I can't complain. My wife and I have plenty to eat and we own our home outright. With no debt and enough money to carry us for the next few years, we'll make it through this economic downturn as long as we continue to live modestly. But when it comes to developing a strategy on how to protect my hard-earned savings from theft, folly, taxes or inflation, great care must be taken.
I've read a lot of monetary history and understand that protecting your savings is actually a very difficult task. While studying economics at Harvard, I had the terrific opportunity to study and learn from some of the best and brightest scholars and professors there, some of whom come January will be thinking up and acting out economic policy for at least the next four years in the White House. My education and experience has given me great insight into how these economic czars think and what their sense of morality, or lack thereof, really is. There's no doubt they'll be forced to act aggressively to get our country out of this slump, and their actions will have a deep long lasting impact on every aspect of the economy as well as your savings, if you're not careful.
Economic czars Lawrence Summers and Ben Bernanke fundamentally believe that the economy is like a great Keynesian engine with pumps and levers. In order to make the engine work, all you need to do is twist a valve here, pull a big lever there and goose the gas, or step on the break. If you were to compare the dot.com crash in 2000 to the situation today, stepping on the gas was just what the former Fed Chairman Alan Greenspan did by lowering the Fed Funds rate to one percent, and forging full speed ahead! Boy, did his economic policies take us for a thrill ride that crashed, resulting in massive bubbles that have blown up in housing, credit, and financial leverage, driving the US and global economy straight into a mini-depression.
So what are these Keynesian boy wonders going to do next? This week, the first big lever has been pulled and the Fed funds interest rate has been cut to zero. (With the US and Japan at virtually zero interest rates, most major countries will follow). In addition, the newly-elected administration will be stepping on the gas and we could see Treasury deficits of 10 percent of GDP; for most governments around the world, deficits could easily exceed seven percent of GDP.
Even old line Republican bankers are beginning to realize that the unemployed will not be able to pay their auto loan, credit card or mortgage, and selling the political side of deficits and inflation has suddenly become easy. In today's economy, the only employer hiring will be the federal government through public works. The policies that are signed off on in the coming months will very likely create the greatest inflation anyone living today will ever remember. Let's not forget: Government-sponsored inflation taxes, destroys and robs any wealth held in financial assets such as cash, stocks or bonds. This destruction of wealth will absolutely dwarf the Bernie Madoff hedge fund calamity, and the stock market decline of the last few months.
What other tricks with your money will these economists dream in the coming months? As Treasury Secretary under President Bill Clinton, Professor Summers believed in Gibson's Paradox. Gibson's Paradox was a trick used by the government to manipulate the price of gold down, thus creating the illusion that if the price of gold is weak, the dollar must be strong! He loved Gibson's Paradox. He actively helped major governments including the United Kingdom sell gold, and even today the US is still trying to hold the price of gold down by manipulating the gold futures markets. Because of his actions over 10 years ago, it's been hard to resist not accumulating gold and silver, and I suspect he'd love to pull off this trick again now, or try something even bigger, if that doesn't work!
You must agree that the financial markets today are nothing short of fascinating! Under Greenspan, the Federal Reserve experimented by cutting interest rates and creating economic bubbles. Today, the Fed is cutting interest rates and printing up money to fight the deflation that comes with the busted bubbles. I do find it short-sighted that most people in the financial markets just look at the current debt deflation. However, there are growing numbers of farsighted investors who can plainly see that the federal government is starting to launch the greatest worldwide inflation ever seen to fight today's debt deflation. As more investors around the world sense massive inflation coming, the wise ones will become gold and silver buyers. Surprisingly, investors in precious metals are finding it harder every day to find the real thing in physical form, and as gold and silver future prices continue to decline, real gold investors - in for the long term that sense Gibson's Paradox is breaking down - will want to buy all the gold that comes to market!
With Professor Summers back at the wheel in the fast lane shifting gears, he may soon be in total disbelief when he realizes the attempts to push down the price of gold - to make the dollar look strong - are not working! Although he is extremely bright, he's famous for turning red and going ballistic when forces outside of his control don't go his way. Why should you care? One reason is that the Treasury sets US economic policy for the value of the dollar, and he'll be the magician behind the scenes. Guys like him have a need to control and there is nothing more important in the world than the value of the US dollar. With gold running in short supply, to support a Gibson's Paradox policy he'll be searching for ways to beg, borrow, or steal gold to support the dollar but it won't be easy while the Fed is printing up trillions of dollars to fight deflation, and holding interest rates at zero.
Beware! If you currently own gold through an ETF it may not be safe. With one little stroke of the President's pen, it can be confiscated by the US Treasury for so-called national security purposes. The government officials will claim they are out to protect US citizens from speculators whom they blame for the dollar collapsing, but in reality their policies that will force Americans, who actually want to save, to flee the dollar. So, could the US Government grab your gold in an ETF?
The act of governments stealing gold and robbing currency holders is nothing new, even in America. President Roosevelt grabbed the gold and devalued it in the 1930 Depression, and Nixon jumped off the gold standard in the 1970s. In order to save the nation the government will need to save the dollar, and the right way to do this would be to run prudent fiscal policy with low budget deficits, and have the Federal Reserve raise interest rates to encourage savings. But the easy short-term fix is to steal some gold now owned by a few who were only trying to protect their savings.
My nature is not to be an alarmist and I honestly don't know for sure when and if the US will grab the ETF gold. However, over the next two years the federal deficit, funded by selling new Treasury securities, is certain to be over 10 percent of GDP. Holders of the dollar will want out and all that gold sitting in vaults makes it too easy for our federal government to come in and rob you of it in order to save the dollar and pay for socialism. I understand the morality here: Inflation is good so robbing savers (for the sake of government) is viewed as good! Therefore, robbing savers of their gold is even better!
So, buying gold, silver, and precious metals is truly one of the few ways you can immunize yourself from the coming inflationary confiscation of wealth. Owning physical gold and silver and keeping it safely in your possession is a good idea! If you can't get gold, buy silver, platinum, palladium, etc., all in physical form. While you still can, think about moving into physical form any gold in ETFs you have; you won't be sorry you did!