Module 3 of 8 | The Gold Window is closed
“The Gold Survival Guide eCourse: Why Gold is your must have insurance and 9 ways to profit from it”
To continue from Module 2, today we look at more recent financial history, including President Nixon taking the World off the Gold Standard, and take a guess, albeit an educated guess, at where we might be headed.
To continue from Module 2, today we look at more recent financial history, including President Nixon taking the World off the Gold Standard, and take a guess, albeit an educated guess, at where we might be headed.
Module 3 of 8: The Gold Window is closed.
In 1971 the US faced a ballooning balance of payments deficit due to social spending programs and the Vietnam War and so it saw an outflow of assets in response. President Nixon responded by severing the $US from gold, thereby enabling the US to expand its money supply to pay for its debts and stop the outflow of its gold reserves.
The IMF and World Bank then required the rest of the world to also come off the gold standard if they wanted to remain in the “club”.
So since 1971, the world has been running on monopoly money. Fiat currencies backed by nothing but the faith and credit of the issuing government. Since then the gold price has – no surprises here – risen substantially. The graph attached below shows the sharp rise in the gold price from 1971 through to the high in 1980.
Very high interest rates (here in New Zealand – there were rates of 22+%) then managed to get things back under control until the money masters again started to crank up the money supply producing the Dot.Com bubble in the late 1990’s and then the housing bubble in the 2000’s.
USA’s Main Export Has Been Debt
Since Nixon closed the gold window in 1971 the USA’s main export has been debt. China, Japan and the rest of the world have been happy to accept the USA’s Government bonds as money in exchange for their goods. So long as this music continues, so do the relatively sunny days. If, or maybe rather when, the music stops, the depression to follow is likely to make the last depression pale in comparison.
In fact one particularly astute commentator, Doug Casey, of Casey Research, describes it as the “Greater Depression”.
This is the only time in history that all currencies the world over are purely fiat, and that includes the US dollar – the world’s reserve currency.
Also the world today is much more interconnected than it was in past centuries.
Put very simply, today the West buys what the East produces. China and the oil producers, produce oil and goods. The US and the West buy and the East lends back to the West so we can do it all over again. All works fine until we get to where we are today when you run out of borrowers – and therefore out of spenders – and the whole house of cards comes crashing down with a THUMP!.
Past deflationary and hyper inflationary episodes have often been restricted to a single country. Take Germany in 1920’s, Argentina in the late 1980’s, or Zimbabwe today. Usually due to a nation’s massive debts and the inability to pay, the ruling government inflates their money supply to enable debt repayment.
The result – hyperinflation.
Today the US is in a similar position being the world’s largest debtor nation. The difference? The US is also the holder of the world’s reserve currency. The US money supply is largely the world’s money supply.
History may not repeat but it does rhyme, and the tune being played is not a nice one….
So, the answer to the USA’s debt problem may be to try and inflate their way out of it, keep creating more and more money, thereby devaluing the US Dollar (and debt) in the process.
So if you’re a US citizen your first thought might simply be to exchange some of your US dollars for foreign currencies. At first glance, a good solution perhaps. If you’re not a US citizen – your thought may be, “it won’t affect me then, my currency will just get stronger and I’ll be able to buy more”.
However, the likely response given the USA’s position in the world is for the rest of the world’s government’s to also devalue their own currencies, so as to maintain the affordability of their own nation’s exports.
So far in 2009 the UK and Swiss central banks have followed the USA’s lead and engaged in “quantitative easing” – reserve bank speak for “printing money out of thin air”. An appropriate phrase has been coined for this competitive devaluation – “The race to the bottom”.
A potentially even more massive loss of wealth than the one we’ve already experienced is possibly looming the world over. One that may creep up on you faster than you realise. Here in New Zealand, we are particularly vulnerable to sharply rising interest rates, which are likely as the Fed tries to rein in the inflation that is coming down the pike as a result of massive money creation.
So to review, in the first 3 modules you’ve heard about the structure of the global monetary system and the risks this poses for your financial security. Next up, you’ll hear from Bill Flinn and also learn what other factors are at play that further compound and amplify the monetary system problems. Module 4 up next.
Remember knowledge is the key to protection and profits!
David Deutsch and Glenn Thomas
Founders
Gold Survival Guide
Disclaimer: We are not certified investment advisers and you should not construe what we write as personal investment advice but rather information of a general nature and as a basis for you to conduct further research.