 The Fed and the Gold Price
Kenneth J. Gerbino
Kenneth
J. Gerbino & Company
Investment
Management
June 19, 2004
In the last five months $213 billion new dollars have been added
to the U.S money supply (M2). Amazingly, no one in the mainstream
financial community questions this.
Looking over some past Federal Reserve archives one finds that
$213 billion was all the money in circulation in 1962. Currently
it is $6.2 trillion. All the material items of wealth in this
country (buildings, roads, cars, aircraft carriers, toasters,
TV sets etc.) were created in the 173 years leading up to 1962
with that $213 billion circulating. Have we come close to that
real wealth creation in the last five months? This is a huge
wake up call that something is not right. This excessive money
creation, as history attests, will bring along an enduring inflation
created by the same people pledged to control it.
The Fed has never been
able to stop inflation. Higher interest rates do not stop inflation.
This is a false economic theory. There are no statistics to prove
higher rates stop inflation. Stopping inflation means if you
have a 3% increase in consumer prices, you will have a 3% decrease
soon thereafter. That is stopping inflation. If you have a fever
at 103, well above the normal 98.6 and you go to your doctor
to stop the fever, you expect him to get you back to 98.6. In
the world of economics we have accepted prices to go up and if
the prices just stay steady at that new price level we are suppose
to be happy. That is the same thing as your doctor telling you,
no problem you are steady at 103 have a nice day. Inflation builds
on itself month after month year after year. It is like the economy
has built up a 150 degrees temperature.
Also, in past inflationary
periods the Fed has raised interest rates for years and all during
those years the CPI continued to go higher and higher. Higher
interest rates not only cannot reverse (stop) inflation they
cannot hold it in check. Prices are rising from money that has
been in the system and has been churning around from years before.
Wall Street professionals who do not understand this concept
will be vulnerable to the future changes that will occur as inflation
distorts our economy and markets once again, and for all the
same reasons.
The Fed's purpose is two-fold,
to create money and be the lender of last resort to the
government when those multi-billion dollar deficits show up and
to be the protector of the U.S. banking system. No one will argue
that if the banks go under we are all in a lot of trouble, so
the Fed over the decades has enjoyed a reputation that has led
the country and the politicians to believe one can print a lot
of money forever with manageable consequences. This is true for
small-scale stuff, but when you are talking about trillions of
dollars it is obvious to some of us that we are now past the
point of no return.
The Fed also controls interest
rates. In a country that espouses free market economics, this
aspect of their daily activities is hard to comprehend. There
is nothing more important in a free market economy than to allow
money and the cost of money - interest rates - to be left alone
and to allow the daily interaction of millions of people and
tens of thousands of institutions and millions of transactions
to function without interventions and manipulations. The fact
that any institution is intervening in any marketplace
to the tune of tens of billions of dollars, sometimes on a daily
basis, is something to fear.
These activities by the Fed will be the eventual driving force
behind excessive inflation, a depreciating currency and a much
higher price of gold. The Fed and other foreign central banks
are following policies that are contrary to basic economic truths,
classical economic thought and just plain common sense.
My late friend, Nobel laureate
(economics), F.A. Hayek told me years ago when I visited him
in Germany that decades before he had a discussion with the renowned
economist John Maynard Keynes, where Keynes told him that he
(Keynes) had made a terrible mistake and was prepared to write
an important piece to disavow deficit spending and hence paper
money creation. But two weeks later Keynes died. World governments
have all embraced Keynes' mixed up theories because it gave them
a convenient solution to cover up their economic mismanagement.
Because of this, huge debts and huge piles of paper money have
been fostered on populations creating what is now an economic
tidal wave that is now on the horizon.
As inflation is always the
result of excessive expansions of money in a society, we should
simply do the math. Huge money increases equal huge producer
and consumer price increases eventually. There is no doubt about
the money supply increases, so there should be no doubt about
a strong and prolonged inflation that has obviously started.
This is all bullish for gold.
For other articles on gold and the economy please visit our website.
Kenneth J. Gerbino
June 18, 2004
Kenneth J. Gerbino & Company
Investment Management
9595 Wilshire Boulevard, Suite 303
Beverly Hills, California 90212
Telephone (310) 550-6304
Fax (310) 550-0814
E-Mail: kjgco@att.net
Website: www.kengerbino.com
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