| THE FED AND THE GOLD PRICE |
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In the last five months $213 billion new dollars have
been added to the U.S money supply (M2). Amazingly, no one in the
mainstream financial community questions this.
Looking over some past Federal Reserve archives one finds that $213
billion was all the money in circulation in 1962. Currently it is
$6.2 trillion. All the material items of wealth in this country
(buildings, roads, cars, aircraft carriers, toasters, TV sets etc.)
were created in the 173 years leading up to 1962 with that $213
billion circulating. Have we come close to that real wealth creation
in the last five months? This is a huge wake up call that something
is not right. This excessive money creation, as history attests,
will bring along an enduring inflation created by the same people
pledged to control it.
The Fed has never been able to stop inflation. Higher
interest rates do not stop inflation. This is a false economic theory.
There are no statistics to prove higher rates stop inflation. Stopping
inflation means if you have a 3% increase in consumer prices, you
will have a 3% decrease soon thereafter. That is stopping inflation.
If you have a fever at 103, well above the normal 98.6 and you go
to your doctor to stop the fever, you expect him to get you back
to 98.6. In the world of economics we have accepted prices to go
up and if the prices just stay steady at that new price level we
are suppose to be happy. That is the same thing as your doctor telling
you, no problem you are steady at 103 have a nice day. Inflation
builds on itself month after month year after year. It is like the
economy has built up a 150 degrees temperature.
Also, in past inflationary periods the Fed has raised
interest rates for years and all during those years the CPI continued
to go higher and higher. Higher interest rates not only cannot reverse
(stop) inflation they cannot hold it in check. Prices are rising
from money that has been in the system and has been churning around
from years before. Wall Street professionals who do not understand
this concept will be vulnerable to the future changes that will
occur as inflation distorts our economy and markets once again and
for all the same reasons.
The Fed’s purpose is two-fold, to create money
and be the lender of last resort to the government when those multi-billion
dollar deficits show up and to be the protector of the U.S. banking
system. No one will argue that if the banks go under we are all
in a lot of trouble, so the Fed over the decades has enjoyed a reputation
that has led the country and the politicians to believe one can
print a lot of money forever with manageable consequences. This
is true for small-scale stuff, but when you are talking about trillions
of dollars it is obvious to some of us that we are now past the
point of no return.
The Fed also controls interest rates. In a country that espouses
free market economics, this aspect of their daily activities is
hard to comprehend. There is nothing more important in a free market
economy than to allow money and the cost of money - interest rates
- to be left alone and to allow the daily interaction of millions
of people and tens of thousands of institutions and millions of
transactions to function without interventions and manipulations.
The fact that any institution is intervening in any marketplace
to the tune of tens of billions of dollars, sometimes on a daily
basis, is something to fear.
These activities by the Fed will be the eventual driving force behind
excessive inflation, a depreciating currency and a much higher price
of gold. The Fed and other foreign central banks are following policies
that are contrary to basic economic truths, classical economic thought
and just plain common sense.
My late friend, Nobel laureate (economics), F.A. Hayek
told me years ago when I visited him in Germany that decades before
he had a discussion with the renowned economist John Maynard Keynes,
where Keynes told him that he (Keynes) had made a terrible mistake
and was prepared to write an important piece to disavow deficit
spending and hence paper money creation. But two weeks later Keynes
died. World governments have all embraced Keynes’ mixed up
theories because it gave them a convenient solution to cover up
their economic mismanagement. Because of this, huge debts and huge
piles of paper money have been fostered on populations creating
what is now an economic tidal wave that is now on the horizon.
As inflation is always the result of excessive expansions
of money in a society, we should simply do the math. Huge money
increases equal huge producer and consumer price increases eventually.
There is no doubt about the money supply increases, so there should
be no doubt about a strong and prolonged inflation that has obviously
started. This is all bullish for gold. For other articles on gold
and the economy please visit the commentary section of our website
at www.kengerbino.com
Kenneth J. Gerbino
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Kenneth J. Gerbino & Company
Investment Management
9595 Wilshire Boulevard, Suite 303
Beverly Hills, California 90212
Telephone (310) 550-6304
Fax (310) 550-0814
E-Mail: kjgco@att.net
Website: www.kengerbino.com
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