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THE VALUE VIEW GOLD REPORT
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from 2008: "PATRIOTIC MONETARY ACT" Washington, D.C.: The President elect today called for passage of the Patriotic Monetary Act of 2008. She said that economic conditions have deteriorated faster than previously forecast. Further, "We can no longer tolerate U.S. citizens controlling their wealth." The Act would prohibit any U.S. citizen from moving more than $10,000 outside the country without a government permit. Any U.S. citizen having money on deposit outside the U.S. would have six months to return the funds, or face confiscation of U.S.-based assets. No U.S. citizen would be allowed to have more than $10,000 of currency in their possession. The U.S. Self Defense Tax would also rise to 3% of all wealth in excess of $30,000. United Nations officials said the higher tax was essential to fund their observers monitoring U.S. economic and military activities. |
In a recent issue of THE VALUE
VIEW GOLD REPORT we considered a graph of various measures of
the rate of change of the U.S. consumer price index. As most
others agree, a change in inflationary conditions seems evident.
Even the Federal Reserve may be adjusting its thinking somewhat.
That conclusion acknowledges all the criticisms and discussions
of the problems with measurement.
The real issue though may be the question of whether or not the
recent tendency toward higher prices is being monetized. When
prices rise, such as the recent experience with oil, the central
bank has two fundamental choices. First, the central bank could
let market forces dictate the response. In this case the rate
of interest would rise to reflect the higher prices. In the short-term,
this action might result in a lower level of economic activity.
That lower level of economic activity should lead to a correction
in the sources of rising prices. Demand for goods would fall.
The higher prices for goods, oil included, would ultimately fall
back down. In this case the natural workings of the markets adjust,
and the higher prices are not built into the system. Market can
naturally adjust to such forces if allowed to do so.
However, the Federal Reserve does not like to let market forces
work naturally. Having made the assumption that the collective
wisdom at the Federal Reserve is greater than that of the market,
it will not allow markets to react naturally. The Federal Reserve's
wisdom is substituted for market wisdom. This mistake of arrogance
is commonly made by central banks.
The Federal Reserve's wisdom sets the level of interest rates.
Rather than let market interest rates react naturally to supply
and demand pressures, it fixes those rates. That action requires
the Federal Reserve to supply reserves whenever the market has
a tendency to raise rates. This move keeps rates fixed at the
prescribed level, but monetizes any price increases. That means
it provides enough money to cause the markets to accommodate
and accept the higher prices.
Sufficient "money" is provided the system to keep interest
rates fixed. Since more money is now in the system, the inflationary
tendency of the economy is higher. Such is the simplified view
of how the Federal Reserve actions monetized recent price increases,
such as those of oil. Little criticism can be leveled at the
central bank of China for its policy decisions, when similar
such actions are being taken by the U.S. central bank.
Before going further with this look at monetization of higher
prices let us take a quick look at the results of Federal Reserve
policy. In our first chart is the year-to-year change in U.S.
M-1, the narrowest measure of money. Some obvious observations
stand out, and are worthy of mention.
First
graph
First, stability is apparently
not an important consideration in the development of Federal
Reserve policy. Little evidence of a stable policy, however defined,
can be found in that graph. Monetary instability leads to economic
instability. Such is the reason the U.S. economy has experienced
a stock market bubble, a housing & mortgage bubble and the
likelihood of currency depreciation of a significant magnitude.
Second, the U.S. economy has been supplied with monetary "juice"
at an accelerating rate. Monetary policy has been set without
consideration of possible adverse consequences, or more dangerously
the cumulative negative impact on the U.S. economic system. The
impact of higher and higher rates of monetary expansion on stability,
both economic and price, has not been a consideration. Generally
accepted is that the money supply should not grow faster than
the growth rate of the economy's ability to produce goods. Let
us accept that. If the money supply grows faster than the growth
rate of the economy's ability to produce goods that action is
deemed to be inflationary. The reverse is generally also accepted.
Second
graph
What we have done in the second
graph is plot this tendency of monetary policy to be either inflationary
or deflationary. To do this each month the year-to-year change
in the narrow money supply, M-1, is calculated. From that value
3% is subtracted. Three percent is probably a reasonable estimate
of the growth of the long-term potential of the economy. If the
year-to-year change exceeds 3%, then monetary policy is conducive
to higher prices developing.
A ten-month moving average is then calculated, and that is what
appears in the graph. If that value is positive, monetary policy
is conducive to higher prices. If the plot is negative, the impact
of monetary pressure is negative on prices.
Three distinct periods of monetary pressure are evident in the
graph. In the early 1990s the impact of Japanese banking fading
from the scene had not yet appeared. Then a long period of monetary
conditions depressing prices developed. This is shown by the
measure being in negative territory. Previously we have written
how this era was largely due to the withdrawing inward of the
Japanese banking system.
More recently we see that the monetary influence is positive.
This condition has manifested itself in exploding housing prices
and much higher rates of increases of other prices. An era of
monetary policy encouraging higher prices has been evident for
some time. That effort to boost prices has now been seen in many
sectors, and has encouraged the depreciation of the U.S. dollar.
Naturally our curiosity took hold. To that plot we added the monthly average price of Gold, the solid line. That appears in the third graph. Here we now have an interesting picture. Also, included are two triangles. The triangle pointing down is when this monetary measure last turned negative. A second triangle, pointing up, is when the measure turned positive.
Third
graph
In short, when monetary policy
is exerting a depressing force on prices Gold does not do well.
When monetary policy is a positive force on prices, Gold does
well. Those results are as we would expect. Most important though
is that the measure continues positive suggesting that Gold should
continue to do well. Since this measure is more like an oscillator
than an index, the level of the measure and the price of Gold
are not particularly comparable.
Now let us tie this graph in with whatever a "measured"
response might be. The Federal Reserve is saying, as so many
others have commented, that taking away the punch bowl in a hurry
is not likely to happen. Waiting is more likely to be the approach
to raising rates. In the mean time, price increases are being
monetized and the cumulative danger to the dollar continues to
compound.
Potential investors on Gold need to keep attention on the longer
term impact of Federal Reserve policy. The Fed has never got
"religion" till salvation was a necessity. That approach
is not likely to change. Central banks just do not have a tendency
to do the "right thing." Why else would Gold have survived
while fiat currencies have faded?
In the day of money moving on the click of a mouse, volatility
in the dollar and markets is going to cause Gold to also be volatile.
More important is what will happen tomorrow to the dollar, not
what happens today based on a measure of last month's consumers'
confidence. Investors should use these opportunities to add to
their Gold positions.
As our last graph shows, these reactions in the price of Gold
create opportunities for investors. One of the fundamental laws
of finance is as the price declines, the future return on Gold
simply rises. Let the stock junkies compound their losses on
consumer confidence estimates while you increase your future
returns. By the way the Silver chart has also flashed a buy signal.
So enjoy the ride in Gold ($1,200+) and Silver ($21+), but do
so by increasing your profits through wise purchasing on price
corrections.
Fourth
(last) graph
July 29, 2004
Ned W. Schmidt
Ned
W. Schmidt, CFA, CEBS is publisher of THE VALUE VIEW GOLD REPORT.
That report now includes a weekly message, TRADING THOUGHTS,
to help investors identify timely points for buying Gold and
Silver.
His monumental report, "$1,265 GOLD," with 255 pages
and 98 graphs, is now widely known, and is available at www.amazon.com
or from the author.
This work has now been read by investors in over twelve countries
around the world. Ned welcomes your comments and questions. His
mission in life is to rescue investors from the abyss of financial
assets and the coming collapse of the U.S. dollar. He can be
contacted at nwschmidt@earthlink.net.
Copyright ©2004 Ned W.
Schmidt. All Rights Reserved.
________________
321gold Inc
