INFLATION WRESTLING

Jun 25, 2004


MARKET NEWS DIGEST

-> Surprise sovereignty transfer in Iraq -CBSMW
-> GDP Revised Down to 3.9% in '04 Q1 -Bloomberg
-> Stocks end on mixed note -CBSMW
-> Gold above $400 on Iraq bombings –TheBullionDesk
-> NO VACATION FOR THE COIN MARKET –CDN
-> Dollar hits 8-week low against yen -CNNfn
-> Third Parties Could Be Problem for Bush -Reuters
-> Odyssey's goal: Raise coins and stock price -Times


COMMENTARY

-> THE WAR FOR OIL -Craig R. Smith, CEO SATC
-> COMPARING SILVER BULLION TO MORGANS - MAJOR GOLD BUY! -RA Spohr
-> THE FED CAN'T STOP INFLATION -Kenneth J. Gerbino
-> ADVANTAGES OF A PARALLEL BULLION-CURRENCY SYSTEM -Alex Wallenwein
-> REAGAN WHIPPED INFLATION - James K. Glassman, NRO


HISTORICAL QUOTE OF THE DAY

"The natural cure for an ill-administration, in a popular or representative constitution, is a change of men."

-Alexander Hamilton, Federalist No. 21


MARKET NEWS DIGEST


Surprise sovereignty transfer in Iraq -CBSMW
By CBS MarketWatch June 28, 2004

SAN FRANCISCO (CBS.MW) -- The formal transfer of sovereignty to the interim Iraqi government was made Monday, two days earlier than the U.S.-led coalition had been expected to hand over power.

Confirming earlier media reports, the transfer of power took place in a move widely believed to be designed to surprise insurgents who might have tried to sabotage the event.

Legal documents turning over sovereignty were handed by U.S. governor L. Paul Bremer to interim Prime Minister Iyad Allawi in a ceremony in the heavily guarded Green Zone, the Associated Press reported.

"This is a historical day," the AP quoted Allawi as saying. "We feel we are capable of controlling the security situation."

Bremer would be leaving Iraq sometime Monday, coalition officials told the AP on condition of anonymity.

"You have said, and we agreed, that you are ready for sovereignty," Bremer said in the ceremony. "I will leave Iraq confident in its future."


GDP Revised Down to 3.9% Rate in '04 Q1

June 25 (Bloomberg) -- The U.S. economy grew at a 3.9 percent annual pace from January through March, slower than estimated last month as companies imported more goods than previously reported.

The final reading on gross domestic product, the value of all goods and services produced in the U.S., compares with a 4.4 percent annual rate reported last month, the Commerce Department said in Washington. The trade deficit subtracted 0.7 percentage point from growth, about twice as much as estimated last month.

http://www.bloomberg.com


Stocks end on a mixed note -CBSMW
M&A activity, tech gains offset by uncertainty in Iran
By Tomi Kilgore, CBS.MarketWatch.com
June 25, 2004

NEW YORK (CBS.MW) -- U.S. stocks closed mixed Friday as blue-chip issues saw early strength evaporate as investors played it safely going into the weekend.

The Dow Jones Industrial Average ended down 71.97 points, or 0.7 percent, at 10,371.84 vs. a session high in the morning of 10,487.54. For the week, the Dow was down 0.4 percent.

The Nasdaq Composite Index rose 9.90 points, or 0.5 percent, at 2,025.47. The Nasdaq managed a gain of 1.9 percent for the week.

The Standard & Poor's 500 Index fell 6.33 points, or 0.6 percent, at 1,134.32, finishing virtually unchanged on the week.

"You're coming into a Friday afternoon with Bush going overseas and people just want to be a little cautious because you never know what could happen," said Paul Mendelsohn, chief investment strategist at Windham Financial Services, explaining the late afternoon sell-off.

Bush is on a 5-day tour of Europe, where he will be attending a U.S.-European Union summit this weekend.

http://www.cbs.marketwatch.com


Gold above $400 on Iraq bombings –TheBullionDesk
June 24, 2004

A jump in violence in Iraq today has added support to gold after militants carried out a series of bomb attacks in 5-separate towns and cities. The yellow metal tracked quickly to $398 in response to the attacks as the Dollar met selling pressure before drifting back on light profit taking.

Anther round of Dollar related buying lifted the metal back to $399 by the end of the European session but the real push came on the US open after disappointing US data fuelled gold’s break above $400, the first time gold has been above $400 in 13-weeks.

US Jobless claims and Durable Good orders data today are likely to spark some life into the lacklustre currency markets but with uncertainty over potential German gold reserve sales still overshadowing the market following yesterday’s draft budget and the prospect of higher US interest rates next week the $400 level continues to look pretty elusive. Gold will find tough scaled up resistance between $396 and $400 while support should be found at $390/85.

Reaction to the violence in Iraq and the Dollar’s response encouraged some buying interest in silver as well today. The industrial has risen towards $6 in late European/early US trade but continues to find strong scaled up resistance.

Silver was again closely monitoring the gold market yesterday, climbing to $5.92 early in European trade before backing off across the rest of the session and into US trade, posting a low of $5.82. The industrial metal worked back to $5.86 by the close and has traded largely unchanged so far today.

http://www.thebulliondesk.com


Dollar hits 8-week low against yen -CNNfn
Higher Japanese stocks, hope of stable interest rates are key factors; Treasurys post modest gains.
June 21, 2004

NEW YORK (CNN/Money) - The dollar fell to an eight-week low against the yen Monday on the back of strong gains in Japanese stocks and accompanying expectations for a firming interest rate picture in Japan.

The dollar bought ¥108.36, down from ¥108.80 late Friday, and the euro bought $1.2107, down from $1.2137 late last week.

"We had a good performance overnight from the Nikkei, which still has quite a bearing on the strength of the yen," Chris Gothard, currency analyst at Brown Brothers Harriman, told Reuters.

"People are confident that recovery is here to stay in Japan and perhaps starting to look a little further forward -- perhaps too far, in my opinion -- to a situation where Japanese interest rates may start rising."

Markets widely expect the Federal Reserve to increase interest rates a quarter point at its policy meeting on June 29-30, but the pace of rate rises after that remains uncertain.

http://www.cnnfn.com


NO VACATION FOR THE COIN MARKET –CDN
COMMEMS, DOLLARS & HIGH RELEIFS EXTREMELY ACTIVE
JUNE 18, 2004

We are already well into mid-June and the rare coin market hasn’t slowed down at all. Dealers are rather amazed at its continued strength and growth. They usually expect the market to slow down considerably at this time of year as people take vacations, attend graduations, do home improvements, and attend religious and family events.

Dealers also plan accordingly with many taking time off in the weeks prior to or shortly after the ANA money show. Yet, the market is not slow and instead we see strong demand forcing dealers to increase their Bids. Collectors, investors and dealers all continue to be excited about the market. However, some have become slightly disappointed because they haven’t been able to buy all the coins they want.

Demand for key dates has not let up in the least. Many a dealer is looking to load-up on the keys. We are learning that several collector/investors aren’t necessarily happy with just buying on or two. Rather, there is demand from a select group that is looking to buy key dates by the roll.

Dealers tell us that these buyers are disgusted with the recent returns of their investments in the stock market and would rather put their money in rare coins. Dealers are chagrined at the task at hand that includes buying the key dates in roll quantity. It I difficult enough for them to located and buy a single key date here and there, let alone several. Consequently, Bids continue to move higher as dealers try to increase their ability to be successful in their quest for material. This scenario is why most dealers continue to be optimistic about the market for the balance of 2004. They are encouraged that demand is continuing to maintain its strength, but they are concerned about satisfying it.

Original, fresh coins are badly needed and highly sought-after. Sophisticated collector/investors are chasing select material and they need nice, no-problem coins for the grade. They also want coins with attractive eye appeal and nice color if they can get it. Brilliant white coins are also desirable on most silver issues. Rainbow toning, exceptional strike and eye appeal are at the top of the special demand list. It is tough enough to find nice material to buy, but when you include these additional requirements it becomes especially difficult.

SOURCE: COIN DEALER NEWSLETTER

READ: 2004 RARE COIN MARKET TRENDS - KEVIN LIPTON


Third Parties on Right Could Be Problem for Bush -Reuters
Jun 21, 2004
By Rolando Garcia

WASHINGTON (Reuters) - Moses Murphy was as Republican as they come. The 27-year-old former Marine always voted a straight ticket and his Jeep Cherokee sported three "Bush-Cheney '04" bumper stickers.

But two months ago as the Boardsman, Ohio, resident was surfing the Internet, he came across the Web site for the Constitution Party, a small, conservative group still struggling to be on the ballot in every state.

Off came the Bush paraphernalia and now Murphy's Jeep is plastered with stickers for Michael Peroutka, the Constitution Party's little-known presidential nominee.

Media attention has focused on Ralph Nader as a potential spoiler to presumptive Democratic nominee John Kerry , but President Bush could face a similar threat from third party candidates on the right.

The Constitution and Libertarian parties believe they could siphon away enough disenchanted conservatives to tip a close election.

For Murphy, Bush's proposal to grant amnesty to illegal immigrants living in the United States was the final straw.

"We can't keep letting illegals come in; we need troops on the border," Murphy said in a telephone interview. "(Bush's) views no longer reflect my views, and I need to vote my principles."

The party occupying the White House is typically more prone to disgruntled ideologues bolting for a third party, said Lawrence Jacobs, director of the 2004 Elections Project for the Humphrey Institute at the University of Minnesota.

And hardline conservatives have no shortage of gripes with the president they helped elect. Topping the list is the dramatic increase in federal spending, especially the $500 billion new Medicare entitlement for prescription drugs Bush pushed through Congress, said Paul Weyrich, head of the Free Congress Foundation and a leading conservative activist.

Weyrich said grassroots conservatives "have a real problem with this administration's out of control spending."

TIPPING THE BALANCE...

FULL STORY

ED. NOTE: Michael Peroutka may not have a chance of winning the 2004 election, but at least he and his party are willing to lift up a standard for restoring the principles of constitutional government which made our nation great. Here is their election strategy ... "... for all relevant purposes we really have just a one party system. There is no substantial difference in the philosophies of the "major" parties. Regrettably, they both represent a worldview that sees redistribution of wealth as the purpose of civil government... the illusion of a two party system is very handy way to make the American people think they have a choice when they really don't. As hard as it is to run the third-party "gauntlet," it must be done to provide Americans with a Constitutional alternative that is NOT the lesser of two evils."


Odyssey's goal: Raise coins and stock price -Times
By SCOTT BARANCIK, Times Staff Writer
June 21, 2004

TAMPA - There are treasures worth billions of dollars on the oceans' floors, Greg Stemm says. To find your share, all you need is precise research and the right equipment.

And about 12 years.

For much of that time, Odyssey Marine Exploration Inc. suffered the indignities of perceived failure. The Tampa company spent millions of dollars trolling the globe's deepest seas for sunken treasure, without success. At one time, its stock could be had for a nickel a share.

Starved for money, the company took loans from co-founders Stemm and John Morris. It paid some contractors in shares of stock. It sold millions of shares more for a song to investors who were wealthy or gamblers or a little of both. To preserve cash, it skipped annual shareholders' meetings.

All that changed last summer, when Odyssey's search vessel finally homed in on a Civil War-era wreck thought to have sunk with a cargo of thousands of gold coins.

Suddenly, two executives whose primary business challenge to date had been avoiding bankruptcy were given an opportunity to cash in on one of the biggest numismatic events in years.

They haven't disappointed. With masterful skill, Odyssey's founders have cultivated a storm of media coverage, a dream team of coin experts and a marketable product - historically significant coins - they hope will keep their search boat afloat for years to come.

In May alone, the publicly traded company took in more than $3-million from initial sales of coins it recovered from the S.S. Republic. Not enough to tempt Leonardo DiCaprio into filming Titanic II, perhaps, but 10 times as much money as Odyssey took in during the prior 10 years combined.

"We knew that if we could just stick it out long enough, we could prove that a real business existed," Stemm says.

"This is a very big thing in the numismatic world," says Chris Cipoletti, executive director of the American Numismatic Association, a nonprofit membership organization for coin collectors.

The salvage of the Republic, located about 100 miles off the Georgia coast and some 1,700 feet beneath the Atlantic's surface, is not complete. But Odyssey's crew has discovered items of value. Among the more than 51,000 coins recovered at last report were several thousand $10 or $20 gold coins, including a particularly rare 1854 specimen for which the company says it has turned down a $450,000 offer.

In many cases, the salt water and lack of handling left Republic's gold coins in better condition than their earthbound counterparts.

Of far less interest to traditional coin collectors are the more than 47,000 silver half-dollars found so far. Because silver is porous, company officials say, many of these coins show the wear and tear of 138 years undersea. Under an electron microscope, some even display coral and other organisms.

Shrewdly, Odyssey's team decided to turn a negative into a positive by marketing the coins as historical relics - the Republic sank in a hurricane while en route from New York to New Orleans on a post-war reconstruction mission - to noncollectors. Thousands have been packaged in handsome wood cases and sold since May for $1,000 to $2,000 apiece via cable TV's Shop at Home Network and through conventional coin retailers.

But "the gold coins are where the big money's going to be," says Steve Carnow, general manager of Swiss America Trading Corp. of Phoenix, one of the half-dollars' distributors. "They could be worth upwards of well over $10,000 per coin."

FULL STORY

READ MORE ABOUT SS REPUBLIC COINS


COMMENTARY


THE WAR FOR OIL -Craig R. Smith, CEO SATC
June 21, 2004

"Humanity's way of life is on a collision course with geology... we're in the twilight of plentiful, cheap oil." -NATIONAL GEOGRAPHIC, Cover Story, June 2004

Oil is one of those critical natural resources that makes the whole world go round. Without it, the world economy comes to a screeching halt.

My concern has been that Al Qaeda will try to disrupt the free flow of oil out of the Middle East, which they know will hurt the American economy.

In the last couple days big events have gotten little attention.

First, the oil pipeline in southern Iraq which carries ALL the Iraqi oil was sabotaged and it is out of commission. It is going to take 10 days at a cost of approx 600 million to fix.

Second, Al Qaeda is back at taking American hostages and using them as bargaining chips to obtain the release of Al Queda detainees. It won't work but they will try. The Saudi's will not negotiate (and rightfully so).

The U.S. State Dept. has told all Americans to leave Saudi Arabia, but they're not listening because the Saudi's cannot produce oil without the help of hundreds of American workers and they're paying BIG "bonuses" to Americans who will stay. Funny how money makes people do stupid things... and take stupid risks.

I suspect more American kidnappings and more attacks on hard targets (up till now attacks have been soft target, like office buildings versus pumping stations) all over Saudi Arabia and the region. That means we could see more pictures of kidnapped Americans in the growing terrorist war for oil.

If I'm right (and I hope I'm not) as more pictures of hostages end up on TV, these events could eventually to cost Bush the White House.

Equally critical is the impact this will have on crude prices. The government says the core rate of inflation is only 1.7%. How many months can they exclude food and energy prices before they finally have to admit that inflation is at 7% plus?

The war for oil will have an impact on the value of the dollar, the Dow and ultimately gold. The middle East is a powder keg with a lit fuse that could blow any day.

In the meantime, Americans continue to whistle past the graveyard, consuming 25% of the world's oil, with only 5% of the world population. Something has to give as China, Taiwan and India are now all thirsting for more oil ... and gold.

Stay ahead of the curve by converting paper assets into golden assets -- which are sure to protect your buying power from the inflation that is sure to follow the growing war for "black gold."

Read more by Craig Smith on Financial Terrorism ...


COMPARING SILVER BULLION TO MORGAN DOLLARS -RA Spohr, SATC
June 2004

Take a good look at this chart of the Silver market, which I believe is now set to make a run to $10 or better. The second chart shows a close up view of the MS65 Morgan Dollar performance during the drop from $8.44 to $5.54 in Silver prices. As for Gold/Silver stocks, most of the major of middle-tier producers were down 25-30% and exploration stocks were off 50-80% during this time.

You will notice that not only did the Morgan Dollars not lose any ground during this 34% correction in Silver, but they actually gained 13% moving from $155 to $175. This should answer any questions as to why we own coins rather than any type of bullion or leveraged futures contracts. This is a classic example of the large commercial traders "shaking the tree" so the weak leaves fall off.

In one four week period, the massive commercial short position was covered while the record speculator long position was decimated. For more on this we will look at the Commitment Of Traders Report below, which lists the long/short positions of the large commercial traders and the public speculators.

The latest COT shows the total COMEX dealer net short position in silver has been reduced by 33,000 futures contracts (165 million ounces) on the wolf pack engineered sell-off, from over $8/oz. Gold's COTs show a breathtaking reduction of 140,000 contracts on the engineered $50 decline. The brain-dead tech funds served as the accommodating patsies, once again. Now the decks appear to have been cleared for a liftoff to a powerful rally.

This downward move occurred for one reason and one reason only - to allow the dealers to cover as many of their short positions as possible. The good news is that they did in spades. As such, the market structure now allows for a rally of significant proportions. The mother of all buy signals in silver is alive and well.

Many of you have heard that Warren Buffett made a comment at his annual shareholders meeting in mid May that he expects to see Silver top $10 per oz. within the next thirty days. It is my belief that the above information was the logic behind that statement.

If the commercials are reversing their positions, and they are, it means several things very profound. The commercial bullion dealers who are manipulating the price to the downside are giving up! They may be winning this battle down from $8.40, but they are losing the war! For the most part, they are covering at a loss at $6, since most of their short positions have existed since the $5 level and lower! And if they are buying at $6, it indicates that those who manipulate the price to the downside think this is a bottom. And so, it will likely be a bottom.

In conclusion, those of you who have positions in the Morgan Dollars have clearly made the right decision. Those folks who are invested in Gold/Silver stocks, or leveraged furures positions should take a long hard look at the risk/reward numbers. Massive moves in markets present danger as well as opportunity.

Read Morgan Silver Dollar Research Report...

* * * FLASH: MAJOR BUY SIGNAL ON GOLD -Richard Spohr
June 22, 2004

For the first time in recent memory my favorite indicator in Gold has turned bullish, therefore I am issuing a strong buy signal in Gold. I believe the most important thing for astute investors to understand is that large money and insiders control markets, not the public. For years now the Gold market has been held down by certain large banks and brokerage firms selling short. Even though Gold has moved from a low of $250 to $400 in the last 5 years the move was capped by strong selling at each major price point. This price capping is over. Not only are the "powers that be" in the Gold market no longer selling, they appear to be buying in a very big way.

Largely ignored by the financial press, the World Gold Council is about to launch a US gold fund. There are already similar funds in Australia and in London but, with respect, the only place that such a fund would have great implication for the gold price is on the New York Stock Exchange. The 19B4 filing for this fund is now with the SEC and copied to the NYSE. Certain sources know that a major Gold fund is being born. The Gold fund as a listed security on the NYSE would, IMO, offer the kind of diversification that regular stock funds and hedge funds will seek.

Recently, big name brokerage firms like Morgan Stanley have been huge lots of Gold futures. This is a major turn in the Gold market, instead of selling at major price points the majors are now buying. Just like insider selling is the best indicator in the stock market, insider buying in Gold is the best indicator of future price movements. Both are at an all time high.

Do not misunderstand me, I am not saying that Morgan is doing anything illegal. Market knowledge is not in violation of regulations as anyone interested enough to follow SEC filings and effective dates can garner important information in a most timely manner. It follows that funds will need to diversify into some gold longs in a security form especially if listed on the NYSE because of inflationary figures, attacks in Iraq against oil refining capacity, the steady nature of the oil price higher levels, the hostage situations in Iraq, Iran and Saudi Arabia, and the upcoming rise in interest rates.

Now with those events and the new gold fund that will have to fill its basket of gold this summer, gold at $480 is beginning to look quite plausible over the coming weeks. Just as the Gold market surprised most of the investing public with a move down from $433 to $375, I believe this move from $400 to $480 will be a quick and surprising move.

It's not just the commercial traders shift to the long side from the short side that is positive in Gold. All the other important factors, centered around the supply/demand fundamentals and general awareness of these facts, seem to be kicking in. It was just announced that China Merchants Bank began to release gold bars to investors here Tuesday 6-22-04, becoming China's first banking institution to offer the product that first began trading again last year after half a century, Beijing Star Daily reported Tuesday.

In fact, there is only one missing ingredient in the whole Gold equation - the price. Once the price of Gold surpasses the February high of $433, the investing public will be forced to take notice. Clearly the "insiders" are buying massive amounts of Gold at current price levels.

Follow the money.


THE FED CAN'T STOP INFLATION -Kenneth J. Gerbino
June 2004

Here are some hard-core facts that you need to consider. Starting in 2000, the U.S. has created $1.5 trillion new dollars (M2), and has a cumulative trade deficit of $1.6 trillion. This totals $3.1 trillion on the negative side of the dollar equation. To say the least, this is bad monetary karma and will lead toward a very strong gold price.

From 1973 to 1981 the inflation rate in the U.S. averaged 9.2% per year! The Fed raising interest rates during this time, on balance did nothing! Why ? Because the money increases from prior years were already in the system…the horses were out of the barn. For most of this time gold went up, interest rates went up and inflation went up. Prior to this time the money supply (M2) from 1965 to 1974 increased 101%. This caused the inflation from 1973 to 1981. The Fed could not stop it. Gold went from $100 to $850.

Here is a reality check on the above mentioned $1.5 trillion created from the year 2000. First, I will refer to the U.S. money supply (M2) in 1980. It was $1.5 trillion. All the tangible wealth in the United States, every bridge, office building, home, car, television, plane, everything was created over 200 years with a money supply that ended up at $1.5 trillion. 200 years of blood, sweat and tears to create all the tangible wealth in the U.S. Our country in a bit more than four years has created the same amount of money! $1.5 trillion! This new money has not created anything near the tangible wealth of the first 200 year’s $1.5 trillion. This is currency depreciation on a grand scale.

This is economic madness and this is the madness that has made people like Warren Buffet recently increase his foreign currency investments (out of dollars) to over $12 billion.

Bill Gross, who manages the largest bond portfolio in the world and is considered on the same world class investment level as Buffet, was on CNBC just last week and in response to Ron Insana’s question of “what to do now” stated, “Move money elsewhere to a central bank in Euroland that is more rational.”

Warren Buffet, Bill Gross, and hopefully you understand this situation. The smart thing to do is to protect oneself with assets of real monetary value….gold. One of the best ways to own plenty of this time tested asset is with gold and silver mining companies that are sitting on mountains of resources and reserves in the ground.

Here is something else important to understand. The dollar is not always that good a barometer of the gold price. From 1976 to 1980 the dollar index went from 106 to 92, down only 13%, yet gold during this time went from $103 to $850, up over 700%.

From 1985 to 1995 the dollar index collapsed from 140 to 80, down 43%. Gold during this time went from $325 to $390, up only 20%. Gold should go opposite to the dollar but the magnitude of the move has a life all it’s own and regardless of all complexities and theories…the bottom line is that it is the world’s heavyweight champ of money and liquid wealth, regardless of whatever everything else is doing. Besides, the price of gold is based on supply and demand of gold not dollars. If the top 10 gold mines in the world closed down for any reason, that would take 20% of the mine supply off the market. Regardless of the dollar, you could bet gold would go up. The gold/dollar relationship has merit, but it is not the key determinate to the ultimate value of gold.

Gold is headed higher regardless of the dollar, the Fed, or interest rates. The gold stocks are also. The current sell-off in the mining shares is a buying opportunity.

http://www.kengerbino.com


ADVANTAGES: A PARALLEL BULLION-CURRENCY SYSTEM -Alex Wallenwein
June 17, 2004

Under the US Constitution, Congress also has the exclusive power "to coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures." Does that mean a private individual or association of individuals cannot agree to accept or not accept something of value in trade for something else?

No. Fortunately, it doesn’t mean that. That case was opened and closed by the "Liberty Dollar" introduced by an organization called "Norfed." The Liberty Dollar is a partially silver-backed paper-currency in circulation among a fairly sizeable but loose association of individuals and merchants. No legal challenges were launched by the government. In fact, representatives of several authorities have declared that the activity is entirely legal and does not interfere with any government prerogatives.

What then, should prevent the circulation of a gold (or silver or copper) token that has a precise set of dimensions, weight, and fineness, but does not purport to be a "coin" of the United States? If such a "token" were to be called a "one ounce" (or "ten grams" or whatever) piece of gold or silver, and was commonly accepted and circulated as such among private individuals, and was referred to only as a "barter instrument" for example, then where would the problem lie, at least as far as the legality of its production, use, and distribution/circulation is concerned?

For, gold, we ned to remember, is not just "money". It is in fact the ultimate barter instrument, which is the very reason why it functions so well as money. Gold is value in and of itself, and therefore a perfect barter object. It's just that as a barter object it is so liquid, and has such a high use-value in that function that its desirability does not decrease after a certain point with each additional unit held (i.e., what Prof. Antal Fekete calls its "constant marginal utility") that people like to use it as money - even though it is value in and of itself.

Leaving aside for the moment the logistical problems of how to get such a medium into wide enough circulation, and to get merchants and producers, etc. to accept it, and the difficulty of making it available for people and get people to use it, what would be the advantages of such a parallel bullion currency?

Advantages of a Parallel Bullion-Currency System

1. The State’s "permission" is neither required - nor desired.
2. No "value" relative to the national currency needs to be set by official decree.
3. There is no "issuing authority."
4. Authenticity could be guaranteed by mechanical means at the point of sale (i.e., a machine can weigh and measure the circumference and thickness of the "bullion barter token" to determine it’s authenticity, just like coin changing machines in supermarkets today are calibrated to a set of weights and dimensions to separate "acceptable" coins from "unacceptable - i.e., foreign - ones.)
5. Merchants and individuals are free to accept or not accept it. (But in a crashing fiat currency situation, the question of whether bullion or fiat is more in demand would be speedily established).
6. Each merchant can set his own "barter-token price" in terms of each good sold according to market forces - just like they decide how much to charge for whatever they sell right now.
7. Manufacturers and wholesalers can do likewise.
8. Any seller of any product (good or service) is free to set his price low enough relative to national currency prices to entice buyers to pay in bullion tokens if that is desired (if he wants the security inherent in earning a medium of stable value rather than fast-depreciating paper-scrip in a currency-crash environment).
9. Buyers (savers) can freely decide if they want to pay for something in valuable, stable bullion (to take advantage of the seller’s incentives) and thereby forego the safety of owning the bullion. On the other hand, if they’d rather pay in fiat, they can do that and thereby "get rid of it," thus not having to hold a depreciating asset. This way a natural, purely market-based equilibrium price between bullion and fiat can be much easier and much faster (and more reliably) established than through the current farce of a paper-based, semi-official exchange like COMEX.
10. Both sellers and buyers would very soon see the advantage of bullion over fiat by being able to witness, in their own corner grocery store, this eternal truth in action: that paper just doesn’t hold its value. This would totally obviate the need of constantly "educating" the public through writings like these which, without media support, is an impossibility.

A Market-Based Solution to Government Largesse?

Naturally, such a system entails something that most governments today are not willing to even entertain: a situation where governments can no longer rely on their ability to cheaply borrow money by issuing low-interest bonds to an unsuspecting public that believes it can "save" money (preserve buying power) that way. Fiat-denominated bonds will carry no or little trade-in value when the world saves its income in bullion rather than fiat. To lure people out of bullion and into fiat, governments would have to offer a horrendous interest rate - something that makes continued borrowing impractical to them.

Wouldn’t that be nice? A market-based solution to government largesse! My oh my, who would have thought?

So, would that mean that governments the world over would always fight any such attempts? You bet. The only thing is that, in a crashing currency environment, it would be an impossible thing for them to prevent. And, as is evidenced by the fact that the euro was actually successfully implemented, there are a number of world-system"architects" out there who understand that the current mess is inherently untenable, and who understand that having somewhat less power to manipulate at will is by far preferable to a systemic crash of the entire structure where none of them will have any power left.

It’s better to give up some power - and so preserve at least some of it - than to try and cling to the idea of retaining "all power" and in the process lose everything! It seems the brightest and most influential "architects" out there have recognized that.

To help make this market-based solution to the impending dollar-crash a reality, it would be great to get all of the world’s gold currency experts to put their heads together, iron out all of the wrinkles in this and other proposals, and let the best ideas rise to the top - which I am hereby inviting them to do.

Some very practical methods for actually implementing such a system already exist, but the theoretical groundwork must be laid first.

http://www.lemetropolecafe.com

[ED. NOTE: Alex Wallenwein is the author of EURO VS. DOLLAR: THE WAR ON YOUR WALLET ... and has volunteered to host a Currency Expert Roundtable on currency alternatives to the U.S. dollar ... more to come.]


REAGAN WHIPPED INFLATION - James K. Glassman, NRO
National Review Online
June 16, 2004

One of the most enduring achievements of the late Ronald Reagan “stands all but overlooked,” my colleague Robert J. Samuelson wrote in the Washington Post last week. Reagan whipped inflation.

It’s easy for us to forget, but in 1979, on the eve of Reagan’s election, inflation was terrifying and debilitating, with “the kind of dominance that no other issue has had since World War II,” according to opinion expert Daniel Yankelovitch.

In 1976, the consumer price index, our standard measure of inflation, rose 4.9 percent; in 1979, it rose an incredible 13.3 percent, with no end in sight. As the 1980 vote approached, the public rated the problem of “holding down inflation” three times as important as “finding jobs” — even though the unemployment rate was a hefty 7.1 percent.

It was Paul Volcker, the talented and courageous Federal Reserve chairman, who raised interest rates and brought inflation below 4 percent by 1982, triggering a recession in the process. But it was Reagan who supported and encouraged Volcker and gave him what David Stockman, then the budget director, called “the political latitude to do what had to be done.”

With the exception of 1990, when it spiked to 6 percent, inflation has remained relatively tame for the past 22 years, but there are now signs that it is rising again. Over the past three months, the change in the CPI, on an annualized basis, has been 3.9 percent. While much of that increase stems from the sharp increase in the price of a single commodity, oil, it’s still a troubling development.

What’s wrong with inflation? It demoralizes consumers, destroys the buying power of people on fixed incomes, and makes rational planning extremely difficult for businesses.

Inflation causes interest rates to rise. Say you lend someone $1,000 for 10 years (the same procedure as investing in bonds). Because of inflation, the $1,000 you get back at maturity can’t purchase as much as the $1,000 you originally lent, so you demand higher rates of interest to compensate for the loss; the higher the expected inflation, the more interest you’ll demand.

Also, as Volcker demonstrated, inflation inevitably leads to action by the Federal Reserve — hikes in short-term rates to bring rising prices to heel. Nearly everyone expects the Fed to start raising rates again, either at its meeting June 29 or the one on August 10.

High interest rates deter consumers from buying houses, cars, and other big-ticket items because they can’t handle the debt load. Higher rates also raise corporate borrowing costs and cut into profits. And, finally, higher rates make lending more attractive, enticing investors to sell stocks and switch into bonds, causing stock prices to stagnate or fall.

In the June 4 issue of his influential newsletter, Grant’s Interest Rate Observer, James Grant, an expert on the history of debt, argued that we’re heading into a new secular, or long-term, period of rising interest rates. The cycles are clear: Interest rates fell in the last 40 years of the 19th century, rose in the first 20 years of the 20th century, fell between 1920 and 1946, rose between 1946 and 1981, and fell between 1981 and 2003.

“Now, we believe, they are going back up again,” Grant writes. “If the past is prologue, they might go up for a very long time.”

Finally, if you’re truly spooked by higher inflation and interest rates, you can invest in precious metals and other commodities, whose prices tend to rise with inflation (or in anticipation of it), or in money-market funds, which are simply very short-term bonds. Money markets pay practically nothing today, but if rates rise, their returns will rise as well. You’re not locked into today’s yields, as you are with medium- or long-term bonds.

If inflation reverts to the average rate during the last 30 years of the 20th century, it will erode the value of your investments dramatically. At that pace (5 percent annually), the purchasing power of a dollar will diminish to 3 cents during a human lifetime. Or look at it another way: In 2000, you had to make a salary of $100,000 in order to match the purchasing power of a salary of $23,000 in 1970.

So take inflation, and the rise in interest rates that accompanies it, as seriously as Paul Volcker and the late Ronald Reagan did.

FULL STORY


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LAST WEEK'S REAL MONEY PERSPECTIVE ...
INFLATION PROOF! - Jun 18, 2004

-> Record Deficit, PPI jumps 0.8%, $396 Gold!
-> The End of Cheap Oil, Here's Why ...
-> Gas prices stir talk of golden age
-> Higher Rates Good For Precious Metals?
-> END MONETARY POLLUTION, BUY GOLD!
-> THE ULTIMATE GOAL OF A FATHER IS...

ABOUT THE EDITOR

David M. Bradshaw is Editor of Real Money Perspectives, publisher of Rediscovering Gold in the 21st Century: The Complete Guide to the Next Gold Rush (7/01) and has been an economic commentator since 1987, when he produced the World Economic Perspectives radio show. In 1997, he produced a one-hour TV documentary, "Preparing Wisely for the Next Millennium," which was distributed free of charge at Blockbuster Video nationally. In 1999, he produced a one-hour radio special, "The Big Picture: The Shape of Things to Come" discussing geopolitical, economic and spiritual trends in the 21st Century. ... MORE NOTE: Youngest daughter Braida (4 months) just discovered that she has control of her tongue -- a valuable lesson for us all to remember!


DISCLAIMER: All of the information in this story is believed to be true, however errors are possible.
Past performance is no guarantee of future performance. All investments have risk.

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