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New Round of Dollar Debasement Coming

Oct 11, 2010

The collapse of the dollar in recent months has been engineered by the US Treasury and the Fed and is a direct result of what they call "quantitative easing," or QE. That just means the Treasury decided to create more money by borrowing from the privately-owned Federal Reserve, which then created the new money out of nothing and traded it for US interest-bearing bonds.

"Quantitative" means they are increasing the quantity of money, so that the value of money "eases" downward. Since the salaries of American workers remains the same in terms of dollar amounts, when the value of their money decreases, they are actually taking a pay cut. This means the prices on goods produced in America are more competitive in the world market. The result is that we tend to export more overseas.

Conversely, it takes more dollars to buy products from overseas, so we tend to import less. This helps our balance of trade.

Of course, the other countries are upset by this, because they want to export MORE to us, not less. Japan is being especially hurt, because the value of their currency has gone up about 30% in recent months, making their exports to America less competitive.

Last Tuesday, the Bank of Japan lowered its interest rates from VERY LOW to ZERO, hoping to slash the value of the yen. It did nothing of the kind. They will have to create lots more money to have such an effect.

However, even the prospect of yet another currency devaluation caused the price of gold to go up over $25 and silver to rise $1.00 in one day. It seems that people don't like holding currencies that are falling off the cliff. They would rather hold something tangible like gold or silver whose values are on the rise.

The next day silver "corrected" for one whole day, dropping about 55 cents. And then it was over. The next day the price rose 75 cents, more than offsetting the "correction." The score is now:

Gold: $1350
Silver: $23.25

As you probably know, America's fiscal year ended on October 1st. In the final two days, September 30 and October 1st, the deficit went up by $72 billion PER DAY, causing Richard Daughty at The Daily Reckoning to gasp:

" On Wednesday, 9/29/10, the national debt was $13.466 trillion. The next day, 9/30, it goes to $13.561 trillion. Again, 'the next day,' 10/1, the start of the new federal fiscal year, it rises to $13.610 trillion!

"This $144 billion is a staggering lot of borrowing that, somehow, happened in Two Freaking Days (TFD)! This is $72 billion per day! This is the government borrowing – per day! – almost $240 for every man, woman and child in the Whole Freaking Country (WFC)! Gaaaahhhh!"


Prospects for the future are dismal for the dollar, good for gold, and stupendous for silver. That is because the Fed Chairman has already announced his new plan called QE2, a second round of dollar debasement, which will simply propel the price of gold and silver to dizzying heights. They are now talking about gold hitting $1650 soon, and silver hitting $80.

QE will soon mean Queasy Economics. QE1 has already started a trade war. What will QE2 do for us? The average American does not understand these things, and those who do not understand will be the greatest losers, even if they only have a few bucks to lose (each). Many have worked hard over the past decades and saved their money, hoping to retire on the interest. They will be the biggest losers, because it is difficult to reverse their work ethic of "work hard, save a lot."

In past times of low inflation in which current retirees worked their jobs, it was a good idea to store money in the bank, because inflation did not erode it very much, and the interest payment more than covered the loss of value. But times have changed, and many have not been able to adjust their thinking to the new paradigm of currency devaluation.

This is why I write about these things. I know that many of our readers have had very little knowledge of economic matters. I don't want you to lose what you worked so hard to obtain over a life time of "slave and save." It would pay to learn some of the basics about money, and if you have extra savings in the bank, buy some gold or silver. (If you don't know anything about this and have never done it, I would recommend buying one-ounce coins.)

It is best to time your purchase when there is a temporary price correction, because the price goes up and down daily. But unless you are a day-trader, you should think long-term and don't worry about daily price fluctuations. Just understand that government policy is telling us that they plan to devalue the dollar and to drive up the price of gold and silver. I believe them, even though they also work at the other end to keep gold and silver as low as they can to lessen the effects of their dollar devaluation.

We seem to be near the brink of a flood of new currency. Inflated currency means higher prices for goods (other than housing, which is about to go down once again). We are not yet at the point of hyper-inflation, but the erosion of dollar value is still going to be painful to many people. So do your reading and be as prepared as you can.

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Category: Financial

Dr. Stephen Jones

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