INFLATING OUR WAY OUT OF DEBT

President Obama and his financial experts and to a lesser extent the other major economies of the world are playing a very dangerous game trying to spend their way out of a very deep recession. 

While the stimulus package and it's spending on massive infrastructure projects in an attempt to get people to work is admirable and even desirable as it should get projects done at a more favorable cost, it is still spending money we don‘t have. 

The timing will have to be spot on to stop the spending before inflation gets out of control to the point it will be irreversible. With the printing presses going round the clock printing the trillions of dollars required for this massive worldwide spending spree it can do nothing more than cause massive inflation. I suppose that repaying all the accumulated debt with relatively worthless inflated dollars is one way to solve the deficit problem.

Purposely attempting to try and inflate our way out of deficit is courting disaster to the point of irresponsibility. I hope it works but creating such inflation will put so much future pressure on all of us it could easily backfire and end in disaster.

Once inflation starts to rise, the debt holders will start to demand higher interest rates thereby driving inflation even higher. As inflation spirals ever higher and faster some countries will manage to eliminate their debt and others will just continue to borrow at ever higher costs. We will end up with more countries like Zimbabwe who are attempting to deal with 150,000 % inflation.

When the US dropped the gold standard and had nothing to back it’s currency it became an open invitation to print money and it has been doing so at a breakneck pace. So far the American economy, still being the largest in the world has managed to keep it’s dollar as the currency of choice in hard times. Some countries have even used it to back their own currencies and others, such as Zimbabwe, use it as default currency to keep their economy functioning while they try to rebuild their failed economies.

The US public debt of 10.8 Trillion dollars and growing, costs 250 billion dollars per year in interest. As interest rates rise which they surely will, this cost will rise as well. As the US keeps piling on more debt year after year it will at some point  become unsustainable. This is the ultimate danger of not having anything to back the currency, be it gold, oil, rice or whatever.

This leads us to the question of what to do to protect ourselves through this coming inflationary period. Unfortunately there is no textbook answer because Governments have a habit of manipulating values of assets and confiscating properties. Protecting what we have becomes a major study of it’s own and not one that can be quickly covered in one post.

GOLD - INVESTMENT OR INSURANCE?

Gold has been bought as an inflation hedge for years. As such it hasn’t worked well because of the U.S. Government’s ability to manipulate the price and make billions of dollars in the process.

 Until 1933 U.S. citizens were required to sell their gold to the gov’t at $20.00 per ounce, at which time, since the government now owned all the gold, President F. D. Roosevelt raised the price to $35.00 per ounce thereby allowing the gov’t to print more money since it was at that time a gold backed currency and they had just ripped the gold owning citizens off by 65%.

In 1971 President Nixon abandoned the Gold standard and allowed the price of gold to float with the world demand and opened it up to Americans to own gold again. Thereby allowing the government to print any amount of paper dollars they wanted because there was nothing needed to back the currency. Opening it up for U.S. citizens to again own gold, which the government sold back to them at free market price, was one of the factors that drove the price up. By 1980 it reached a price of $850.00 which in todays dollars would be over $2100.00

Since then the world governments have been effective at manipulating and controlling the price of Gold by buying and selling as they chose. Even though inflation rose by double digits in the 80’s the price dropped to $350.00. It did not work out well as a hedge against inflation.

Fast forward to today and you have the U.S. Government printing paper money as fast as the printing presses can print with nothing to back it up. With other world economies in trouble as well, it is keeping the greenback strong for the time being.

The price of Gold is now starting to creep up due to world demand. China has started to be a purchaser of gold, no longer confident in owning U.S. Dollars, it has allowed it’s citizens to now own gold, and has started a Gold ETF, thereby affording it’s citizens the ability to own small amounts of the metal.

With governments around the world In a financial bind the American dollar is remaining the strongest currency in the world and the go to safety currency. The question now is can it retain it’s strength in the face of the massive stimulus spending they are now proposing. If it does it will keep a ceiling on the price of gold.

As the world economies start to recover and confidence comes back to lesser currencies, people will start dumping their U.S. dollars. As the dollar weakens, the theory goes, there will be upward pressure on the gold price.

If the U.S. led recovery program does not go exactly as planned, all bets are off, governments worldwide will no longer be able to manipulate the price of gold and it will have the potential to spike to prices not even dreamed of in past.

So as an investment gold has not worked out well in the past.

As a speculation, if your timing is spot on, there has been an opportunity to make some money.

As insurance against a pending financial disaster, in my opinion, it is a very wise choice.

Trivia - It’s against the law to pawn your dentures in Las Vegas