Where Do the Feds Get Any Money?

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Gold futures tapped the $1,000-an-ounce mark in early morning trading, a level the precious metal hadn’t reached since February.

“As long as the Federal Reserve and the US government take actions that debase the dollar, the dollar price of gold will rise,” says GoldMoney.com’s James Turk. “Similarly, as long as the Bank of England and the UK government take actions that debase the pound, the Sterling price of silver will rise. It is a certainty, just like night follows day.

“Years from now we will look back at today’s action with amazement at how low the price of gold and silver were, just like I can today look back to my college years when gold was only $35 and an ounce of silver could be had for 46 pence. It is a distant memory – and those prices will never again be seen. Eventually a three-digit dollar gold price and single-digit Sterling silver will never again be seen, as long as those currencies continue to be mismanaged and continue on the path to the fiat currency graveyard.

“…the dollar and pound are being debased, and in the absence of any policy advocating sound money in the US and the UK, inevitably gold will hurdle $1,000 and silver will clear £10.”

“Frugality is the new normal,” says an Associated Press report. One study suggests that consumer will spend 14% less – even AFTER the recession is over.

Boomers are out of time. Out of money. And they’ll be out of luck unless they trim expenses and begin saving.

They’ve figured it out. Personal spending has fallen in 4 of the last 6 quarters. It hasn’t done that since 1947 – when they first began tracking it.

Consumers’ net worth has taken a big hit – down $13 trillion, from $62 trillion to $50 trillion.

And so, the simpletons think the government has to rush in where fools foundered…that is, they rush in with more money.

But where do the feds get any money? They have to borrow it…or print it. There’s a big difference between federal borrowing and private borrowing. When the private sector borrows the risk is that people won’t be able to pay back their loans. That is a risk that lenders live with. They know the risk; they factor it into their decision-making. Sometimes they’re right. Sometimes – such as when economists mislead them with a lot of gibberish numbers – they’re wrong. And when they’re wrong, borrowers default…and lenders lose money.

The feds, on the other hand, can’t default. At least, not when their debts are calibrated in money they control. But there’s the risk right there. And it is a different kind of risk. It’s the risk that the feds may choose to pay back the loan in much cheaper currency. Or merely make a mistake that results in much cheaper currency.

Imagine a private borrower who could print up a few extra bills in his basement to pay his monthly mortgage. He may not do so…perhaps his sense of honor would prevent him. Or maybe he would fear that he wouldn’t be allowed to borrow again. But if his back were to the wall, there is little doubt that he’d soon be in the print shop.

The feds are in the print shop already. They’re printing up more dollars intentionally – to try to get inflation rates up…and to finance federal borrowing. It will be a miraculous thing if their new dollars don’t eventually cause inflation. But the macroeconomists who run the print shop tell us not to worry. They’ve got it all under control. They’re already talking about when and how to withdraw the dollars they so helpfully provided during the crisis period.

The simpletons – who had no idea that the crisis would come…and then thought it could be easily contained…and then mistook it for a monetary, banking crisis…and then judged it over before it had really started…

…these same simpletons still do not understand that the problem is not a lack of money, it’s a surplus of debt…

..they now reassure us that they know just how much money to put into the system…and just when to take it out.

If you believe them…you might want to stay in stocks and US bonds. If not, you should head for cover.

The country is being run “by a gang of clueless bozos,” says Lee Iacocca, in his new book.

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
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Comments

  1. In a way I see what Billy is saying that when gold was $35 to the $1 then. If the dollar lost 100% of its value gold would be worth $3500 to the (inflation) $1 now. If looking at this way it does seem very realistic.
    Even half correct it can go to $1750 very easily

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  2. “They’re already talking about when and how to withdraw the dollars they so helpfully provided during the crisis period.”
    Big problem here though Bill (as you no doubt know). Even if a they could withdraw the dollars, when will the time come to withdraw them. Obviously when the economy is better. But how can an economy improve if businesses are strangled by rising interest rates and taxation….the inevitable consequence of monstrous sovereign debt. They just cant. And then there is the issue of business conditions in an environment of fast moving price inflation.
    A new system of currency/political order assured now…the old is past use by date.
    Still…paradise awaits neither those who would rule or be ruled. Its an illusion.

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  3. One thing we in Oz need to be wary of is that we are often talking about gold in $USD terms which is great if you are a U.S. investor, but gold in $AUD terms is not doing so well. A lot of U.S focused experts love gold because the USD is struggling but I think Australian investors need to be a little more cautious. Remember the $AUD has been rising strongly against the USD and so the run up in gold prices is actually being muted a fair bit by the movement in exchange rates.

    As for U.S investors, why don’t they just park money in $AUD, earn some interest and then sit back and enjoy the ride?

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  4. That is a decent point Greg.

    If the AUD continues a rise against the USD, gold in Australia will experience a relative drop in price (AUD). However, if the rise in gold exceeds the rise in AUD (using some proportional measure) then Australians who are into gold will still come out ahead.

    Still, if our miners sell a lot of their gold in USD, they can probably build up some USD reserves and try and ride out any appreciation of the AUD on the USD. If it ever retreats again (which is possible!).

    It’s nice and confusing isn’t it? :)

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  5. Pete..yep it is confusing :) I think we just need to keep the views of the U.S. focused commentators in perspective. The future for the USD is not looking very good but it seems many FOREX analysts are pretty bullish on the AUD.

    Personally it all becomes a bit much for me so I just stick with the diversified miners like BHP and hope they are digging up something the world wants in a cost effective manner.

    I see oil is on the move up once more, but this again has a lot to do with the USD heading south rather than any major pick up in oil demand.

    Greg Atkinson
    September 10, 2009
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  6. Good points re AUD gold Greg. You gotta believe in much higher prices for gold to put that obstacle behind you. For mine when an AUD bounce finally does arrive and the markets come off it will be make or break for the AUD gold price. Chinese buying may be pushing gold up against non US currencies now, but how far will it get? A flight to safety is whats required IMO. I do worry about oil until a true recovery comes about.

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  7. Sorry should read “when a USD bounce finally arrives”

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  8. Lachlan, DXY finely balanced, it could go down to 71 or up to 90 like late last year. It is on the verge of something. Many watching…..
    http://www.marketwatch.com/investing/index/DXY

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  9. Lachlan with the currencies around the place all moving so much it is really hard sometimes to work out how to gauge what anything is really worth these days. We are so use to measuring against the USD but now, that it is no longer stable enough. I guess that why there is so much talk about a new reserve currency. Maybe we need to use the Big Mac index more? :)

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  10. Greg I read Doug Casey calls money now nothing but a “floating abstraction”. Sounds impressive. :) Some days I wake up and cant believe how much this world has changed…but then we’re all just starting to see things as they’ve really been for a good while…due to some critical events.

    Ross I have tended to bet on a last ditch drop to low 70’s before the bounce and one last crazy high for the various inverse performers. Maybe the underground dollar bulls should hold up in their tunnels just a wee bit longer. PMs seem to be pulling back from overbought maybe priming for dollar drop and everything rally. Thanks for link.

    Reply
  11. Maybe we need to use the Big Mac index more? Never stopped using it, Greg! (Seriously, continual travel provides a constant measurement of relativities. And, as Einstein said “I’ll have fries with that.”)

    Biker Pete, Ottawa, Ontario, Canada
    September 10, 2009
    Reply

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