Wealth Redistribution In turbulent times, changes that may have occurred over a generation or not
at all can quickly be written into law within a matter of days. The federal government
continues to print trillions of dollars in new money for stimulus spending,
health care and continuing resolution spending bills. The very nature of
running deficits is an additional form of stimulus spending. It’s obvious that the
governments' intention is to distribute our tax dollars in the form of bureaucratic
jobs, make-work projects and direct welfare payouts. Throughout history
whenever socialist policies have been imposed, inflation was soon to
Energy Dependence Energy in the form of imported oil is the greatest segment of our trade deficit. The high energy prices we pay are another force pushing up the cost of everything needed to survive, from transports to heating and electricity. Since prices came off the 2008 highs there has been little effort to develop domestic sources of new energy supply. This failure on the part of our government is setting us up for a dangerous economic situation down the road, should oil prices move towards $100 again. High imported energy prices will further weaken the dollar and send gold prices higher. Instead of sending billions of our dollars each day to OPEC and the petro-tyrants like Russia and Venezuela, we should be saving those dollars by developing domestic solutions for our long term energy needs.
Diminishing Gold Supply Less gold is produced each year and it is becoming more costly to find gold. The miners have to dig much deeper into the earth for each ounce of new gold. Furthermore many of the new sources of supply are located in unstable or violent countries. It is very likely that the gold mines in these countries may one day be shut down or nationalized, further disrupting the supply. And since the collapse of Fannie and Freddie, gold coins have been experiencing supply disruptions.
Government Debt When you add up the costs incurred just from the bailouts of the auto companies, AIG and the housing mess, we are now locked into trillion dollar deficits each year for the next decade. The interest portion from this debt that we pay out each year is now $600 Billion and is projected to rise to $1 Trillion in five years. Without a thorough realignment of our national priorities it is unlikely we can avoid a debt crisis in the near future.
Future Inflation The supply of Dollars has been expanding at a rate above 10% for the past two years. In normal times, the money supply would rise in lock step with economic growth. But since the recession began the Federal Reserve has been working overtime just to create money. Once these extra dollars work their way into the economy we can expect to see higher prices for food, energy and all products that are derived from basic commodities (everything).
Currency Debasement One solution to our excessive debt problem would be to monetize the debt by expanding the money supply. The Federal Reserve has stated its intentions to do just that with its policy of “quantitative easing”. When the Fed buys Treasury Bonds, it is basically “printing” the money to do it. The overall effect is currency debasement because the money used to buy something today will buy less of it tomorrow. Unlike inflation, which tends to creep up on you over a period of years, currency debasement can hit you almost overnight. As the US and other governments around the globe continue debasing their money through endless printing, gold may one day become the only reserve currency.
More Bank Failures The too big to fail policy created by the Federal Reserve is now part of the Financial Reform legislation and will almost certainly guarantee future bailouts for the large institutions at the expense of the smaller banks and the taxpayer. So with the system rigged to favor the big banks, the number of smaller banks in trouble is approaching one thousand. This will further undermine confidence in our financial system and support the conditions for higher gold.
Real Estate Crisis The housing crash that began in 2007 has not abated and threatens a sustainable recovery. Home ownership was once a source of wealth and security for individuals, but now for many it has become a liability threatened by lost value and foreclosure. As the deflation in housing prices causes many of the more traditional assets to lose value, demand for gold is surging while its price has reached new highs.
War on Terrorism Wars cost money and the costs for the Iraq and Afghanistan wars will be felt for generations. With America struggling to define the enemy, history is repeating itself as a great power approaches bankruptcy while fighting a long term far away war. The price tag up to now is thousands of American lives and $1 trillion. As the costs keep piling up, our politicians and bureaucrats will come to rely on what they understand and choose between debt monetization, or defeat.
Deep Recession Typical recessions last about a year. Our current downturn has been running close to three years and with no jobs recovery in sight. The great depression started out in 1929 as a financial panic, similar to what we had in 2008. But history from the period shows that when the federal government became actively involved in providing “stimulus” to the economy, the recession grew into a full blown depression by 1934. With our actual unemployment near 18% and with the tax base deteriorating, the probability is high that congress will raise taxes. Should some new castrophy strike, it may cause a downward spiral which may take years to recover.