The Party is over & our “Friends” Have Gone Home!

It’s been quite a party for America since World War II and especially since 1971 when President Nixon threw open the monetary liquor cabinet to Americans by detaching gold from money. That meant Americans didn’t have to work for their wealth because the Fed could print money that was accepted by the rest of the world for whatever they produced.

For a while it worked like a charm. After an initial post 1971 bout of double-digit inflation that was corrected by the Volcker Fed, the U.S. printed more and more money, faster and faster, and it was so much fun! What made this free lunch possible for several decades was the willingness of foreigners to use the dollars they earned by selling us stuff to pay for our materialistic orgy by buying U.S. Treasuries. That meant that even as the U.S. went deeper and deeper into debt, interest rates could continue to decline as long as foreigners kept buying U.S. Treasuries. 

But now, for a host of reasons, foreigners, most notably China, have stopped buying U.S. Treasuries at a time when America’s addiction to the free money is incurable. Moreover, if the Fed tried to do what the Volcker Fed did in 1980 –raise rates so that U.S. Treasuries could be funded from sources other than the Fed, it would fatally wound the American economic patient. As the chart above on the right shows, only the Fed (in blue) and Pension Funds (in green) are meaningfully funding the trillions of dollars of spending America does not have. We could get away with that as long as foreigners funded our materialistic and war mongering addiction. But acting as irresponsibly as we have, the funders of our irresponsible “drunken” behavior are gone. The only thing the Fed can do now is pretend that inflation is transitory and continue to engage in the same drunken behavior that got us into this mess—print money. But now it is forced to print dollars in exponential quantities, which all but guarantees a limited time left for the dollar’s reserve currency status. And whether or not that means endless inflation in terms of the CPI, it does mean hyperinflation of the money supply, which is by Austrian economics definition, hyperinflation. That in turn means gold and other tangibles are going to rise indefinitely in terms of dollars. Never has it been more important to exchange those dollars for gold and silver and for shares of companies that produce the monetary metals as well as other tangible assets.

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.