Hey Peachtree City...are you guys able to keep track of all the new legislation, regulations and other recent changes? Yeah, it's becoming pretty esoteric, right? However, I agree with Warren Buffet that we should support our President and the current economic policies. It's just these new changes have added a cataclysmic amounts of information to absorb, review, and evaluate on top of all the gloom and doom we are inundated with day in and day out by our new media. My brain is fried, my house in under water, and my finances could use some bailing out!
But there is still hope and plenty of money out there to be made....right? Heck, the last estimate I read had the world's total wealth at $100 trillion dollars! Yipee..its not like there is only a few loaves of bread and some fish left to feed us all.
However, according to the Asian Development Bank and a report from the World Economic Forum the global financial crisis has destroyed about half of the world's wealth. That's $50 trillion dollars....cha-ching gone! I know that type of gone sounds more like in an alien abduction. But, all this tends to make me pause and ask the question, "So What is the ultimate fate of our dollar?"
Hmmm...How about let's start out with the question we all have, "Who or what is backing all those George
Washingtons?" Well...Money as we know it today is not backed up by anything more than a promise from Uncle Sam. How did this come to be? Read on folks! We all know that centuries ago commerce relied upon precious metals such as gold and silver as the medium for barter and exchange. It's also a fact that the almighty dollar was once back by gold and silver. More on that later.
If you go back and check, historically during times of war, nations would take their currency off the gold standard and then inflate the money supply in order to finance the huge expenses of war. At the end of the wars money would go back to a gold standard. That is until the end of World War II. After WWII, the United States emerged as a real super power having established itself as having the strongest economy in the world. The U.S. not only was the sole possessor of the "bomb" but it produced half of the world's coal and electricity. From a financial perspective, the US held a majority of investment capital, was a powerhouse in manufacturing, and over 65% of the world's total gold reserves was owned by the USA.
Then came the United Nations Monetary & Financial Conference better know as the Bretton-Woods conference held in New Hampshire in 1944. A new relationship between gold and paper was established, (among a number of things) and a system of exchange rate management was set up and remained in place until the early 1970's. The currency of the United States being the prominent world power, become the reserve currency of the world as the Franc was devalued and the exchange rate for the dollars was redeemable in gold to the amount of $35 per ounce.
That system, and U.S. power, stabilized the world's monetary system and allowed for an unprecedented surge of prosperity. But the system failed in the late '60s when costs for the Vietnam War flooded the world with tons of American dollars. Foreign governments balked at holding those dollars at an artificially fixed rate. Consequently, foreign nations began to value gold more than the dollar due to the fundamentals of supply and demand. As a result, the gold reserves of the US began to dwindle.
In 1971 the US noticed such run on gold and if continued at that rate, the entire U.S. gold reserves would be depleted. Circa August 15, 1971, ( a year prior to the Watergate break-in) President Richard M. Nixon unilaterally "closed the gold window," making the dollar nonconvertible to gold directly, except on the open market. This effectively severed any last remnant of paper money being backed up by gold. All currencies were said to "float" against one another from this time forward. Fast forward to May 23, 2006, our US government announced that it would cease to publish the M3 money supply figures. Hmmm..Was it because someone knew that massive amounts of monies would have to be created to fund the increasing trade and federal budget deficits? Maybe a stock market crash could be predicted? Hyper-inflation? Just food for thought!
So how does gold look these days against the dollar? Well, since the beginning of 2009, the dollar has gained 9.5% against the euro and 2.3% against the pound. Gold in dollar terms, is up 9.4%. At the time I am writing this blog, gold was at $977 an ounce. It is becoming obvious that the rise in gold prices may be signaling that the dollar's rally is not going to continue. Maybe it's like Voltaire stated that Paper money, is intrinsically worthless. Many paper currencies have failed altogether, and the two most successful currencies the world has ever known, the British pound and the American dollar, have both seen their purchasing power erode approximately 95% over the last century.
At present there are 176 currencies in circulation in the world. The median age for all existing currencies in circulation is only 39 years. Under the US Mint Act of 1792, which established the dollar as the currency of the US and created the decimal system for currency, the dollar was defined as 371.25 grains of silver. There are 480 grains in a troy ounce. Thus it took 1.3 US dollars to purchase a single troy ounce of pure silver. As of the beginning of 2009, the price of a troy ounce of silver is $11.22, representing a 89.5% drop in value!
So what about our monetary base? Okay to begin, the monetary base is comprised of currency in circulation and the commercial banks' reserves with the central bank. Recently, there have been unprecedented increases to the bank reserve portion of the US monetary base. Up until August 2008, the portion of the monetary base that consisted of bank reserves was between 8% - 12%. In December 2008, that proportion had risen to 47%! This drastic increase was due largely in part by the unwillingness of the banks to lend. Remember, TARP (Troubled Asset Relief Program) was enacted in October of 2008. 442 institutions received almost $200 billion dollars!
The greatest risk at present is that the magnitude of the latest efforts to stabilize the system may destroy public confidence in paper money, thereby sparking the phenomenon of hyperinflation. So what is hyperinflation....It is the total meltdown of a currency system. As the Feds continue to print out money to be sold as treasury notes the actual dollar is weakened by inflation. At some point it can be assumed that entities may sell off the dollar before it gets completely devalued.
Some experts say the bottom is nearing as the market dropped below 6500 on its way to predicted 5000. Other experts expect gold to go up in proportion to the dollar's downward spiral. What will happen to the dollar still remains to be seen but one thing I can say with certainty....throughout history gold and silver have always been the last man standing.
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