*** What $1000 Gold Is Telling Us ***

By: Rick Ackerman
Rick’s Picks
Tuesday, October 13, 2009


The inflation/deflation discussion in the Rick’s Picks forum has attracted some interesting comments -- none moreso than this one from our Lake Tahoe friend, retired Merrill fund manager and investment maverick Rich Cash:

When we show donors the long-term Econocast Consumer Price Index Forecast to measure against investment performance, they see more than a doubling of CPI over the coming decade after a few minor decreasing negative CPI blips last year. Most people call this inflation. It is institutional inefficiency. It is the cost of government administrations, bureaucrats, congresses, courts and wars on everything, the tyranny of fiat red tape, Barack Obama’s one month in office Nobel Peace Price nomination and award notwithstanding.

He wants to share it with everyone. Maybe he could share it with Martin Armstrong, Dr Franz Pick, Col E.C. Harwood or Vern Myers, American political prisoners whose property was seized while they were held in jail indefinitely without due Constitutional process, some eventually plea-bargaining to get out as do 98.5% of people incarcerated by government. Harwood, Pick and Myers died while Martin Armstrong is held Fort Dix Prison Camp until 2012 smuggling economic truth out.

99% Conviction Rate

USA Courts have a 99% conviction rate. The USA has the highest percentage of people in prison in the world. Ten percent of the working age population are in jail, plus half the people work for or depend on an unproductive government. People who consume but do not produce drive up the costs for everyone else. Various commissions defined CPI down to reduce government COLA payments: Cost of Living Adjustments are as unrealistic as government savings bonds and TIPS: Treasury Inflation Protected Securities.

Real inflation which affects asset prices, is a credit condition. Anyone can look at John William’s Shadowstats Chart of M-3 since 2008, read David Rosenberg’s Gluskin Sheff report of the $20 B reduction in consumer credit in August temporarily hidden by cash for clunkers, take a good look at GE Credit and GMAC DiTech 125% Loan to Value shadowbanks disappearing. Or they can merely consider their own disappearing paycheck, home or mutual funds, to know which way the Arctic credit wind blows the economy. In fact, divided by the eternal constant gold, we had -83% real declines in Real Estate since 2007, -83% declines in the dollar since 2001 and -84% real declines in the Dow since 1999. It is not so much gold going up. Most assets are going down.

A Proxy for Real Rates

Central Banks are doing everything they can to prevent a bubble in gold, for it is the basis of all money, finance and trade. Gold is a proxy for the real rate of interest that reflects increasing scarcity of capital as it flees for freedom. At 1061.50, having quadrupled since 1999, gold is telling us real interest rates (deflation plus nominal rates) are the highest in history. With high interest rates comes higher tax rates. It is no accident Fed usury and income taxes came the same year to the home of the brave and land of the free in 1913 with a Princeton Academic President. 70% of Federal income taxes are paid by the working class. There were no tax cuts for the middle class. Then or now.

Now we have a Princeton Academic head of the Fed and a Princeton First Lady.

The Fed took trillions from Americans by creating trillions out of thin air and government TALF, TARP and PPPIP programs to protect a failing banking system by purchasing toxic assets to bail out big bank members and their corporate friends like AIG, GM, FNM, FRE marking the end of the biggest inflation of corporate monopoly government in the history of the world. We face the prospect not only of failing, underfunded government agencies and programs like FDIC, OPIC, PBGC with an insolvent treasury, but a failing Fed, bailed out by foreign central banks like the BIS and the IMF, which happened in Revolutionary, Civil and World Wars with Panics and Depressions.

No Zimbabwe

To think the Fed is likely to inflate the money supply to Zimbabwean levels is to forget the inflated Treasury debt market is at least ten times the size of American equity markets. Equity does not drive the derivative markets, debt does. If real money supply inflates again, bondholders sell in droves, driving nominal interest rates to the sky to reflect gold prices. Only Centenarians who were adults coping with the Great Depression may intuitively comprehend this. Thus 1061.50 gold, which may be the high-water mark, reflects the failure of the Fed and Treasury to stabilize the economy against the Greatest Depression. Quadrupling gold prices are not inflationary, but deflationary, as compounding Treasury interest devours everything in its path like a Borg Cube Black Hole.

Treasury Interest is already the third largest budget item after transfer payments and the military industrial complex. In coming years, Treasury Interest may compound to number one, unless Treasuries default first. None of this realpolitique finance is inflationary for college tuitions driven sky-high by student loans, defense budgets bloated by foreign conquests, dollar creation based on limited Treasury bonds, government subsidized healthcare or unfunded entitlements. Even ammo, food or guns may slow their appreciation for a time. People are most bullish at golden tops and most bearish at dollar bottoms. Regards…Rich.

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