both fiscal and monetary policy, or

3) cede control of our currency and thus economic cycles to well-capitalized foreign interests.



[ February 21, 2009, 02:42 AM: Message edited by: KJ Duke ]

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Fed, Inflation and Gold: Debunking the Misinformation

Post by KJ Duke » Fri Feb 20, 2009 8:02 pm

Hyperinflation and Gold.



If the Fed increases the supply of money at too high a rate, they risk hyperinflation - a condition which could be defined as far too much money being in circulation for the level of economic output or production. In such a case, there is so much money around that people will bid up the price of goods because their demand for goods will be far greater than the potential output of the economy.



This is why gold is getting bid up sky high - speculation that the Fed is throwing so much money at the banking crisis that we will end up with too much money for the output of the economy. So I guess everyone who is in a frenzy to buy gold sees this condition developing with certainly - everyone will be awash in cash, soon. That IS the case for gold.



But that's strange to me, because the same people who want to buy gold don't seem to believe the economy will recover anytime soon. So how do we get to hyperinflation (the case for gold) if there isn't enough demand to push prices higher, if production capacity utilization remains low and if unemplyment remains high ?



There are two other possibilities:



(1) We have a price shock, like we had in energy in the '70s, where supply is contrained and thus the price that people will pay for goods accelerates because of fear of shortages. Is that happening today? I don't see any evidence of it.



(2) Our currency is liquidated in massive quantities by foreign holders, thus rapidly increasing the supply of money circulating within the US and at the same time driving the value of the dollar lower and thus creating dollar inflation in all imported goods.



This is a more plausible scenario, except for one overlooked item. We remain the world's biggest buyer of goods and services from foreign countries, and if they force the dollar lower, they absolutely ensure that US demand for their goods will dry up. This will push their own economies into even deeper recession, or worse. Any many of these countries, especially emerging growth economies, do not have our wealth nor level of domestic demand as a safety net to support their own solvency. China, and others, have in fact been doing the opposite of dumping dollars - trying to devalue their own currency against the dollar to maintain export demand. So once again, how do we get to hyperinflation to support the "buy gold" thesis? You never know what could happen next, but for now I don't see it. And the fact that gold already has moved substantially higher, while evidence points to the contrary on hyperinflation, makes this an even more speculative bet.



And finally, suppose hyperinflation is becoming a threat for one of the reasons stated above. What can the Fed do? They can sell securites that they've previously purchased back into the open market, that immediately reduces money supply (aka retiring money, as opposed to printing money). Whereas reversing fiscal policy can take months, years, decades, reversing the money supply can be done almost instanteously. Additionally, they can impose more restrictive conditions on bank reserve requirements, which also would have an almost immediate effect on money in circulation.



[ February 21, 2009, 10:33 AM: Message edited by: KJ Duke ]

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Fed, Inflation and Gold: Debunking the Misinformation

Post by DOUGHBOYS » Sat Feb 21, 2009 2:56 am

I know you guys are too young to remember it, but these threads are so reminiscent of the fifties and sixties where a lot of Americans could not trust their neighbor to be a real Americans. "Commies" were thought to be infiltrating everywhere, nobody could be trusted, and the end of the world was always just moments away. By the way, there was a great "Twilight Zone" episode that depicted this.

Thank God we did not have the internet then, it would only have inflamed the situation even more and their might have been devestation that manifested itself from people's fears.

I see fear in talking to folks around my part of the world, I see fear in some of the threads that are here.

Fear can be faced in three ways. Lets say you're walking down a street and a mugger puts a gun in your face and says, "Your money or your life!" Three choices-

1. You give him your money and hope the problem goes away

2. You try and take his weapon and beat the crap out of the problem.

3. You can be like me or Jack Benny and respond to the question, "I'm thinking, I'm thinking!"





Hopefully we can all get through this and have a little money (gold) left in our pockets.
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Fed, Inflation and Gold: Debunking the Misinformation

Post by sportsbettingman » Sat Feb 21, 2009 5:03 am

Good stuff! (...AND in the right forum!) :D



I have a couple questions, mainly on the big picture. You could answer "who cares, it doesn't matter"...but I care...even if it's a long way off.



1) In theory (I'm not talking the FED here)...if the folks who set up shop as the banks (when the banks were a new idea) are still set up the same way now, but on the largest scale...would they not be "untouchable" and above all law and such? They are the most knowledgeable of finance and accounting, and could buy influence in all areas needed to be above the laws of countries? You yourself stated that most in Congress and Senate and Presidents are almost clueless re: economics and finance. They would pose no threat, and believe what they are told. The independent economists would have no power to actually audit anything but what they are given to audit, etc.



What motivations run these types?



2) It seems that the entire system is set up to grow, grow, grow. Is that not unsustainable? Would overpopulation and the resulting drying up of natural resources be a possible outcome of this system based upon never ending growth?



3) Could the problem of the "end game" of too many people and too much need for growth temporarily be solved for another 100 years or so by reducing the amount of people?



4) Is war and its resulting damage and population loss a needed part of a system like this, to stall the "end game" and create jobs of rebuilding and such? Is war even better when at the end of the war, you can install an office (foreign embassy) in that country, or a central bank as well?



5) Which specific countries have done the bulk of the financing of the wars of the last 50 years?



~Lance



[ February 21, 2009, 11:40 AM: Message edited by: sportsbettingman ]
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Fed, Inflation and Gold: Debunking the Misinformation

Post by GOD Loves You » Sat Feb 21, 2009 8:58 am

Originally posted by DOUGHBOYS:

Fear can be faced in three ways. Lets say you're walking down a street and a mugger puts a gun in your face and says, "Your money or your life!" Three choices-

1. You give him your money and hope the problem goes away

2. You try and take his weapon and beat the crap out of the problem.

3. You can be like me or Jack Benny and respond to the question, "I'm thinking, I'm thinking!"





Dan, you forgot choice #4. Read this article about the 92 year old lady, who wasn't afraid and you'll see what I am talking about.



http://www.stategazette.com/story/1294862.html



Of course it doesn't always work, but it's better than being a coward.

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Fed, Inflation and Gold: Debunking the Misinformation

Post by DOUGHBOYS » Sun Feb 22, 2009 2:35 am

None of the four options are cowardly. The cowardice is being perpetrated by the man with the gun.

My grandma is 96. She wears that cheap perfume that a lot of older ladies do, when she doesen't she has "old lady smell". Gun in my face or 12 minutes in an enclosed area with my grandma....Its a tossup :D



[ February 23, 2009, 12:42 PM: Message edited by: DOUGHBOYS ]
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Fed, Inflation and Gold: Debunking the Misinformation

Post by GoBabyGo » Sun Feb 22, 2009 5:01 am

Duke: Just wanted to respond to one item:





"3. Abolish the "fiat" currency and go back on the gold standard. I'll use the term fiat because I know Fed-haters love the sound of it, like its evil. This would transer control of our economy from a group of top, non-political, trusted economists, to an unknown group of foreign interests who could in effect manipulate our currency, and thus our economy, at will. A yet bigger disaster than options #1 and #2. :





The forgein interests have already hijacked the financial and politicial system of this country. As they look to BK it and establish the IMF the reciever in BK of the United STates of America. Impossible? Follow the events. Scary but imho that is what we are facing from these crooks.



Laugh all you want but there is a reason Madoff is NOT in jail, while Stanford now cannot be found

, why Mozilo is now living large in France, Fuld out living with his riches, Paulson living large, Ken Lay probably living in SOuth America or Europe somewhere after Plastic Surgery imho, etc etcetc. Why no one has been jailed. You can make excuses for these people to satisify your mind. But reality is NO TRUST exists in the markets. These guys are part of a Big Cabal that run this country. There I said it.



I believe the FED does not give a crap. Ben is a student of the Great Depression not to avoid it but imho to make it worse. Don't you think something is wrong when Most COUNTRIES in the world face riots and monetary problems? When STate Govt's are seeking Bailouts, When they want to tax things such as mileage, carbon taxes, tiolet flushes in Australia? TAX TAX TAX squeeze that blood out of a stone. SO we further become debt slaves for whose benefit? Now Holder is going after the guns why? Crazy? Or is this the real agenda by design that is taking place. Start to think outside the box. imho



[ February 22, 2009, 11:04 AM: Message edited by: GoBabyGo ]
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Fed, Inflation and Gold: Debunking the Misinformation

Post by KJ Duke » Sun Feb 22, 2009 1:23 pm

Originally posted by GoBabyGo:

The forgein interests have already hijacked the financial and politicial system of this country. As they look to BK it and establish the IMF the reciever in BK of the United STates of America. Impossible? Follow the events. Scary but imho that is what we are facing from these crooks.



Laugh all you want but there is a reason Madoff is NOT in jail, while Stanford now cannot be found

, why Mozilo is now living large in France, Fuld out living with his riches, Paulson living large, Ken Lay probably living in SOuth America or Europe somewhere after Plastic Surgery imho, etc etcetc. Why no one has been jailed. You can make excuses for these people to satisify your mind. But reality is NO TRUST exists in the markets. These guys are part of a Big Cabal that run this country. There I said it.







[ February 22, 2009, 07:35 PM: Message edited by: KJ Duke ]

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Fed, Inflation and Gold: Debunking the Misinformation

Post by sportsbettingman » Sun Feb 22, 2009 3:56 pm

5) Which specific countries have done the bulk of the financing of the wars of the last 50 years?



http://video.google.com/videoplay?docid ... 9389&hl=en



~Lance
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Fed, Inflation and Gold: Debunking the Misinformation

Post by GoBabyGo » Sun Feb 22, 2009 4:18 pm

Paging Mr. Duke, Paging Mr. Duke:



Dr. Ron Paul has an interesting message I think you will totally enjoy.





http://www.youtube.com/watch?v=uDGiwUpw ... %3Amptnews



[ February 22, 2009, 10:19 PM: Message edited by: GoBabyGo ]
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Fed, Inflation and Gold: Debunking the Misinformation

Post by sportsbettingman » Mon Feb 23, 2009 7:19 am

Just pointing out something to KJ...



You reference the FED website and love Milton who loved Greenspan. Very pro-FED.



You refer me away from Deninger and Ron Paul and label them crazy. You label GoBabyGo crazy.



You refer me to Economist.com, Financial Times.com (same ownership as Economist), and Wall Street Journal.com to get better info.



I decided to look up who owns these three companies (to see if it falls in line with my idea of big media control)



News Corporation is one of the world's largest media conglomerates. The company's Chairman, Chief Executive Officer and Founder is Rupert Murdoch (FOX news)...owns The Wall Street Journal.



The Financial Times and Economist are owned by Pearson...another media giant.



http://www.stopbigmedia.com/chart.php?chart=pub



What does this mean? Who knows. I just wanted to point this out.



~Lance
"The only reason for time is so that everything doesn't happen at once."

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Fed, Inflation and Gold: Debunking the Misinformation

Post by Bama » Mon Feb 23, 2009 7:35 am

The forgein interests have already hijacked the financial and politicial system of this country. As they look to BK it and establish the IMF the reciever in BK of the United STates of America. Impossible? Follow the events. Scary but imho that is what we are facing from these crooks.



If people are paying attention this is spot on. I know some will disagree and try to say it cant or will not happen and i will have to wonder about their motives for misinformation or distorion of facts that are slapping them in their face.

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Fed, Inflation and Gold: Debunking the Misinformation

Post by sportsbettingman » Thu Feb 26, 2009 3:12 pm

Here's your boy Karl's speech from his award night... ;)



"Delivered this evening at Accuracy In Media's awards dinner in concert with receipt of AIM's 2009 Reed Irvine Award for Grassroots Journalism.



(Video will be online sometime Friday or Saturday)







I’d like to thank Accuracy In Media for this honor; an honor that two years ago, when I began The Market Ticker, I could have never envisioned being bestowed upon me.



The Market Ticker began after the Asian Market Crash of early 2007 when I began reading first quarter financial reports, including those of many banks that made subprime and “liar” loans. The outrageous accounting treatment that I found within led me to start writing, and as our current financial crisis deepened the web of falsehoods and fabrications has grown along with it.



Much has been written about the Community Reinvestment Act, about the role of campaign contributions and PACs, and about what can, quite frankly, be considered corruption both on Wall Street and in Washington DC that brought about the destruction of our securitized credit markets, a 50% decline in the stock market and both the inflation of and subsequent popping of the housing bubble.



The Market Ticker serves as a chronology of many of these events as they have unfolded, including the “back stories” that you do not find in The Wall Street Journal.



But this evening I would like to challenge those here and indeed all Americans: How does a nation with a strong conservative political presence allow this to happen?



Does not conservatism rest on the principle of the rule of law rather than the rule of man? Do conservatives not argue daily for truth, justice, hard work and, as Ronald Reagan said, “rugged individualism”? Is not the conservative movement supposed to be about full transparency in both government and finance, not layer upon layer of intentional obfuscation, deception and lies?



How did half of our nation’s population – the half that defines itself as conservative or moderate with conservative leanings – come to believe that it was ok to lie on a mortgage application? To put together thousands of loans into securities that were so complex that the printed documentation spanned thousands of pages? To sell a mortgage to a consumer knowing full well they could not pay. To sell a security out the front door to a customer, while shorting it in the next room?



How is it that our government has become so corrupt that Stanford Financial, now accused of a massive fraud spanning more than a decade, gave $250,000 to the Republican Senatorial Campaign – and nearly a million to the Democrats? Their lobbying successfully killed a bill that might have uncovered their alleged fraud years ago – in a Senate Committee. Partly as a consequence, over $8 billion in uninsured CDs held by Americans appears to have disappeared. Someone clearly got the best government money can buy, but it certainly wasn’t us.



How did Congress look the other way while our nation’s leaders – allegedly conservatives themselves - locked senators and representatives in a room one dark September night and predicted the end of the world unless Henry Paulson was given a blank check for $700 billion dollars that this nation did not have and would have to borrow?



We have descended the economic slope to where we are today because we, as Americans and conservatives, were willing to tolerate “just one little lie” in the pursuit of profit. As we have now seen, one little lie, repeated often enough, becomes one gigantic mess.



Private capital has fled our nation’s markets not only because of loss, but because of fraud, corruption and the willful blindness of our legislators and regulators. That capital, contrary to popular understanding, forms the foundation of our credit markets; fully 2/3rds of all lent and invested capital does not come from banks, but rather from private investors and sovereign funds. Our stock market has collapsed not because of economic recession but because that capital has retreated overseas or into the mattress where it cannot be stolen by those on Wall Street through their willing and complicit enablers in Washington DC.



Without that capital available to fund our economy, which government is incapable of replacing, we will experience a depression greater than the 1930s.



We have a challenge before us as a nation and as Conservatives in particular: to tell the truth, to once again stand for law and order, and to demand that “the bezzle”, or the undercurrent of fraud and deceit in our markets, be met not with a wink and a nod, but with indictment, prosecution and imprisonment.



Ronald Reagan called upon us to express our spirit of rugged individualism and free enterprise as Americans. He rolls in his grave tonight, along with Alexander Hamilton, our first Treasury Secretary, at the abuses visited upon our nation over the last decade in our markets and government.



I stand here this evening to call Conservatives throughout this nation to action – to refuse to tolerate that “tiny little lie” any longer. To flush out the fraud, abuse and concealment in all things financial, whether in government or private enterprise. To restore the soundness of our capital markets not by borrowing trillions of dollars we do not have and showering it upon wall street and main street alike, but by demanding that every balance sheet be transparent, every financial statement truthful and complete, and every transaction honest and easily understood.



Our nation can get through this difficult time. We can rebuild our capital markets and restore the health of our finances, both as a nation and individually. To do so we must recognize that whether we are a government or an individual it is not possible to spend more than we make, that you cannot borrow your way to prosperity, and that we can only retain and grow our nation’s birthright as the bastion of capitalism so long as the rule of law triumphs over those who would lie, cheat and steal for a buck. May we find it within ourselves to put these principles into action, and restore America’s status as the world’s economic engine.



I look forward to the day that The Market Ticker will no longer have a purpose in providing commentary on the obfuscations of our government in matters economic along with the malfeasance and misfeasance of robber barons disguised as capitalists. With the help of Conservatives everywhere, that day, along with a return to prosperity for our great nation, will arrive soon.



Thank you."
"The only reason for time is so that everything doesn't happen at once."

~Albert Einstein

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Fed, Inflation and Gold: Debunking the Misinformation

Post by sportsbettingman » Thu Apr 09, 2009 2:22 pm

Fiat Currencies May be Replaced by Gold Standard







Gillian Tett is the head financial writer for the Financial Times, one of the leading mainstream financial publications. Investment analyst and financial writer Yves Smith says of Tett:



[Whatever] Tett is writing about ... will be taken seriously, since Tett is read by central bankers.

So it is newsworthy that Tett writes today that the odds of a return to the gold standard are increasing:





A panel at the World Economic Forum meeting in Davos ... was asked to produce one concrete recommendation to fix the global financial crisis.



The top pick? ... a new reserve currency, akin to an old-style gold standard....



Moreover, these musings about a gold standard are currently cropping up in all manner of unlikely places. One savvy European property developer (who aggressively sold most of his holdings in early 2007) recently told me that he is now moving a growing proportion of his assets from government bonds into gold, even at today's elevated prices.



"The logical conclusion of where we will end up eventually is with some type of gold standard," he explains, arguing that future inflation will almost inevitably cause a future collapse in government bonds.



Half a world away in the Middle East, some sovereign wealth funds now say that they are stocking up enthusiastically on food and gold, due to similar reasoning.



Meanwhile, in New York a (still) formidable American hedge fund recently circulated private research that echoes the reasoning of Mr Smith. Most notably, this hedge fund points out that since the world abandoned the gold standard on August 15, 1971 credit creation has spiralled completely out of control.



But this four-decade long experiment with fiat currency is not just something of a historical aberration, it argues - but potentially very fragile too. After all, the only thing that ever underpins a fiat currency is a belief that governments are credible. In the past 18 months that belief has been tested to its limits. In coming years it could be shattered, particularly if the current wave of extraordinary policy measures unleashes a wild bout of inflation.



Hence that chatter about a gold standard. Indeed, as the debate bubbles up, some financiers are now even e-mailing each other an extraordinary little essay that Alan Greenspan himself wrote in support of a gold standard back in the 1960s, called "Gold and Economic Freedom"*....



"Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets . . . [but] in the absence of the gold standard . . . there is no safe store of value," Greenspan wrote back then, pointing out that without a gold standard in place, there is little to prevent governments indulging in wild credit creation. "Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights."...



Shell-shocked investors are increasingly reluctant to rule anything out, as they stare at such uncharted waters. So while I would not bet today on a gold standard returning any time soon, I would also not bet that the debate dies away. Nor would I bet that the gold price crashes too far from its current rate of $900, while so much fear continues to stalk the world.





Bottom line? Even mainstream financial players are starting to mull a return to the gold standard. While it would not happen any time soon, it might happen in the medium-term future.
"The only reason for time is so that everything doesn't happen at once."

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Fed, Inflation and Gold: Debunking the Misinformation

Post by sportsbettingman » Wed Oct 07, 2009 5:57 am

"The only reason for time is so that everything doesn't happen at once."

~Albert Einstein

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