Remember When?

Recently by Richard Russell: What's the ‘Big Money’ Doing?

You and I are witnessing perhaps the greatest bubble in world financial history. And yes, it’s the amazing American credit bubble. Honestly, no one knows exactly how large this credit bubble is. We have already run up a national debt of roughly $16.432 trillion. Further, we have unfunded future liabilities of anywhere from $50 trillion to $100 trillion (I have seen estimates of both figures – Niall Ferguson claims our unfunded liabilities are $238 trillion). I’m afraid the gigantic credit bubble is doomed to topple over and splatter. It will burst when the credit of the United States is no longer accepted by our creditors.

The US will never default on its debts. That would be an unthinkable admission of sovereign bankruptcy. No, the US will, and is, following a different and time-tested method. The US will devalue the dollar, and thus attempt to pay off its debts with billions of devalued “mini-dollars.” Of course, this is a form of subtle, legal robbery.

Suppose you just borrowed a thousand dollars from a friend to be paid off in the year 2030. In 2030 you pay off your debt in devalued “mini-dollars.” Your friend screams, “This is thievery – what the hell are you giving me? I can’t use this junk!” You smile and say, “C’mon, I borrowed a thousand dollars from you, and I’m paying off my debt with a thousand newly-minted dollars, just as I promised you. I paid you off, so what are you squawking about?” Thus ends our friendship.

Now, on to gold.

1974 to – 2001 – 50.8% 2002 – 24.8% 2003 – 19.5% 2004 – 5.35% 2005 – 17.77% 2006 – 18.36% 2007 – 32.34% 2008 – 5.14% 2009 – 24.3% 2010 – 29.8% 2011 – 14.2% 2012 – 9.6%

Do you see those percentages up there in that column? Do you know what they mean? They represent the year after year loss of purchasing power in Federal Reserve notes (“dollars”) in terms of gold. You may not have noticed the loss of purchasing power in the dollars that you earn and own, because the annual loss has been subtle and gradual. The above are official figures. Actually, I remember buying one-ounce gold coins in 1974 for $70 a piece. Based on that price, that’s a multiple for gold of 23.9 from 1974 to the present.

By the way, during the last decade you would have made little holding the S&P 500, which is why investors bitterly call it “the lost decade”.

But if you’re as old as I am, you may remember what prices were back in the year 1946. For instance, I remember new Ford autos at a price of $450.00. I remember the fare on the New York subways and busses at a nickel. I remember the cost of a ferry from Manhattan to New Jersey at a nickel. I remember the daily New York Times at 3 cents. I remember buying a good meal at the Automat in NYC for 35 cents. I remember a loaf of bread for a dime. I remember a double-scoop ice cream cone for five cents. I remember the Sunday Daily News at a nickel. I remember a ticket to a Broadway show for a $1.10.

Yes, and I remember working for now-deceased Postal Telegraph Co. for twenty-five cents a day. And I remember loading trucks five days a week (including half-a-day Saturday) for $18.75 a week, and that was a union job.

Meanwhile, subscribers get nervous when the price of an ounce of gold declines from 17.50 to 16.50. But you shouldn’t be nervous, because we’re dealing with a long-term story of steady devaluation. It’s the story of the US owning the world’s reserve currency, and as far as our creditors are concerned, the dollar has been “as good as gold.” Well, until it isn’t.

Near term problem – minutes of the Fed revealed that certain voting members of the Fed are worried that the Fed is being too free with its output of currency. This has scared some short-term, in-and-out gold-holders, who are afraid that the Fed is going to press the brakes down on its money-creation spigots. But that’s a short-term situation. The really big picture is the steady ongoing devaluation of our currency. That will continue, and it’s bearish long term for the dollar and bullish long-term for gold.

Let’s say that you’re a Communist big-wheel in China, and you are in charge of China’s sovereign reserves. You are aware that China holds well over a trillion dollars worth of US Treasury bonds and dollars. Then you are surely aware of the parade of percentages that I have posted in the column above. And you are also well aware of the US’s debts and deficits. And surely, you know that the US has additional trillions of dollars in unfunded liabilities.

So yes, Mr. Communist, you are well aware of all this. And you know that the US is never going to default on its debts. But wait, you know something else. You know that the US has a long-held habit of printing itself out of its debts. You know that Uncle Sam, by creating new trillions of Federal Reserve notes, is systematically devaluing our currency. And lastly, you know that your nation’s sovereign reserves are bulging with items denominated in Federal Reserve notes.

OK, you know the whole crazy story. So what are you going to do about it? The answer is obvious, you are going to swap your Federal Reserve notes for gold and other currencies. But you have to do your swapping carefully, lest you run up the price of gold and euros and Swiss francs.

BEIJINGu2014Fresh data suggest China is moderating its appetite for investing in U.S. securities, a trend that could mean lower flows of cheap capital from Beijing and a possible rise in borrowing costs across the American economy. An analysis of U.S. Treasury data suggests China, with $3.2 trillion in foreign-exchange reserves, has begun to rapidly diversify its currencies portfolio.

“It clearly indicates China’s intention not to put all its eggs in one basket,” said Lu Feng, director of Peking University’s China Macroeconomic Research Center.

Below – weekly gold – the little flag at the far right of the chart should break out to the upside.

Reprinted with permission from CMI Gold and Silver.