●The more federal budgets are cut and taxes increased, the weaker an economy becomes.
●Austerity is the government’s method for widening the gap between rich and poor, which leads to civil disorder.
●Until the 99% understand the need for federal deficits, the upper 1% will rule.
●To survive long term, a monetarily non-sovereign government must have a positive balance of payments.
●Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
●The penalty for ignorance is slavery.
●Everything in economics devolves to motive.
Back in 2009, this bog carried the post, Fool’s Gold, in which we said:
Gold is one of those commodities, the value of which is based solely on faith. Just as there have been real estate bubbles, stock market bubbles, oil bubbles, tulip bulb bubbles, sugar bubbles, coffee bubbles and diamond bubbles, there have been gold bubbles, the biggest coming in 1980 and perhaps again, today.
For reasons beyond my ken, many people believe gold, the value of which is supported by nothing, somehow is safer than dollars, the value of which is supported by the full faith and credit of the United States government.
While I don’t have great faith in our government’s full faith (especially with the unusually low quality of today’s political leadership), I still think it is better than nothing, exactly what gold provides. Which brings me to this article from Associated Press:
Gold plunges to lowest in more than 2 years
2:10 PM ET, 04/15/2013 – Associated Press
NEW YORK — Gold plummeted to its lowest level in more than two years as traders rushed to sell their holdings following a big price drop on Friday.
The precious metal has plunged almost $200 over the past two days and is trading below $1,400 an ounce for the first time since February 2011.
The sell-off started Friday when the U.S. government reported that wholesale prices fell in March by the most in 10 months. Investors had been buying gold in anticipation of a pickup in inflation. With prices now falling, the attraction of the metal as an alternative investment has waned.
All kinds of interesting stuff, here. First, gold that supposed paragon of financial stability, fell 13% in just two days. Some stability!
Second, consider all the debt-hawk hand-wringing that the federal debt is “unsustainable.” Those deluded folks say federal money “printing” is causing inflation or even hyper-inflation. They compare the U.S. with Zimbabwe and the Weimar Republic, which resemble the U.S. the way the moon resembles green cheese, i.e. not at all.
All this while the real danger is deflation.
The gold market was also rattled by a proposal last week that Cyprus sell some of its gold reserves to support its banks. Traders worry that Spain, Italy and other weak European countries might follow suit, flooding the market with excess supply just as demand for the metal is weakening.
The euro nations very well might sell gold in order to pay bills. Having given up the single most valuable asset they have — their Monetary Sovereignty — they have run short of euros.
Unlike the U.S., which can create unlimited numbers of its sovereign currency, the dollar, the euro nations have no sovereign currency at all. They chose to become monetarily non-sovereign, putting them on a par with our struggling states, counties and cities.
Gold peaked at $1,900 an ounce in September 2011 during the market turmoil that followed a downgrade to the U.S. government’s credit rating.
The credit agencies (those same guys who gave top ratings to worthless debt instruments) downgraded the U.S., a Monetarily Sovereign nation with the unlimited ability to pay any bills of any size. But they didn’t downgrade euro nations, whose bill-paying ability is limited. This is what passes for fiscal prudence in today’s financial world.
Gold has been declining from a recent high of $1,792 on Oct. 4 as the outlook for the U.S. economy improved, diminishing the metal’s appeal as a safe haven investment.
And pray tell, what is the definition of a “bubble”? (A useless product, whose price has been bid up by fools, hoping to sell it to bigger fools.)
Some Federal Reserve officials have also been calling for an early end to the central bank’s bond-buying program [Quantitative Easing]. If that happens, it would likely cause U.S. interest rates to rise, resulting in an appreciation of the U.S. dollar. That gives traders another reason to sell gold, since they see the metal as an alternative to holding dollars.
The U.S. is sovereign over its currency, and sovereign means total control. It can create as many dollars (by spending) or destroy as many dollars (by taxing) as it wishes.
The U.S. also can set dollar interest rates at any level it wishes. This doesn’t even require an end to QE. It simply could be done by fiat, i.e by charging banks more for reserves. Dollar interest rates are not derivatived from supply and demand; they are set.
Meanwhile, gold bugs tremble in panic their supposedly “safe harbor investment,” sitting in a vault somewhere, costing storage fees every month, is crashing, while “dangerous” dollars earn interest every month.
In all fairness, the price of gold has risen about 50% in the past five years, earning a nice profit for those who bought low and sold high. But wasn’t gold supposed to be non-speculative? Wasn’t that the whole point?
Anyway, a friend of mine actually made a profit on Beanie Babies. That’s the way it is with bubbles.
Rodger Malcolm Mitchell
Nine Steps to Prosperity:
1. Eliminate FICA (Click here)
2. Medicare — parts A, B & D — for everyone
3. Send every American citizen an annual check for $5,000 or give every state $5,000 per capita (Click here)
4. Long-term nursing care for everyone
5. Free education (including post-grad) for everyone
6. Salary for attending school (Click here)
7. Eliminate corporate taxes
8. Increase the standard income tax deduction annually
9. Increase federal spending on the myriad initiatives that benefit America’s 99%
No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia. Two key equations in economics:
Federal Deficits – Net Imports = Net Private Savings
Gross Domestic Product = Federal Spending + Private Investment and Consumption – Net Imports