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High Price of Gold is a Clear Sign That Inflation Is Not the Answer

By: Steve Johnson

9/3/2009 - 37 Comments

The demand for Gold is increasing around the world as central bankers have continued to try and print their way out of the global recession in a mad attempt to give their economy one more day in the sun.

Gold is perhaps the oldest source of wealth on the face of the earth and when it is in high demand – look out – because the house of cards that holds up the financial system is about to fall down.

The HUEY gold index was up about 15% in the last two days as gold reached $998.00 today in intraday trading.
The politicians have been able to claim that the recession is almost over in dollar terms, by flooding the economy with newly printed money.  Yet the real wealth of the nation continues to plunge as the value of the dollar is being debased. 

The same thing happen before the Great Depression, central banks around the world where printing money as fast as they could, in an attempt to get out of financial trouble before the drop in value of their currency could be felt by the people.  The result led to massive inflation in many parts of the world and WWII.

Inflation Is Already In The Cards

When a government issues new money, the first ones to get the money benefits the most because the value of the currency has yet to be reduced and they can still purchase goods at low prices.  But as the new money makes its way into the economy, each transaction cause more people to realize that more money is available to pay for the same goods and prices gradually increase. 

New money can take years before its effect is completely realized with higher prices. This slow process of inflation is very difficult to judge how bad it will get and almost impossible to reverse.  Stopping inflation requires the painful process of taking the extra money back out of the system, which is like trying to get some water back after dumping it down the drain.

Fed Chairman Ben Bernanke says he can extract the extra money when they need too – but talk is cheap and history proves just the opposite. 

The foreign bankers that have borrowed the US trillions of dollars are starting to realize that it is impossible for the US to pay them back, without renegotiating the terms – which include forgiving much of our debts. If you run the numbers with all the debts and liabilities, each household owns something like $450,000, which is impossible to pay back.

Renegotiating Foreign Loans

The process of renegotiating a nations loans can be done in two ways,

  1. Repay the loans with newly created money that has much less value then the money that was originally borrowed
  2. Work out a new deal with the creditors to extend the loan terms or reduce the principle (forgive part of the loan).

The US government is attempting strategy #1 and the world is not liking what they see. They don’t want to be paid back with dollars that have lost value because of a drastic increase in the supply of dollars. 

They see inflation on the horizon and that means gold will be the only safe place to protect wealth because gold cannot be manipulated or created by any government and gold has a limited supply. 

The recession maybe ending in dollar terms, but it’s far from over in gold terms.

Inflation Is Not the Answer

For some reason the politicians still believe they can inflate their way out of financial trouble.  When all they are doing is creating a bigger problem and trying to force the rest of the world to settle for less then we committed to.

Inflation is not the answer, frugality is. What we really need is to strengthen the value of the dollar by drastically cutting government spending.  Frugality is not an easy road, but it’s the only path to true economy recovery.

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