Today's Downsizer Dispatch
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Quotes of the Day:
"We didn’t need a central bank when we were on the Gold Standard. People would buy and sell gold and the markets would do what the Fed does now."
-- Alan Greenspan
"I’ve been in the forecasting business for 50 years, and I’m no better than I ever was, and nobody else is either.”
-- Alan Greenspan
Subject: Vanishing Value
The Cox News service reports that food prices are up 37% from a year ago. The "Times" of London reported on December 3 that Gulf Oil states are reducing their ties to the dollar. Iran stopped conducting its oil business in dollars on December 7th.
Why are food prices rising? Why is the worldwide demand for dollars shrinking?
Changes in prices, or in the value of a currency, always reflect a change in the supply of goods and services, or in the demand for them, or in the size of the money supply, or a combination of all three.
We've touched on part of the cause of rising food prices before: government subsidies for ethanol. These subsidies divert corn from food to fuel production. That makes meat more expensive, becasue corn is used to feed cows. It also sends a signal to farmers to stop growing other crops, and start growing corn. This lowers the supply of those other crops and causes their price to rise. Meanwhile . . .
Ethanol requires more energy to produce than it delivers.
That means ethanol is triple bad news. It raises your price at the pump, and at the grocery store
, and it's bad for the environment. Thank you very much government. But . . .
Is ethanol enough to cause a 37% increase in food prices? We think not, especially when those price increases are accompanied by $800-an-ounce gold
, and a world-wide flight from the dollar. Why have so many people traded dollars for gold, and why is the dollar losing its value overseas?
Is it because foreigners suddenly have less demand for American goods and services? This can't be the answer. The volume of American products sold abroad is roughly unchanged.
Of course, not all dollars are used to buy goods and services. Many dollars are held as an investment -- as a store of value.
Is the American dollar no longer a good investment? Consider, first we had a stock market crash between 2000 and 2002.
The American stock market lost nearly 38% of its value. Then there was the housing bubble, followed by the housing bust.
The housing bubble began in about 1996, but the balloon really started to inflate at about the same time the stock market was deflating.
It certainly looks like money sloshed out of the stock market and into the housing market. It looks like people have been trying to find a safe place to invest their dollars.
But if the stock market and real estate turn out to be unreliable then it stands to reason that some money would then go to things like gold or to other currencies. This would explain the retreat from the dollar, but it doesn't necessarily account for rising prices for food and other goods.
There is actually one thing that explains all of these phenomena: the size of the money supply.
When the Federal Reserve expands the number of dollars certain sectors get the new Fed money first. Those sectors are . . .
* The government, and those who do the most business with the the government
* The banking system, and those who do the most business with banks
This means that you would expect to first see the impact of an expanded money supply in the Big Business and Big Banking sectors. And what did we in fact see? We saw a stock market bubble (Big Business) followed by a housing bubble (Big Banking).
Eventually the new Fed money has to work its way through the entire economy, raising prices for everything you buy. We might call this the Consumer Bubble
. And what are we in fact seeing? We are seeing rising prices for consumer goods like food.
Remember what we said in our last message on this subject. New money created by the Federal Reserve works exactly like money created by counterfeiters. The people who have the new money first are able to get something for nothing (purchasing goods and services before prices rise to account for the increased money supply). We might call this the Theft Phase of the Inflationary Cycle
. Then . . .
Businesses are tricked by the new money into thinking there is increased demand. This causes them to raise prices so as to maintain inventories and invest in new production. This is the Boom Phase.
Then . . .
The new money works its way through the entire economy, raising all prices, which removes the impression of increased demand, causing the previous investments in inventory and expanded production to become unneeded and unsupportable. This is the Bust Phase.
This is exactly what we have seen happen. This is why the dollar is losing its value. There is no mystery.
Think about the two Alan Greenspan quotes at the top of this message. Greenspan admits that no central bank -- no Fed -- was needed under the Gold Standard. Notice the other quote. Greenspan admits that neither he nor anyone else knows how to predict what the economy will do. This is very important because . . .
The whole idea behind the Fed was that the money supply would be backed by all of the goods and services in the economy (instead of by gold), and that the managers of the Fed would increase the money supply in sync with the growth of the economy, thereby avoiding price inflation. But . . .
Greenspan admits that it is impossible for him, or anyone else, to know enough about what is going on in the economy to keep the money supply in sync with productivity. This has resulted in repeated disasters, from the Great Depression, to the Great Stagflation of the 1970s, to today.
How do we get off this roller coaster? Returning to the stability of gold would be one way. And gold would probably work even better today with our advanced ability to transfer the ownership of gold/money electronically, instead of toting it around with us. But . . .
The process of returning to a gold economy seems daunting given that the Federal Reserve and the money it creates is so interwoven with our economy. We will have more to say about this in future messages, but for now, suffice it to say that Congressman Ron Paul has devised a very elegant way to get things started.
The simple act of repealing the legal tender law, which confers a monopoly on Federal Reserve Notes, would empower transactions in gold, or any other currency or commodity the market found worthwhile. This would foster monetary competition, and competition would reduce the Fed's ability to inflate the money supply.
This one change would be a big first step toward getting off the roller coaster.
Please send your elected representatives a message, asking them to co-sponsor Ron Paul's "Honest Money Act."
Tell them you're tired of the boom and bust cycles created by the Fed. Tell them you want to be free to use money that retains its value.
Thank you for being a DC Downsizer.
Jim Babka & Perry Willis
President & Communications Director