-- Posted Monday, 29 September 2008 | Digg This Article
| Source: GoldSeek.com
by Howard S. Katz
9-29-08
At this writing, the nation is embroiled in a financial “crisis.” All of the newspapers and TV are screaming that the economy is on the edge of “systemic risk.” By this is meant that, if the people of American do not give $700 billion to certain Wall Street firms, our entire economic system will collapse. The source of this dire prediction is one man, Secretary of the Treasury Henry Paulson.
Mr. Paulson has been good to us gold bugs. He no sooner started shouting “systemic risk” than the price of gold exploded to the upside. But let us address the question, merely because one or two (or even a dozen) Wall Street Corporations go bankrupt does this mean that the whole system will collapse?
First, the whole system has never collapsed, neither in the history of the United States nor any other quasi-free economy. Second, if you understand the rudiments of economics, you know that economic systems do not collapse. It is only financial systems which collapse, and this is because of the special privilege given to bankers to create money and to make promises beyond their ability to keep. It is a fundamental principle of a free economy that you do not have to make a promise, but if you do, you are expected to keep it. Somehow, at the beginning, bankers were made an exception to this rule. The bank run is the classic example of instability in the financial sector, and all financial instability, including the current “crisis,” is related to it.
For example, the collapse of Black Tuesday 1929 was caused by Herbert Hoover, who directed the Federal Reserve to drive stock market speculators out of business. The Fed cracked down on the private banks, who stopped lending to people on margin. Brokers’ loan rates soared, and margin speculators were forced to sell. It was their selling which caused the 1929 crash.
The credit contraction mislabeled “The Great Depression” was caused by the Federal Reserve Bank itself, which created more money than it had gold to redeem with. When gold started to flow out of the Fed in the late ‘20s, it had to contract the money supply. In this case, a collapse in the financial system led to a disruption in the economic system. But the Great Depression was nowhere near as bad as the propaganda would have. Prices declined faster than wages, and this meant that real wages rose. This made all Americans who kept their jobs richer, and they showed this by eating significantly more meat, switching from margarine to butter and giving more to charity. (And oh yes, that story about people jumping out of windows? That is a complete lie. The suicide statistics from that day show no unusual number of suicides after the stock market crash of 1929.)
Well, in that case what is the evidence that the whole economic system is going to collapse if the Government does not take $700 billion from the people of America and give it to Wall Street? We turn to Secretary Paulson, who started this controversy, for his reasons.
Secretary Paulson has given no reasons.
So here is a man who wants to steal $700 billion from us, and he can’t give us any reasons. Further, anyone who has followed Secretary Paulson’s career knows that nothing he does seems to work, and very little that he says makes any sense. He is the Chicken Little of our day shouting, “The sky is falling.” But at least Chicken Little wasn’t hitting us up for money.
Neither has the media of this country distinguished itself by its ability to correctly predict the future. We all remember their campaign to frighten people out of the stock market in 1982 by touting Henry Kaufman (Dr. Doom). And of course there was their vicious attack on the leading gold bugs in the early 1970s and their refusal to apologize or acknowledge that we had been right in the late 1970s. In 2000, the New York Times and the Wall Street Journal teamed up to promote a book by James K. Glassman and Kevin A. Hassett entitled, “Dow 36,000.” This book predicted, in 1999, that the DJI would reach 36,000 between 2002 and 2004.
I could go on and on. The establishment in this country does not know its front end from its rear end, and the vast majority of their predictions prove wrong. (Do you remember when AIDS was just about to spread to the heterosexual community? Do you remember the various flues which surface every third spring with dire predictions of a mass pandemic by the summer? None of these things ever happened.)
So why should we get alarmed when Henry Paulson, George Bush, Jr. and Barney Frank agree on the proposition that our entire economy is going to collapse?
What we have before us is a crude attempt to steal from the American people to bail out Wall Street, and the principal question is, do the American people have enough spunk to stand up and vote against this monster? After all, all we have to do is vote. The Founding Fathers were not allowed to vote against the King of England. They had to fight. It is because of them that we get to vote.
What does this mean for the price of gold? Notice that, although there is much talk of a taxpayer bailout of Wall Street, none of the proposed versions of the bill contain a tax increase. So, quite frankly, nobody involved with this bailout intends to take the money from the taxpayer. They will get the money in the time-honored way by having the Federal Reserve counterfeit it. The Fed will print up $700 billion. This will cause the value of the dollar to decline, and average goods and services will go up.
This is why gold exploded over $140 (interday) on Sept. 17 and 18. And it is why the U.S. dollar fell by three full points on Sept. 17-22.
If this bill passes, there will be another rise in gold and fall in the dollar. Unfortunately, the entire establishment is for the bailout. And in my experience the establishment does not lose. Notice that it is being pushed by an alliance of the Bush Administration and the congressional Democratic leadership. Notice that both presidential candidates are for it. If you wanted to protest the bailout, you would have to vote for Bob Barr (on the Libertarian ticket) or write in Ron Paul.
So as much as I want the bailout to fail, my political savvy tells me that it will be passed in some form. The establishment has too many weapons. They can threaten a recalcitrant congressman. In 1776, Americans risked their lives. Today they are afraid to risk their perks. The establishment knows how the system works. At this writing, the House vote has been set for Monday and the Senate vote for Wednesday. The bill only finalized over the weekend so this is not enough time for any member of Congress to read it, but they will vote for it without reading it. These are the people we elect to represent us.
In a few months (or weeks) another giant company will come hat in hand to Washington asking it to steal money from the people and shouting “the sky is falling.” But this time the precedent will have been set. What can be done once can always be repeated. Unless the American people turn around and show some spunk, this is a very dark day for America.
If you want to hear more about the disastrous policies now being followed by our leaders and the consequences for gold and the financial markets, then my website, www.thegoldbug.net, (no charge) discusses political and social issues. The 9-29-08 blog will discuss the ongoing economic “crisis.” My newsletter, The One-handed Economist, ($300 per year) discusses the financial consequences and how you can best profit from the greed and stupidity of the establishment. It is a black day for America, and we are all sad, but we must continue to live our lives and function as best we can, and this means making the rational (versus the irrational) decision. Many people flew for “safety” into T-bills, accepting a nominal interest rate of close to 0 and a real interest rate sharply negative, but your only haven is gold. Those foolish people who believe the establishment propaganda will be the first ones they eat.
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-- Posted Monday, 29 September 2008 | Digg This Article | Source: GoldSeek.com
