The $64 Billion, Trillion Question

Dramatic financial events have dominated the news for the last several weeks. Today investors are very concerned about the safety and value of their financial assets while Wall Street ponders the fate of its most established brokerage and insurance companies. We at Swiss America love the attention to money matters but do not relish the possibility of market meltdowns.

After the recent 1,000-point drop in the Dow, an emergency behind-closed-doors meeting was held with members of Congress, the Treasury, the Fed and the President. Subsequently it was announced that legislation would probably be enacted to transfer the liabilities of bad mortgage instruments from banks and brokerage companies to the government. Senator Dodd implied he was led to believe the situation was dire and immediate action was necessary.

It appears we have come full circle since 1980 when we experienced another financial crisis. At the time inflation was double digits and foreigners were losing confidence in the US dollar. Fed chairman Paul Volcker boldly began raising interest rates up to 20% to squelch inflation and restore confidence. Today investors are once again looking to the government to restore confidence in the financial markets.

The proposed government bailout appears to be a temporary fix and adds to a long-term debt problem. Over the last 25 years we have witnessed the greatest accumulation of debt in world history. We were dismayed when Reagan’s commission scoffed at the return to a gold standard. Those of us involved in the rare coin and precious metals market have warned about excessive debt leading to severe inflation, higher costs of living, and a weaker US dollar. Our antagonists have argued that excessive debt will lead to deflation and hence a stronger dollar.

With the bailout of Fannie Mae and Freddie Mac, AIG, Bear Stearns and the recent Resolution Bailout; the $64 Trillion Dollar question of inflation or deflation has finally been answered! Peter Schiff, President of Euro Pacific Capital, wrote on 9/19/08, “While it is dizzying to predict how this plan will be implemented, it is fairly simple to foresee the macroeconomic consequences. The U.S. dollar will be shattered beyond repair. The government simply has no means to make good on the trillions of new liabilities…So while the move ensures that depositors will not lose money, is does insure that the money itself will lose value.”

The government’s abandonment of the gold standard and establishment of the Federal Reserve have proven to be disastrous. The result has been unsound monetary policies with trillions in unfunded liabilities, and an overdependence on foreign creditors. Today we are expected to believe the government’s “Resolution Bailout” will cure Wall Street’s ills and restore confidence in the economy. I believe the plan will shift the liabilities to the saver and taxpayer while exemplifying moral hazard.

LeMetropoleCafé.com reported on 9/19/08, “The President’s new bailout plan to be a Patriot Act for the economy. Both pieces of legislation are being rushed through Congress as emergency actions with little time for scrutiny. Both acts rewrite the rules of how the country operates. Just as the Patriot Act compromised individual political freedom, the bailout compromises economic freedom. Never again will the market determine the big winners and losers; henceforth the government will, in its infinite wisdom decide which firms will live or die. As a political matter, the new structure is unlikely to function well. As Milton Friedman said, ‘If you put the Federal Government in charge of the Sahara Desert in five years there’d be a shortage of sand.’”

The obvious question one should ask is; where will the hundreds of billions or trillions come from for this bailout? History teaches us when federal government needs immediate cash and has over borrowed; it turns to the printing press. The Federal Reserve buys US bonds and infuses cash into the system. This is called monetization of debt and is the root cause of inflation.

Jim Sinclair of JSMineset.com wrote on 9/19/08, “Today's reported potential infinite bailout of all and any portends, if adopted, is the largest increase in dollars outstanding since the Jurassic Age... It closely models actions undertaken regarding the production of currency liquidity seen in the Weimar Republic."

So today we embark on a new stage in American financial history. It appears the government’s “Resolution Bailout” will temporarily calm the markets but mortgage our financial future. This program will weaken the dollar and insure higher costs of real assets such as housing and automobiles. Higher costs of living will be the burden for our children and grandchildren, as well as those looking toward retirement or those on a fixed income.

Now that the $64 trillion question has been answered in terms of inflation; there is no doubt as to what action a proactive investor must take. Bill Murphy, GATA chairman and proprietor of LeMetropolecafe.com, on 9/19/08, “Once the dust settles, most everyone with half a brain is going to go out and buy gold and silver.. The small gold and silver markets will not be able to handle the demand without sending their prices sharply higher”.

Citigroup metals analysts, John Hill and Graham Wark wrote on 9/19/08, “We have been surprised that gold has been so heretofore quiet, and have expected a much strong and more immediate response to the government takeover of GSE [Government Sponsored Enterprises]/mortgage insurance entities, and broker-deal bankruptcies…It is notable that hard-core goldbugs have been proven correct in the decade-long contention that an overwhelmingly vast and complex pool of nested financial derivates would ultimately result in cascading defaults and ruin for major portions of the banking system. Frankly, we're surprised that gold is not already at $2,000 per ounce.”

I will emphasize the Swiss America strategy. Proactive investors should go on their own gold standard, by taking possession of numismatic gold and silver coins and precious metals. The gold price correction from over $1000/oz. in March 2008 to $880 today gives investors another opportunity to buy undervalued real assets. The country’s economic problems will continue to make headlines the rest of this year and into the next decade. All of us at SATC will continue helping individuals protect their hard-earned savings, while limiting investors’ exposure to the next financial crisis. Free DVD!