Why the Fed and Obama Are Willing to Wreck the Dollar
The rise of gold to over $1,300 is no accident. We saw a similar rise of gold in the 1970s to over $2,000 per ounce. The reason? The U.S had just dumped the gold standard (the link that makes a dollar worth a certain amount of gold) and had started to print like crazy to pay for the Vietnam war. Japanese bondholders of U.S government debt took it on the chin.
The mechanics are the same, but this time around the reasons are different. The Federal Reserve and the U.S Government will do whatever it takes to “save” the economy because governments at all levels are “invested” too much in suckling from the private economy pig.
There is a sharp contrast to the 1970s when government had gotten bigger, but not anywhere as big as it is now. You might say, well, as a percentage of GDP the government (at least at the Federal level) is taxing at about the same as it was in the past decades. This might be true, but there is a clear disconnect between what governments collect and what they spend, borrow, and have committed to in future expenditures through entitlements.
Here’s a quick run down on what has changed over the past 40 years:
- The baby boomers are near retirement. The accrued benefit promises have outstripped expected tax revenues for Social Security, Medicare, and Medicaid.
- 401ks and other tax deferred retirement accounts were invented and now contain 100s of billions of dollars. Governments need a good stock market so that they can reap their share of these accounts in the future.
- It’s been bi-partisan, or non-partisan that government entitlements are expanding even though we can’t pay for the ones we have. George W. Bush (Republican) passed a prescription drug bill onto Medicare. Obama (Democrat) signed legislation that expanded the involvement (and funding) of health care for those younger than 65 (outside Medicare age).
- We have gotten into a few wars, all put onto the credit card. No money was asked for from the taxpayer.
- States are broke. They too have over committed on pensions and health benefits.
The message that I get from the Fed is this: start spending and investing now, otherwise I will print more and more dollars and trash the currency until you do. Governments need a strong economy and if they don’t get one, they will simply take your money by inflation.
This is why gold is so hot.