GoldMoney Alert - 1 October 2008

We Are in the Sixth Inning

As we begin this year's fourth quarter, it may be useful to step back from the trees and take a look at the forest. The big picture is shaping up pretty much as expected.

In my February 1st alert I laid out my expectations for this year, specifically that "2008 is shaping up much like 1974. There are many similarities. These include rapidly rising inflation and growing monetary problems not only in the States, but across the globe. In fact, the last serious global credit crisis before the present one occurred in 1974...If history is any guide - and I really do believe that it is - then the current banking and credit crisis is going to get much worse before it gets better. Years of imprudent reckless lending are taking its toll on the global banking system."

Six weeks later in my March 16th alert I re-emphasized this point noting that the events then unfolding "adds more support to my view that 2008 is shaping up like 1974".

Given the several months that have passed, it may be more accurate to say that the parallels are closer to 1932 because the wealth destruction today is far greater than occurred in 1974. I didn't live through the banking and monetary turmoil in 1932 as I did in 1974. But I have studied the 1930s closely, and events are evolving today as they did back then, with one major exception. The tremendous wealth destruction we are witnessing today is inflationary, not deflationary.

The wealth destruction during the Great Depression led to deflation because the dollar was on a gold standard. As the economic and monetary situation deteriorated, promises were increasingly broken, which made financial assets of all sorts suspect. So people moved wealth from financial assets into tangible assets, and the 1930s deflation was the inevitable result because people converted their dollars into the safety of gold, which forced a contraction of bank balance sheets. Consequently, the money supply contracted.

Today of course the dollar is no longer formally linked to gold, and the money supply continues to soar at double-digit rates. Inflation is the result. After all, despite all the wealth destruction we are seeing today, where's the deflation? Who can honestly say that their cost of living is declining? Even though the price of gasoline has dropped recently, its price is still far higher today than a year or two ago.

The point is that the cost of living is rising. The dollar is being inflated, and given the way the Federal Reserve and central banks around the world are printing money, it is quite clear to me that inflation is going to get much worse.

Politicians and government authorities alike continue to ignore one crucial fact. Many banks are insolvent, including some of the world's biggest. So the continuing efforts by central banks to add liquidity does not in any way make these banks solvent. As a consequence, the core problems of the crisis are not being addressed, and perhaps even being impeded from resolution because the half-baked ideas of governments and their captive central banks seemingly ignore this stark reality that so many banks are insolvent.

So while much of the financial crisis is behind us, we still have a long way to go. To put it in baseball terms, I think we are in the sixth inning. The worry though is that I fear this game is going into extra innings.

So continue to 'batten down the hatches' and avoid counterparty risk. The best way to do that is to own gold and silver. As the following charts show, they remain in bull markets. Throughout the world, as people are becoming increasingly fearful about their 'money in the bank', sound money is becoming an increasingly important safe-haven.

Published by GoldMoney
Copyright © 2008. All rights reserved.
Edited by James Turk

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