The History and Future of Gold

Ever since 1971 the United States has had the ability to supplement tax revenues by accessing an endless supply of money via the Federal Reserve.  This ever increasing supply of money causes inflation.  The historical and forecasting data below demonstrates how drastically the price of gold has been impacted due to inflation.  Gold is the most stable asset in existence.  The purchasing power of gold does not fluctuate over the years.  It is the purchasing power of the dollar that fluctuates.

Year   Gold $/ozt
----  -----------
1800        20.65
1850        20.65
1900        20.68
1930        20.65
1933 --> confiscation of privately owned gold
1940        33.85
1960        35.27
1970        35.94
1971 --> removal of the gold standard
1980       612.56
1990       383.51
2000       279.11
2005       444.74
2010     1,224.53

@ 12.08% based from 1971
2015      2,352.95
2020      4,161.84
2030     13,020.57
2040     40,735.65
2050    127,444.02

@ 20.58% based from 2005
2015      3,152.06
2020      8,035.18
2030     52,215.11
2040    339,310.27
2050  2,204,945.18

Prior to the removal of the gold standard in 1971, the price stayed very consistent.  However, after the removal, the monetary system lost stability and has been undergoing large amounts of inflation.  As you can see, the years ahead nearly guarantee more inflation and higher prices of gold.  This is the reason why gold has always been considered one of the best hedges against inflationary fiat currencies.

Do democrats or republicans really matter at this point?

The only political stuff I watch on TV is the local news.  That's because I only pay for a basic cable package.  I primarily use Google Reader to stay up-to-date on RSS feeds.  My RSS feeds are:  BlackListed News, Reuters Politics, RogueGovernment and SurvivalBlog.  I am also subscribed to the National Inflation Association (NIA) newsletter.  They provide a lot of news in their newsletters.  I consider myself a libertarian at heart which would make me a far right conservative.  I honestly view most republicans as being more toward the middle instead of the right.  Furthermore, I view both democrat and republican parties as pointless.  They seem to stand for different values but typically accomplish the same results:  incur debt and go to war.  In general I agree with republican views, but their actions don't line up which makes them two-faced.  On the other hand, I disagree with democrat views, but at least most of their actions line up with their views.

For me it comes down to some fundamental ideas.

• The Federal Reserve needs to be dismantled and then our currency needs to return to a gold standard.
• Our military needs to be downsized dramatically and returned to a defensive stance.
• All federal assistance programs need to be retired.
• The federal government needs to remove itself from the public school system and allow the states to do what they think is best.
• Our federal tax system needs to be dismantled and replaced with something like a simple flat percentage tax.
• The allodial title system needs to be restored which means the retirement of eminent domain.
• Any law not dealing with crime (an offense against person or property) needs to be repealed.
• The ability for government to spy on citizens needs to be repealed.  This would include the Patriot acts.
• The second amendment needs to be enforced.
• You shouldn't need to register firearms.
• You shouldn't need a license to carry a firearm concealed or unconcealed.
• There shouldn't be regulations on how to transport a firearm.
• There shouldn't be regulations on what kinds of firearms you can own.

There are probably some ideas I am forgetting, but those are the main ones.  But honestly, I don't think any of this will happen since it appears the majority of people agree with where the country is going.  Most people don't agree with my views, and that's okay.  I am very thankful we live in a republic instead of a democracy.  In a democracy the majority determines the best route for the country and I realize that it has been the majority in this country that has brought us down the path we have taken.  In our republic, the majority is supposed to be confined within the restrictions of the constitution in order to keep the majority from removing the rights of the minority.  Sadly, our country has been operating more like a democracy instead of a republic.  I don't think our country can continue down this path without destroying itself.  My hope is that our country will collapse to such a degree that it will have the chance to rebuild on a much stronger foundation with more wisdom than we are currently displaying.  I am very excited about the years ahead.  I think our country could make a great turn around, but I think it will require some very rough adjustments.

My hunch is that our federal government will stay extremely bloated like it is now.  We will never bring in anything close to the kind of tax revenue required to operate our government.  Which means we will continually need to sell treasury notes to fund our expenditures.  Less and less countries are buying our debt (treasury notes).  China and Japan used to be the largest holders of our debt.  However, last year the Federal Reserve passed up both of them and is now the single largest holder of our national debt.  There is no sign of that changing.  China used to be the largest holder and they are beginning to sell off their treasury notes and diversify into gold.  The faster they do this, the more inflation we will see.  The Federal Reserve will continue to buy up our treasury notes in order to keep our government running.  Which means more and more dollars will enter the economy usually through stimulus or bank reserves.  Bank reserves are the most dangerous due to the way fractional banking works.  There is no way for us to ever pay off our federal debt.  At this point there are only two options:  default on our debt obligations or hyper-inflate our way out of them.  I would be very surprised if we default.  I fully anticipate us hyper-inflating in the years ahead.  NIA believes we could enter hyper-inflation as early as the second half of this year, and they fully expect us to be in hyper-inflation by 2015.  If they are right (and I think they are), that doesn't give people much time to prepare.

That said, I don't think republicans or democrats will make any real difference in the outcome of our nation.  I only like to track what they are doing in order to make appropriate preparations.  The only thing to do at this point is prepare for what is coming.

Will we see deflation or inflation in the years ahead?

I would welcome deflation with open arms.  It would be rough on the economy, but I think it would be much better in the long run.  However, I think our government and the Federal Reserve will do everything in their power to make sure we stay inflationary.  The last time we had any deflation was back in 1955 and it was 0.37% which is basically stagflation.  The last time we had any meaningful deflation was back in 1933 and it was 5.11%.  So at least historically from a statistical point, the odds are against deflation.  The only way I think deflation would even be possible at this point is if we defaulted on our debt obligations but that would instantly crush the U.S. dollar.  We have had some more recent moments that felt like deflation, but they were simply the effects of lower inflation.  The early 80's felt like deflation because inflation fell from 13.50% in 1980 down to 3.00% in 1986.  The only reason that happened was because the Federal Reserve raised the national interest rate dramatically in order to avoid hyper-inflation.  You probably remember those years.  That was when a home mortgage had an interest rate of 20%.  Back then we had less than $1 trillion in debt and foreign countries were more than happy to buy our U.S. Treasury bonds with the new high interest rate.  They made great returns on their investment.  What we avoided in hyper-inflation we made up for in national debt.  Our national debt was climbing at a rate 34.87% by 1986 and we hit $3 trillion in debt by 1990.

That brings us to our problem today.

• Our 2009 inflation was 7.5% with an annual averaged national debt of $12 trillion growing at a rate of 18.8%.
• Our 2010 inflation was 8% with an annual averaged national debt of $13.5 trillion growing at a rate of 13.87%.
• Our 2011 inflation is 8.5% with a national debt already above $14 trillion and climbing fast.

Inflation will keep climbing fast as long as the Federal Reserve keeps the national interest rate at such a low level.  I think the national interest rate is currently at 0.25%.  If the Federal Reserve tries avoiding hyper-inflation by raising the national interest rate like they did back in the 80's it will send our national debt through the roof.  Could you imagine a national debt rate of 35% like we had back in the 80's?  Back then we didn't have nearly the kind of national debt we have now and taxes paid for nearly all our federal spending.  That's not the case today.  2010 taxes brought in $2.281 trillion while government expenditures were $3.552 trillion leaving a gap of $1.271 trillion.  That's huge!  That gap is estimated to be $1.7 trillion for 2011.  I bet it will be more like $2 trillion.  Government projections typically low ball it.  So even if we can temporarily force inflation lower, it will send our national debt much higher which will lead to higher inflation shortly down the road as we must service all the new debt at a much higher interest rate.  I just don't see how we can get out of what appears to be a catch 22.

Oh, and just so you know.  Quantitative easing (QE) is just a fancy phrase the Federal Reserve created.  It is still the same old routine.  They are buying large amounts of U.S. Treasury bonds and they are adding loads more money to the banking industry's discount window.  The interesting thing right now is that banks are too scared to give out loans right now because of the housing bust.  Most of the money added to the discount window from the last QE is still there waiting to be used.  If at some point banks decide to start loaning again we will see all that QE run through the fractional banking system and multiply up to 10 fold.  There is potential for massive inflation from that alone.

Is hyper-inflation going to occur?

Yes, hyper-inflation will occur.  For me, it's not a question of if hyper-inflation will occur, but when it will occur.  A few of us from work began discussing this and many other topics a few years ago.  We discuss articles, books and current events on a somewhat regular basis.  Because of our discussions I began doing in-depth statistical tracking in order to confirm or deny our hunches regarding what was happening in the economy.

Here are some of the more relevant statistical data points I track:

• Federal Budget (inlays, outlays):  data going back to 1940
• Copper:  data going back to 1850
• Consumer Price Index (BLS, ShadowStats):  data going back to 1913
• Federal Debt:  data going back to 1791
• Federal Reserve Notes (M1, M2):  data going back to 1959
• DOW:  data going back to 1900
• Gold:  data going back to 1833
• Nickel:  data going back to 1840
• Silver:  data going back to 1792

You can view this data in graph form on kietzman.org.

The primary reason we will see hyper-inflation comes down to how our money supply is maintained.  I originally discovered the effects of our monetary system on our economy via statistical tracking before I had a good understanding of the cause.  The cause helps to explain the statistics.  For that reason, lets cover the cause first.

For the vast majority of our country's history our money supply had been maintained by the U.S. Treasury.  All money was on a gold standard in the form of certificates and was backed by real gold/silver.  You could literally walk into a bank and exchange your dollars for gold/silver.  Then came the Federal Reserve.  It was created in 1913.  It is not a government institution.  It is a conglomeration of privately owned banks and always has been.  The Federal Reserve got its first taste of power n 1933 when the government confiscated all privately owned gold from its citizens.  At the same time the government also invalidated the ability for citizens to redeem gold/silver certificates for real gold/silver.  However, the government still allowed certificates to be redeemed on the foreign market.  So at this point we were on a hybrid version of a gold standard.  Then in 1971 the government removed the last vestiges of the gold standard by invalidating the ability for foreign markets to redeem gold/silver certificates for real gold/silver.  That ended the gold standard in this country.  From that point on we have been on a completely fiat money system run and maintained solely by the Federal Reserve.

Here's how our money system works these days.  Taxes make up only a portion of inflowing money used for government spending.  A large portion comes directly from the sale of U.S. Treasury bonds which has been responsible for creating our large federal debt.  These bonds basically work like a loan.  They have a set lifespan and interest rate associated with them.  China and Japan used to be the two largest purchasers of U.S. Treasury bonds, but last year the Federal Reserve passed up both of them and is still number one even now and doesn't appear to be turning back.  The U.S. Treasury creates and sells bonds our of thin air to the Federal Reserve who in turn purchases the bonds using Federal Reserve notes (dollars) which were created out of thin air.  The U.S. Treasury is then responsible for buying back the bonds over a given set of years and a set rate of interest.  This setup provides the federal government with an endless supply of money used to fund all their various projects.  The side-effect is that all of that money is attached to bonds which are to be paid back.  That is where it gets a little weird.  In order  for the U.S. Treasury to pay off all the bonds it has sold to the Federal Reserve it must sell more bonds which increases our federal debt even more.

If you think that is crazy, it gets even stranger.  The money that the U.S. Treasury obtains via bond sales goes into bank accounts.  Banks have a standing rule that can be modified on a national level by the Federal Reserve.  This rule is called the bank reserve and is currently 10%.  For every 10 dollars that flow into a bank, 9 of them can be loaned out leaving a bank reserve of 1 dollar.  For example, lets say $1 million is deposited in the bank.  The bank then loans $900,000.  That $900,00 then gets spent and redeposited into a bank.  That bank now has a fresh $900,000 and can loan out $810,000.  This process repeats itself around 28 times before finishing its course and finally multiplying the original $1 million by about 10 times.  This whole process is called fractional banking and it is responsible for a large portion of the inflation we see in the economy.  However, all of this gets its start when the Federal Reserve creates money.  This is why the inflation tax is the largest tax of all.

There is one other source of inflation in the banking industry which is called the discount window.  That is when a bank itself takes out a loan from the Federal Reserve and then must pay it back with interest.  Banks do this quite a bit since they can borrow money from the Federal Reserve at a lower interest rate than they loan out to citizens.  This whole operation in essence works just like the U.S. Treasury borrowing money from the Federal Reserve via bonds.

Okay that is the history and explanation of how our current money system works.  It is a fiat system completely dependent on the existence of debt which is the cause of these strangely abnormal statistics.  Even though the Federal Reserve was created back in 1913, our monetary system was not severely impacted until 1971 when we fully went off the gold standard.  I think most people don't recognize the poor monetary shape of our country because our fiat system has been such a short lived experiment.  However, anyone who studies the statistical data will probably start to see the patterns just like I did.  Our monetary system was free from most inflationary trends prior to 1971.  For the most part we would only see inflation during wars, which are inflationary by nature.  By the way, we are involved in at least seven wars right now, which is the most in our entire history.  I think our country will be a fully engaged war machine indefinitely.  Okay, back to topic.  The Consumer Price Index (CPI) is used to calculate inflation.  The CPI, gold and silver were all extremely stable up until we went off the gold standard.  I use that key year when determining average rates for statistics since that is when we migrated to a fiat monetary system.  So the rates I provide are annual rates averaged from now back to 1971.

Annual rates averaged back to 1971:

• Debt:  9.39%
• DOW:  7.87%
• Gold: 11.85%
• Inflation:  7.45%
• Silver: 13.33%

Annual rates from 2010:

• Debt:  13.87%
• DOW:  19.21%
• Gold:  25.94%
• Inflation:  8.00%
• Silver:  37.62%

CPI (inflation) is the most difficult one to calculate because the Bureau of Labor and Statistics (BLS) keeps changing the formulas used to calculate the CPI in order to push the figures lower.  Lucky for us there is a group called ShadowStats that uses the same base data as BLS and uses the unmodified pre-1980 calculations.  You can view their graphs for free, but they charge an annual membership fee in order to see the underlying data.  I have not yet become a member.  So my inflation figures from 1983 going forward are based off eying the ShadowStats graphs.  All other statistics are completely accurate.

In my opinion, gold is the best indicator of inflation because it is the most stable asset in existence.  That is why entire monetary systems can exist on a gold standard.  Most people think they can retire on $1 million.  That may be true today, but it won't hold true much longer.  The more inflation hits the market, the more money you will need for retirement.  If you think Social Security is going to carry you, think again.  Payouts for Social Security are directly tied to the BLS CPI figures which are pushed artificially low for the sole purpose of keeping government entitlement programs at a low payout.  The sad part is that many people will never be able to retire.  They just don't know it yet.

Now lets bring some more perspective.  The cost of an ounce of gold:

• As early as I can track (1833) it was $20.65.
• In 1930 it was $20.65.
• During the gold confiscation (1933) it was $34.84.
• When we went off the gold standard (1971) it was $40.80.
• In 2010 it was $1,224.53.
• When I retire (2034) it will be $18,104.
• When I'm 120 years old (2098) it will be $23,518,093.

The price of gold remained stable for a hundred years 1833 - 1930.  It then began rising slightly from the gold confiscation of 1933 to the removal of the gold standard in 1971.  From that point on it has been climbing rapidly.

As you can see, inflation is a beast and it all stems from the Federal Reserve and fractional banking.  There is a group out there called the National Inflation Association.  They have predicted and been right on a lot of things over the years.  They are predicting hyper-inflation will set in between 2013 and 2015.  They also said they wouldn't be surprised if it set in the second half of this year.  That doesn't give us much time to prepare.  Like I said in the beginning.  For me it is not whether it will happen, but when it will happen.  My concern is how quickly it will happen and how devastating it will be to our economy.  I have been working hard at hedging against the dollar in order beat inflation.  Gold and silver are the absolute best hedges.  They always have been.  Even in the bible this holds true.  What did the wealthy collect back then?  It was gold and silver.  That kind of logic still stands today.  People in the 1930's knew it and people will realize it again as more and more of their wealth erodes due to the collapse of the dollar.

Illinois AG: State must release FOID card list

I wanted to inform you of a possible safety issue for Illinois citizens.  This issue was on the news last night.  A friend of mine, Kurt Johnson, also provided me with the link to this issue from the Chicago Tribune:

http://www.chicagotribune.com/news/chi-ap-il-gunowners-disclos,0,5686959.story

SUMMARY

The Associated Press recently requested the public disclosure of all Illinois citizens registered with a Firearm Owner's Identification (FOID) card.  The Illinois State Police (ISP) denied the request stating that it would break privacy.  The Associated Press then brought the matter to Attorney General (AG) Lisa Madigan's office.  The AG issued a ruling Monday night that declared the names of gun permit (FOID) holders to be public information that must be disclosed.  The ISP has not yet released the information and is ramping up a court case to challenge the AG.

CONCLUSION

The National Rifle Association (NRA) brought up a good point on this issue and I had the same idea the minute I heard this on the news.  The most obvious danger in a release of this nature is not to those on the list, but instead to those who are not on the list.  Under this disclosure criminals all over the state would have public access to a list of everyone registered with a FOID card.  In essence, this would let criminals know who is armed and on the inverse who is not armed.  Until now criminals have had to play a guessing game when breaking into homes.  They take the chance each and every time of facing an armed citizen who is willing and able to defend themselves and their family.  But under this public disclosure, criminals would now have critical information at their fingertips in determining which unarmed homes to invade and which armed homes to avoid.

I would recommend anyone not having a FOID card to get one soon.  It is an easy and inexpensive process.  You can register at the following link:  http://www.isp.state.il.us/foid/foidapp.cfm.  Even if you have no intention of defending your family with a firearm, I would still register for a FOID card.  At least then a criminal would assume you are armed and be more likely to avoid your home.

Be blessed and may God keep you and your family safe in the days ahead.

Government is No Place for a Union

I am not against unions, and I can support workers who band together to ask for a fair share of company profit.  But Governments do NOT have profits to share.  The only source of income for a government is taking money from people in the form of taxes.  Governments have slowly evolved into the best place to work, with the best wages and benefits.  It does not make sense to take money from those who earn less (private sector employees) and give it to those who earn more (government employees). The tail is wagging the dog.  It is time to bring government worker compensation in line with the private sector.  It will not be easy, it will take a lot of effort to stop the gravy train and drag them, kicking and screaming, into the real world with the rest of us.

I recently heard someone say it is good to pay government workers, even if they are useless, because they spend money to stimulate the economy.  I guess this person did not realize that taking money from someone in the form of taxes and giving it to someone else does not create any more money.  The person who originally earned the money would be more than happy to spend it themselves, had it not been taken from them.  Either way, the money gets spent and goes into the economy, there is no benefit to redistributing the money before it is spent, and in fact, that causes great harm.  We have been punishing the producers and rewarding the non-producers in our society, and the results speak for themselves, we now have fewer producers.

Written by Jim Shures

Who will save us?

Our government does a lot of things to protect us.  They have increased security at airports, they regulate drugs, alcohol and firearms, they make sure we do not drive fast, and they require us to wear seat belts.  However, the single largest danger to America today was created by government, and that is the economic consequences of unsustainable debt.

We cannot blame a slow economy, we cannot blame corporate greed, we cannot even blame the federal reserve.  There is only ONE way to get the nation into massive debt, and that is for all members of government, and all political parties, to act together and create the problem.  It really does not matter if the reason is incompetence or ignorance or some grand conspiracy, we must remember who is accountable, and we must remember all budgets were approved by our leaders.

The American people sent a clear message in the mid-term elections, for many people the single most important issue was wasteful government spending.  A new TEA party movement even swept the nation, suggesting the budget gap should be closed by reducing spending, not increasing taxes.  Obama himself said the last elections were a "shellacking", but did he get the message?

In his State of the Union address, Obama suggested we "freeze" spending at current levels.  Perhaps he needs to review our current levels of spending.  Our current spending level has increased our national debt about 1.5 trillion dollars per year, over the last 3 years.  That is 1.4 billion dollars per day, or 171 million dollars per hour, or 2.9 million dollars per minute.  How can anyone think we should "settle in" at this spending level, when we desperately need spending cuts.

In the spirit of the new "bipartisanship" attitude, let me be the first to find some common ground we can all agree on, regardless of party or political views:  Nothing good can come from increasing our national debt at a rate of 171 million dollars every hour.  If we cannot agree on that, we will never agree on anything.

Now for a few disclaimers:  Please do not try to tell me that one party is good and the others are bad, I do not want to hear it, they all take their share of the blame.  And yes, I realize Obama inherited a lot of debt and I certainly do not blame him for all of it.  Lastly, I am not promoting the TEA party movement, although I like the fact that more people are getting active in politics.

Written by Jim Shures