Calculated Risk originally posted a snippet of this article by the NY Times At Tiny Rates, Saving Money Costs Investors:

The elderly and others on fixed incomes have been especially hard hit. Many have seen returns on savings, C.D.’s and government bonds drop to niggling amounts recently …

” … what’s going to happen now as C.D.’s mature is that retirees and the elderly are going to take anywhere from a half to three-quarters … cut in their incomes,” said Joe Parks, a retired accountant in Houston …

“What the average citizen doesn’t explicitly understand is that a significant part of the government’s plan to repair the financial system and the economy is to pay savers nothing and allow damaged financial institutions to earn a nice, guaranteed spread,” said [Bill Gross of PIMCO] … Mr. Gross said he read his monthly portfolio statement twice because he could not believe that the line “Yield on cash” was 0.01 percent. At that rate, he said, it would take him 6,932 years to double his money.

This is the typical M.O. of the inflators at Central Banks; Dropping rates to levels where it forces people to disinvest their savings and to allocate it to either consumption or other (mal)investments looking for higher yields. To quote Henry Hazlitt from his book “What You Should Know About Inflation“:

Inflation, to sum up, is the increase in the volume of money and bank credit in relation to the volume of goods. It is harmful because it depreciates the value of the monetary unit, raises everybody’s cost of living, imposes what is in effect a tax on the poorest (without exemptions) at as high a rate as the tax on the richest, wipes out the value of past savings, discourages future savings, redistributes wealth and income wantonly, encourages and rewards speculation and gambling at the expense of thrift and work, undermines confidence in the justice of a free enterprise system, and corrupts public and private morals.

In the currency game, only one player has dominated throughout the course of history: precious metals. Over time, fiat currencies lose their worth, as governments inflate the paper through printing and confidence is lost with each recession. This phenomenon was proven in the United States with the Continental currency, which was rapidly inflated to pay for the revolutionary war. Thereafter, the inflated Continental dollar was replaced with hard metals, which retained and actually grew in value from 1774 to the creation of the Federal Reserve Bank in 1913.

Since the Fed

After the creation of the Federal Reserve, the US dollar began is descent. Inflation to pay for the American involvement in wars, particularly World War II, the Korean War, Vietnam, the Persian Gulf, and now the War on Terror, has crippled the US dollar. Since 1913, the year the Federal Reserve was created, the US dollar has lost 96% of its value. Savings became all but impossible, as the practice of putting money aside led to a loss of spending power for US dollar holders.

Countries Laying the Groundwork

Distrust in fiat currencies is growing at an alarming rate. Gold prices have struck the same price they were in the 1980s as inflation in the United States reached record highs. China and India have made huge purchases of gold.

Investors and currency holders have begun to demand tangible value for their pieces of paper. However, the amount of gold and silver around the world is well outpaced by the amount of paper currency in existence. In order to reach equilibrium, gold and silver prices will need to skyrocket, and savers will require that their paper is backed with bullion, regardless of how miniscule the amount may be.

One common complaint with a metals standard is that there isn’t enough gold or silver to back all of the currency. This is easily debunked by the fact that the importance of a metals backed currency isn’t the amount of metal each dollar, pound, euro, or yuan is representing, but rather that a metals standard requires that currency issuance remain flat until more gold or silver are obtained. This restricts central banks and world governments from creating hidden inflation. Either the issuer must obtain greater stocks or metals or devalue the currency in plain sight by resetting the value of the currency to a new weight of metals.

Gold and Silver as Currency

Gold and silver have been the dominant currency throughout human history. With the expansion of gold and silver stocks expanding at roughly the same rate as the global population, metals remain one of the best ways to ensure a stable currency value.

Today’s investors have an excellent advantage, having already bought in at prices that will seem tiny when gold and silver are again adopted as currency. History is ripe with examples of gold and silver’s ability to track the changes in currency values, and there is little doubt that the future will be any different.

By Dr. Jeff Lewis

Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of Silver-Coin-Investor.com and Hard-Money-Newsletter-Review.com

With the current US deficit soaring above $12 trillion, the conditions are ripe for inflation. However, is hyperinflation just around the corner?

Step 1: A Collapse

Before hyperinflation can begin, there is often a collapse, or series of collapses, that send currency prices higher. Fleeing from assets, whether metals, stocks, or even real estate, investors sell their holdings for currency or cash. When you sell an instrument, you are not necessarily selling an asset as much as you are buying another.

For instance, should you sell real estate, you are buying dollars, which you receive in trade for your property. This increases the demand for paper currency, and ultimately, its value. Cash equivalents, money markets and treasury bonds, for example, also rise in value, as they are seen as safe-haven investments that also provide a small, although tangible, return.

Step 2: Keynesian Solutions

After a collapse, Keynesian economics calls for an increase in government spending, as well as an expansion of the money supply to calm the markets. Although the validity of Keynesian economics is questioned by other schools of thought, it is the prevailing think-tank philosophy employed by most governments and central banks.

Government spending is usually increased by the creation of new entitlement programs (think Social Security) or stimulus spending (think New Deal and the American Reinvestment Act of 2009). These new programs generally increase debt loads and simultaneously increase the amount of money in circulation.

While these programs are in service, the central bank must also act to keep interest rates low. As expected, during such periods of economic calamity, investors want safety and are generally unwilling to invest. The central bank usually acts to decrease interest rates, increase the money supply, and provide ample credit to governments to fund the ventures. Keeping interest rates low also minimizes the long term cost of stimulus by making borrowing less expensive.

Step 3: Weeding Out Bad Investments

The markets are keen to find the most rational prices for any good or service, as well as the value of money. Although central banks have intervened at this point, there are still plenty of bad investments that need to go bankrupt for the system to correct itself. This can include unstable governments, debt laden corporations, or producers that have yet to establish themselves.

In this step, another exodus to cash usually occurs, as local destabilization flows through the economy. In the most modern occurrence, the automotive industry would have been the prime suspect for collapse; however, government aid avoided the closure. The mal-investment was not allowed to be removed from the system and re-established through bankruptcy.

Not all bad investments are protected by inflationary economics, however, as homebuilders and other “boom” industries were weakened substantially through the downturn and have consolidated.

Step 4: Rampant Inflation

Throughout Step 2 and Step 3, interest rates are kept low, stimulating the economy’s desire to borrow, which subsequently increases the money supply. In Step 4, the central bank must tread carefully. Raising rates too high can reduce the money supply too much, sending the economy into a death spiral. Knowing this, the central banks usually keep interest rates too low throughout the recession and allow for inflation, which is seemingly a better consequence than an economic fallout.

Although inflation is enemy number one for the working class, investors can pocket a plethora of profits. Stocks and other hard assets, such as gold and silver, often multiply in price, protecting the spending power of investors at the cost of those not yet invested in hard assets. It is most important that each investor have a backup plan of gold or silver, which can help protect savings from inflation, while holding their spending power until economic conditions improve.

By Dr. Jeff Lewis

Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of Silver-Coin-Investor.com and Hard-Money-Newsletter-Review.com

‘The Dollar Bubble’, is a  30 minute documentary about the upcoming collapse of the U.S. dollar and how the Federal Reserve’s destructive monetary policies could bring the U.S. financial system to an end.

Are you prepared for hyperinflation?  In economics, hyperinflation is inflation that is very high or “out of control”, a condition in which prices increase rapidly as a currency loses its value.  Many economist are predicting that the US is on a collision course with hyperinflation.  Many are predicting that the dollar will collapse.  It’s not a matter of if…. but a matter of when.  Are you prepared?

“In discussing this question, let me state two facts which in my view cannot be denied: First, that the present crisis has been initiated by the Federal Reserve’s too expansionary monetary policies after the (2001) bursting of the New Economy bubble. Second, that the Fed and the US government embarked on even more expansionary policies to fight the current crisis: indeed, their policies constitute an experiment on a scale that has never been seen before in the history of fighting crises.”

Peter Bernholz December 15, 2009

Peter Bernholz has earned our most careful consideration on this matter.  He is the world’s leading expert on hyperinflation, a professor emeritus at Basel University in Switzerland, and a member of the Academic Advisory Board of the German Minister of Economics. He is also a former President of the European Public Choice Society, who has deep insights into the working of political markets.

In his famous book, Monetary Regimes and Inflation: History, Economic and Political Relationships,  Bernholz demonstrated that hyperinflations resulted whenever 40 per cent or more of government expenditures were financed by money creation (resort to the printing press). In 2009, approximately 42 per cent of US government expenditures were financed by some form of credit.  So the prospect of hyperinflation, however remote that may appear to be at the present time, cannot be ignored.

Bernholz presents the relevant facts: The monetary base of the Fed grew by about 99 per cent over the 12 month period August 2008 to July 2009.  The US deficit increased from 2.9 per cent of gross domestic product in 2007 to 8.0 per cent in the fourth quarter of 2008; for 2009, a deficit of 10.2 per cent is anticipated, implying that the  US national debt will reach 73.2 per cent of gross domestic product in 2009, and inevitably will continue to rise into the foreseeable future.

At the present time, there is little sign of significant inflation.  In my judgment, that is because the monetary multiplier is suppressed because of the toxic assets that continue to contaminate the balance sheets of  US  banks.  The banks simply will not extend loans in multiples of  expanded base money.  However, the fact that they will not lend does not imply that the demand for loanable funds has diminished. Evidence is quite the contrary.  The US economy is not inflicted by a Keynesian liquidity trap.

So what happens once the financial sector restructures its financial ratios to regain levels that were abandoned during the bubble economy of the mid-noughties. What happens when the money multiplier kicks in, economic recovery is under way, and the massive increase in Fed base money offers the opportunity for  significant inflation?  Can and will the monetary authorities reduce the swollen monetary base, can they do so in time, and will they do so?  These are different questions, seemingly with different answers that should be explored.

From his detailed discussions with board members of several central banks (including the Fed) Bernholz is moderately convinced that the central banks technically are able to reduce the monetary base and to increase interest rates to their natural levels of between 3 and 4 per cent  at any time. Economic adjustment will not be instantaneous, because of  lengthy lags in the impact of monetary policy change, but it will eventually occur. The problem lies in the political implications of such a major monetary contraction, the recessionary and budgetary  implications of tightening the monetary corset. 

The Fed has been politicized by Ben Bernanke and his Board following the financial crisis of September 2008. Congress and the President are now looking over his shoulder all the time. Both the Democrat-majority in Congress and the President are aware of what happened in 1994 when policy mis-judgments by President Clinton (and his wife) resulted in the resurgence of the Republican Party and the abortion of Clinton’s domestic policy agenda. They understand that the 2010 and 2012 elections are critical for any continuation of the progressive liberal policy agenda in the United States. They do not relish having another Newt Gingrich throttling the presidential throat.

So, if the Fed is not allowed to reduce the monetary base at a rate designed to abort inflationary pressures, inflation most surely will follow, with all the harmful consequences that US citizens have learned from experience during the Carter presidency. But will inflation spiral into the kind of  hyperinflation that destroys civil society, that leads to the displacement of fragile democracies with various kinds of dictatorship?  

Bernholz, thankfully, is optimistic on this issue.  Although his research clearly indicates that government expenditures financed more than 40 per cent  by credits historically have led to hyperinflation, the composition as well as the size of the credits turns out to be important. The 12 major hyperinflations that he has evaluated  were caused  in each instance by the financing of huge budget deficits through money creation. The story does not hold for borrowings taken up in the capital markets if they are not resold to the central bank.  According to Bernholz’s calculations, not 42 per cent, but only 13 per cent of US government expenditures currently are financed by money creation.  For this reason, there is presently no danger of hyperinflation in the United States, although, in Bernholz’s judgment, inflation may well rise, more or less strongly, during the next few years.

Let us be truly thankful for large mercies!

AIG, Fannie Mae, Freddie Mac and GMAC: “Long-Term Wards of the State”

Cryptogon
December 18, 2009

Though the four are not in all the same businesses, they were caught in one of the same traps: They sold mortgage guarantees — in some cases to each other. Now when homeowners default, as they are doing in record numbers, these companies are covering the losses. Essentially, taxpayer money to these companies is being used partly to protect banks and other investors who own the mortgages.

U.S. Debt Hits $12 Trillion, Will Double By 2019

Outside the Beltway
November 18, 2009

Presumably, we’d have had another major bailout had Bush stayed in office for a third term (were that Constitutionally or politically possible) or had John McCain been elected. So spending and thus the debt would have escalated substantially regardless. But we likely wouldn’t be talking about adding a massive health care payment on top of the pile.

Obama: We must spend our way out of recession (and into deeper debt)

Hello,

I AM loving Money more and more and more everyday that I live and I AM Becoming correspondingly more concerned about how I can multiply my wealth and protect my wealth as my American paper currency continues to fall in value.   So, what have I found and WHAT is my answer???

SILVER   SILVER   SILVER   SILVER   SILVER   SILVER   SILVER   SILVER   SILVER

I have learned from major Silver investors such as Mr. Robert T. Kiyosaki, Mr. David Morgan & Mr. Micheal Maloney — that Silver is thee Way to go.   Both Silver and gold are quality investments, however, Silver is an Infinitely better option for mySelf and for others simply Because Silver is hundreds of times more affordable than gold — Silver is running for about $18-$21 per ounce & gold is actually running for about $1100-$1200 per ounce!!!   Thus, Silver is my most awesome option, considering my developing financial independence.   Silver is also verrry special Because Silver is ‘consumed’ — i.e. Silver is Used for Thousands upon Thousands of industrial goods & services.   Most All electronics contain some Silver, Silver is Used as jewelry AND Silver is Used for countless medical applications Because Silver has Been well Known to Be our best anti-microbial on our Earth, as far as safety and Effectiveness are concerned — for many Thousands of years.

So, basicAlly, I AM just sharing my New paradigm shift and I AM Now a certain ‘Silver Investor’.   I Know that our American dollar MUST continue to fall, thus, indirectly continuAlly raising our prices and correspondingly raising our Silver and gold prices.   I Love gold, however, I Loooooove SILVER.   Why???

1)   Some Silver coins are Immune to Government theft and general intervention.   In other Words — The ‘Walking Liberty’ Silver Dollar canNot Be confiscated by our Government (which has happened on a national level Before) and I do Not have to report my Silver collection to our Government (along with other Forms of Silver).

2)   Silver is affordable, even at my current income level.

3)   Silver keeps Me healthy ( I drink Colloidal Silver daily).

4)   Silver FEELS reAlly good in my hands.

5)   Silver is in constant high demand as a tool for industrial goods and services and shall Become ever more special as we continue to move deeper and deeper and deeper into our current ‘electronic inFormation age’.

6)   Silver inFormation is abundant — so I can Be lazy and non-Thinking and STILL learn exactly what I need to do in Order to feed my Silver investment and wealth evolution – habit (Because plenty of professionals figure these things out for a living and share their Knowledge Because they like to teach and Because they get PAID to teach).

My final Word for You is simply this — CONVERT YOUR MONEY TO SILVER……slowly slowly slowly, but, surely surely surely……and You shall Be just fine!!!

I have links for You to learn and buy at the bottom of my writing, please enjoy.

Thank You,

In the NAME of my BALANCE, the WORD of my LOVE,

Jelani Asar

LINKS      LINKS      LINKS

1)   ‘Rich Dad’ Book on Investing in Gold & SILVER

http://www.amazon.com/Rich-Dads-Advisors-Investing-Financial/dp/0446510998

2)   The BEST Site for Building Wealth Despite our Building American-HyperInflation (that I have found so far)

http://www.inflation.us/

3)   Mr. David Morgan — Professional SILVER Investor — with FREE Knowledge

http://www.silver-investor.com/

4)   ‘American Precious Metals Exchange’ — Buy SILVER — SILVER – Bars, Bouillon, Coins (Non-Confiscatable!!!) … et cetera …

http://www.apmex.com/

5)   ‘Comex’ — SILVER Stock InFomation

http://www.cmegroup.com/trading/metals/precious/silver.html

6)   SILVER — Affiliate Program/Dual-Level Marketing Program

http://www.silversnowballprogram.com/

7)   Video — WHY SILVER Is The Way To Go — Mr. Michael Maloney & Mr. Robert T. Kiyosaki

8)   Video — SILVER Coins In The Making

9)   Video — ‘The Dollar Bubble’ — Why Our American Dollar Is Dying — MUST WATCH!!!!!!

0) I Pulled All of My Money Out of My Bank  & I AM Now Converting To SILVER

Financial Crisis Perpetrator Bernanke Hailed As World’s Saviour By TIME

The real person of the year, Ron Paul, puts the record straight

Watch the full interview below:

Transcribed by Jeff Fenske from The Prophetic Watch with Ronnie McMullen,

9/18/09

“The inflation is going to kick in in 18 to 24 months.”

— Kevin Trudeau (former secret society member)

How Likely Is Hyperinflation?

By Peter Bernholz

Tuesday, December 15, 2009

Have central bank and government reactions to the crisis created a large danger for the future?

During the past several months, concerns have risen that the expansionary policies of the U.S. government and the Federal Reserve System to counter the present crisis are creating the danger of a substantial future inflation. Some speak even of a hyperinflation, that is, of a rate of inflation  exceeding 50 percent per month. People believing in the latter scenario base their concerns on results I presented in Monetary Regimes and Inflation: History, Economic and Political Relationships, which shows that all hyperinflations were caused by huge government deficits. By analyzing many historical examples, I illustrated how hyperinflations resulted whenever 40 percent or more of government expenditures were financed by money creation. Since it is expected that about 42 percent of U.S. expenditures will be financed by credits this year, some fear the emergence of hyperinflation in the United States. Consequently we face the interesting question of whether a very high U.S. inflation with a corresponding fall of exchange rates has to be expected.

In discussing this question, let me state two facts which in my view cannot be denied: First, that the present crisis has been initiated by the Federal Reserve’s too expansionary monetary policies after the bursting of the New Economy Bubble. Second, that the Fed and the U.S. government embarked on even more expansionary policies to fight the present crisis; indeed, their policies constitute an experiment on a scale which has never been seen before in the history of fighting crises.

Though the Fed initiated the crisis, we should not forget that it would never have taken such a dramatic course, which hurt the real economy, were there not other well-known defects in the financial system.

Let me turn to the first point. In a mistaken fear of deflation, the Fed lowered its interest rate to 1 percent and increased the monetary base by about 39 percent from 2000 to 2006 after the bursting of the New Economy Bubble. In doing so it encouraged an incredible credit expansion by the financial sector and thus allowed the subsequent asset bubble. Later, it helped to pierce the bubble by raising its interest rate step by step above 5 percent and by strongly reducing the growth of the monetary base. Though the Fed thus initiated the crisis, we should not forget that it would never have taken such a dramatic course, which hurt the real economy, were there not other well-known defects in the financial system such as:

via How Likely Is Hyperinflation? — The American, A Magazine of Ideas.