By James M. Carrillo
July 1, 2013
Forward thinking is critical when looking at where we should park our money. With Ben Bernanke's tenure coming to an end, we should take a look not at what he has done but instead at what he is leaving behind. Starting with a brief look in the rear view mirror. On my way in to work this morning I heard several "market experts" on the nation's largest on-air financial programs. They were asked to rate Bernanke. They gave an A rating to a man who they stated, saved the markets and without his policies we would basically be living in the dark ages. I remember hearing these same type of statements in the past.
When Alan Greenspan left office after his reign as Federal Reserve chairman from from 1987 to 2006, he left us with a robust, healthy economy. Not only was it healthy, it was booming like nothing we have seen in American history. Wealth abounded with the strongest Real Estate market in history. He had loosened monetary policy and drove interest rates to the lowest levels in modern history after the 9/11 tragedy.
After he left office many likened him to a "rock star", even calling him "the Maestro", but then the truth of his policies eventually surfaced. His legacy is now tarnished at best. In an article in the Economist entitled "Monetary myopia" released January 12, 2006 stated that "ALAN GREENSPAN, now in his final weeks as the chairman of America's Federal Reserve, has been proclaimed 'the greatest central banker who ever lived'. Among ordinary Americans he enjoys almost rock-star status. He has been awarded the Presidential Medal of Freedom, a British knighthood and the French Legion of Honour."
Now his easy-money policies were shown to be the leading cause of the subprime mortgage crisis. The crisis hit almost immediately after his departure from the Fed. In fact, all he left is a legacy of debt. And a nation who consumed and invested about 6 percent more than we produced.
Today Investors are demonstrating the same kind of faith in Fed Chairman Bernanke and his central-bank colleagues that they did during the 1990s under his predecessor Greenspan. Greenspan also inherited a mess that Fed Chairman Paul Volcker left behind. However when Volker left office he was widely credited with ending the United States' stagflation crisis of the 70s. Inflation, peaked at 13.5% and was lowered to 3.2% by 1983. In other words Volker inherited the mess left to him by G. William Miller under the Carter administration. Now take a look at the date Greenspan took the office of the Fed! Remember the famous 1987 stock market crash? The housing bubble occurred within months of Greenspan leaving office.
So what will Bernanke's REAL legacy be? What is he leaving for our next Fed Chairman and for us? People who were forward thinkers and saw the forest through the trees made fortunes when Miller, Volker and Greenspan left office. Let's examine the real numbers and not swallow the kool aid just yet.
Watch what they do, not what they say.
Right after Greenspan left office he said on 10/9/2006, that the housing market worst may be over. "There is a good chance of coming out of this in good shape, but average housing prices are likely to be down this year relative to 2005. I don’t know, but I think the worst of this may well be over". During the run up in housing prices that would eventually be blamed for the 2008 global financial meltdown, Greenspan denied there were any signs of a housing bubble, saying that home values were only "frothy"." He later conceded that he was "shocked" when the financial system "broke down" that year.
Now we have Bernanke saying that, he "sees no U.S. inflation risks". Oh really? We can clearly make a case for upcoming massive monetary inflation. It is as easy to see as the housing bubble was at the end of Greenspan's Fed.
US Monetary Base under Bernanke
Under Bernanke we have a large easy to understand, clear picture. Just like the real estate bubble was visually easy to see for those who were focused on the warning signs instead of simply investing blindly. When a government prints massive amounts of currency its value will eventually preciptiously decline. We are in a currency war and by the Fed's actions (seen below) we fully intend on winning this war. We have tripled the monetary base in just three short years. This is currency debasement. The truth is the Fed is talking taper but is, in reality, accelerating the future mass debasement of our dollar. When currency is diluted to this degree, tapering isn't going to slow the future rapid depreciation of the dollar.
The definition of monetary inflation is, "a sustained increase in the money supply of a country. It usually results in price inflation, which is a rise in the general level of prices of goods and services." Can you see it coming?
But gold is declining in value, right? Now the mainstream media says its going lower! In 1975/76 the price of gold collapsed after a major bull market in the early 70's, the media headlines in 1976 read the similar to today. "It's a seller's market. No one is buying gold," a dealer in Zurich said. New York Times, July 20.
"Though the price recovered to $111 by week's end, that is still a dismal figure for gold bugs, who not long ago were forecasting prices of $300 or more." Time magazine, August 2.
"'Gold was an inflation hedge in the early 1970s,' the Citibank letter says. 'But money is now a gold-price hedge.'" New York Times, August 29.
Gold was up 400% in the early 70's and ran all the way to $200 in January 1975. It subsequently crashed to about $100 in August 1976, a loss of about 50%. But due to a rapidly increasing money supply backed by nothing but the full faith and credit of the government for the first time ever in the history of the United States, it climbed to over $850 in January 1980, a rally off the low of over 750% in 41 months. It only ended after Volker took over and ran interest rates to 18% in order to slow down the inflation the Fed itself created. I see history is about to repeat itself.
I base this on; 1) our massive indebtedness, 2) the historical mass increase in monetary printing, 3) the fact that our banks are in dire straits unless we pump up inflation to bolster their books and 4) the Fed's ability to mark up the assets they are holding. Even with the recent 37% decline we have seen in gold, it is still up 450% since 2001. In referencing the U.S. Money Supply chart above I can make a case for gold moving to astronomical levels in the coming years.
I firmly suggests we side with 3,000 years of history. Gold and silver have always been a store of value and the ultimate currency. History suggests we should not trust our savings with either the paper pushers or their un-backed paper money. Bernanke's legacy will be that of monetary inflation in my view, fortunes will be made by those who act now.