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Dollar looks good; how long?

“You cannot have real peace and prosperity unless you can absolutely trust the money.” This is a paraphrase of comment by silver guru David Morgan Oct. 24, at the Silver Summit in Spokane, Washington.

For decades I have implicitly understood the above concept expressed by Morgan. But, it wasn’t until he said it that the light bulb went off in my head to explicitly grasp it.

Think back over the course of history.  Nations and empires at their peak had relative peace and prosperity when there was a stable currency. But, when currencies were debased, the economies of these nations and empires declined and sometimes collapsed.

As this essay is being published I will be speaking to high school world history classes about, “The Rise And Fall Of Rome’s Money – And What It Means For America Today.” If you want a copy of this PowerPoint presentation, email me at path@libertycoinservice.com.

Think about it. There was a long time when the U.S. dollar was “as good as gold” because it was literally backed by and exchangeable upon demand for the equivalent amount of physical gold.  During these decades, the United States economy grew and America turned into a world superpower.

Since President Nixon closed the gold exchange window in August 1971, the U.S. dollar has fallen significantly in value. Back then, well over 90 percent of all international transactions were settled by payment in U.S. dollars. Today, that percentage has fallen to about 60 percent and continues to decline.

Even the U.S. government no longer pretends that anyone can trust the U.S. dollar. Many welfare benefits and calculations of income tax liability blatantly proclaim the declining value of the dollar when annual changes are tied to increases in the Consumer Price Index.
Since Morgan shared these words with the audience at Silver Summit, I have asked dozens of people if they expected that an ounce of gold or silver would still be an ounce or gold or silver a year from now. Unanimously, they said yes. I also asked them if they believed that the value of the U.S. dollar would be as much a year from now as it was today.

Unanimously, they all said that the U.S. dollar would be worth less.

This lack of trust in the value of the U.S. dollar is probably the main reason why recent polls report that 80 percent of the public believe this nation is headed in the wrong direction. Ordinarily, such a lopsided poll would worry incumbent politicians going into this week’s elections. You might think that advocating a return to a condition of the U.S. dollar’s value being absolutely trustworthy would be a major campaign promise by those seeking election or re-election.

If you think that makes sense, you are in for a huge letdown. I have yet to hear any political commercial or see any literature from any candidate that advocates restoring absolute trust in the value of the U.S. dollar.

However, that doesn’t mean that the politicians are not playing games with the value of the U.S. dollar to help their election prospects. As we now know because of a whistleblower, the final jobs report the U.S. elections in 2012 overstated the number of jobholders. When the October 2014 jobs report was released a few weeks ago, it was quickly followed by another whistleblower exposing the same distorted overstatement of the number of jobholders.

That was one of the opening salvos trying to prop up the U.S. dollar in the weeks before the elections. Remember that the latest round of inflation of the U.S. money supply (called quantitative easing) started right after the November 2012 elections. Beginning about a year ago, the policy of the level of quantitative easing started to be reduced at meetings of the Federal Open Market Committee (FOMC).

This enabled the FOMC last week to claim that the U.S. economy was improving enough that this round of quantitative easing could be ended completely – just six days before the election. There are two major things wrong with such a pronouncement. First, this was a statement of policy, which does not necessarily match up with what is actually being done.
In fact, the Federal Reserve is continuing to roll over maturing Treasury debt plus collected interest into even more inflation of the money supply. Second, major U.S. banks now have $2.6 trillion more in cash on their books loaned back to the Fed than they did in November 2012.

The current round of quantitative easing cannot be said to have ended until the Fed withdraws this $2.6 trillion in funds back out of the economy – meaning the major U.S. banks. Don’t look for this to happen as actually ending this quantitative easing would lead to the financial collapse of these very same banks.

The value of the U.S. dollar has been strong thus far in 2014 as a result of comparative weakness in the euro and the Japanese yen. Right after the FOMC announced that it was ending its latest round of quantitative easing, Japan’s central bank announced that it would substantially expand its own quantitative easing.

The Bank of Japan also announced a more aggressive program of buying worthless and devalued assets from Japanese banks at full value. Is it truly a coincidence that this announcement came three days after officials of BlackRock, Inc., a major U.S. investment management company, met in Japan with officials of that government? Or that the announcement was timed to hit four days before the U.S. elections?

This new announcement by the Bank of Japan that it would knock down the value of its currency had the desired effect. Investors clamored to get out of the yen. As the value of the yen dropped, the U.S. dollar appreciated to a multi-year high. To make sure that investors would not be tempted to instead acquire precious metals, it was necessary that gold and silver prices drop – significantly.

Therefore, it really should come as no surprise that gold and silver prices (as measured in U.S. dollars) fell by unexpected large percentages late last week.  The London P.M. fix for gold last Friday was $1,164.25, its lowest close since late April 2010. In U.S. markets last Friday, silver traded during the day as low at $15.55, lower than any COMEX close since Feb. 15, 2010.

These suddenly lower prices had two expected results in U.S. markets. First, the amount of physical gold and silver being liquidated by owners almost completely dried up late last week. At the same time, physical demand soared – especially for silver.

As of Friday evening, premiums were close to unchanged for bullion-priced gold coins and bars. Mostly there was a small increase in the spread between the spot prices used by wholesalers (and therefore retailers) to quote buy and sell prices on merchandise. As for silver, there were significant increases in some bullion-priced silver products that are not in current production, such as U.S. 90 percent silver coins.

Unless there is a quick recovery in gold and silver prices, expect there to be supply shortage and higher premiums perhaps on the scale that we experienced in late 2008 and in April and June 2013.

The U.S. politicians have temporarily gained traction 1) by pretending that the economy has improved enough to end the current round of quantitative easing, 2) by the U.S. dollar hitting a multi-year high in value, and 3) with gold and silver prices getting clobbered. This may all be good for politicians in this week’s elections, but in the long run it is the American people who will lose peace and prosperity as they will never have absolute trust in the U.S. dollar.

Patrick A. Heller was the American Numismatic Association 2012 Harry Forman Numismatic Dealer of the Year Award winner. He owns Liberty Coin Service in Lansing, Mich., and writes “Liberty’s Outlook,” a monthly newsletter on rare coins and precious metals subjects.  Past newsletter issues can be viewed at http://www.libertycoinservice.com.  Other commentaries are available at Coin Week (http://www.coinweek.com and http://www.coininfo.com). He also writes a bi-monthly column on collectibles for “The Greater Lansing Business Monthly” (http://www.lansingbusinessmonthly.com/articles/department-columns). His radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com).

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