Gold, Inflation and The Federal Reserve

GOLD, INFLATION, AND THE FEDERAL RESERVE 

Below are my comments and answers to various questions about gold, inflation, and the Federal Reserve. They are “for the record” so to speak, and are meant to be taken literally and specifically…

GOLD 

Gold is real money; nothing else is. Gold meets the test of real money definitively and historically.  Gold is 1) a medium of exchange;  2) a measure of value; and 3) a store of value. Of those three things, store of value is the most critical.

Gold is original money. Gold was money before the U.S. dollar. The U.S. dollar and all paper currencies are substitutes for real money, i.e., gold.

Gold’s value is in its use as money. Gold’s use as money is singular in nature; in other words, gold is not anything other than real money. (see Gold’s Singular  Role)

INFLATION 

Inflation is the debasement of money by government.  All governments inflate and destroy their own currencies. The term government applies to central banks, who create inflation by continually expanding the supply of money and credit. ALL inflation originates with government and the banks. 

Expansion of the supply of money and credit cheapens the value of all the money in circulation, leading to a loss of purchasing power. The loss of purchasing shows up in the form of higher prices for all goods and services.

The higher prices for goods and services are NOT inflation. They are an effect, or the result, of inflation that has already been created by government and the banks.

The effects of inflation are cumulative, volatile, and unpredictable. 

FEDERAL RESERVE 

The Federal Reserve is a banker’s bank. The Fed’s purpose is to facilitate a system whereby banks can create and lend money in perpetuity (to governments, corporations, and individuals) and collect interest.

Related to the purpose stated above, the origin of the Federal Reserve is steeped in controversy and conspiracy which is supported by historical fact. (see Federal Reserve – Conspiracy Or Not?)

The Federal Reserve created the conditions which led to the 1929 stock market crash, not the crash itself. The Federal Reserve caused the Great Depression of the 1930s by pursuing a tight money policy, i.e., raising interest rates, in 1928 and 1929.

WHERE WE ARE NOW 

After more than a century of Federal Reserve inflation (intentional expansion of the supply of money and credit), the U.S. dollar has lost ninety-nine percent of its purchasing power. The ninety-nine percent loss in U.S. dollar purchasing power (the effects of inflation) is reflected in the gold price which has risen one hundred-fold from $20.67 oz to more than $2000 oz.

The policies and actions of the Fed are geared to keeping a fragile financial and economic system intact for as long as possible. They will do, or not do, whatever is necessary to accomplish that; however, they are merely reacting to the effects of their own irresponsible actions over the past century.

The problem for the rest of us is expecting that the Fed can avoid the inevitable consequences (financial and economic collapse) of their own actions.

WHAT TO EXPECT 

Even if the Fed were to change course at this point, it won’t make much difference. Sure, investors would belly up to the bar for another round of cheap credit, but what comes after will be worse.

The U.S. dollar would come under renewed pressure; then they would have to consider a more restrictive approach to credit expansion – again. Of course, that is why they are currently pursuing an aggressive approach to raising interest rates now – to protect the dollar.

The beat goes on. Expect more volatility, credit defaults, stock price declines, etc.

Don’t expect too much from gold. At $2000 oz. earlier this year, gold already reflects the ninety-nine percent decline in U.S. dollar purchasing power mentioned earlier. Only a further, huge and lasting drop in the U.S. dollar will bring about higher gold prices – after the fact, not before.

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!