Pretending the US is Solvent

Except for gold, all the key market metrics were up this week. I have a feeling—it’s only a feeling—that some of gold’s weakness may be due to price manipulation by the bullion banks to shape a bearish psychology before June 24 when Basel III goes into effect for European banks. One thing we do know and is that if gold started a dramatic rise it would call into question the legitimacy of the dollar. Most Americans don’t give any thought to the dollar’s importance in terms of inflation. But as I noted in my May 20 MIF talk, the fate of the dollar is hyperinflation. Just as in the early 1720s the French had to print unlimited livre to buy shares of the Mississippi Company to pretend France was solvent, the Fed must now print endless trillions of dollars to pretend the U.S. is solvent. 

There are many plausible arguments for suggesting the current monetary danger in the U.S. is more to the deflationary side than toward hyperinflation, unless the dollar heads rapidly toward the dustbin of history. Renown economist David Rosenberg presented said arguments on my show on June 1. But in David’s forecast there is no assumption that the dollar will be anything other than the world’s reserve currency for the foreseeable future.  But the world is changing very rapidly and one of the most important changes has to do with the turn against the dollar by net export countries who used to recycle the dollars they earned from trade back into the U.S. by buying Treasuries. As I demonstrated in my May 20 MIF talk, the only significant buyers of Treasuries these days are the Fed, which creates money out of thin air and pension funds that have to have some liquidity and safety.

Michael Oliver put out a piece on the dollar on Friday, warning that the dollar is skating on thin ice. He noted that a fall to 0.89 or 0.88 for sure would likely set off an avalanche toward levels. And reading his material over the past couple of years and listening to him on my show, I know he believes we will see much lower levels than that. The world is changing in so many ways as western socialism is basically destroying the last remnants of free market capitalism. ( Michael’s chart above left .)

Whether inflation declines as measured by the CPI or PPI, or Core index is transient or not, we can be sure the Austrian definition of inflation—even hyperinflation—is on its way. The Austrians define inflation as the increase in the money supply and you can see that by my Inflation-Deflation Index, which did manage to stay unchanged this week at 189.17. By the way, as reported this week, the year-over-year CPI came in at 5% above the consensus of 4.7%. The real outlier was the core rate that came in at 3.7% year over year. I’m trying to keep an open mind regarding these basic price measurements, but I have no doubt that hyperinflation as defined by the Austrians is just getting started. I hope and pray this doesn’t lead to chaos and civil disorder. But that’s what happens in hyperinflationary situations. Which of course is why we own gold and must continue to do so.

About Jay Taylor

Jay Taylor is editor of J Taylor's Gold, Energy & Tech Stocks newsletter. His interest in the role gold has played in U.S. monetary history led him to research gold and into analyzing and investing in junior gold shares. Currently he also hosts his own one-hour weekly radio show Turning Hard Times Into Good Times,” which features high profile guests who discuss leading economic issues of our day. The show also discusses investment opportunities primarily in the precious metals mining sector. He has been a guest on CNBC, Fox, Bloomberg and BNN and many mining conferences.