…In basic terms, the United States is going broke. We’re heading for a sovereign debt crisis. I don’t say that for effect. I’m not looking to scare people or to make a splash. That’s just an honest assessment based on the numbers. There’s no way out of the debt death trap. Or is there? There is actually a way out. It’s the only solution left, really, and that’s…
Tax cuts won’t bring us out of it, neither can structural changes to the economy. Both would help if done properly, but the problem is simply far too large so an economic time bomb is ticking. Velocity is dropping. Debt is growing while growth is slowing. The explosion will come in the form of asset bubbles bursting and stocks crashing.
There’s no way out of the debt death trap. Or is there? There is actually a way out. It’s the only solution left, really, and that’s inflation.
- Deflation increases the real value of debt. With deflation, the value of money increases, making it more burdensome to pay off debt. This is why debtors hate deflation, and guess who is the world’s largest debtor nation? That’s right, the U.S.
- On the other hand, inflation decreases the real value of debt. It’s easier to pay down debt because you’re paying back debt with dollars that are less valuable than when you originally borrowed them.
The Fed has failed to produce inflation for over a decade now, despite all the trillions of dollars it’s fabricated….[so] how can the government and the Fed produce inflation now?
- The solution is to increase the price of gold in order to change inflationary expectations. That will increase money velocity and get the growth engine running again. The Fed could actually cause inflation in about 15 minutes if it used this method.
- FDR did this to perfection in 1933, and his actions began to dig us out of the Great Depression. Jerome Powell, Biden and his Treasury Secretary Janet Yellen could do it again if they wanted to…but
how could they increase the gold price to increase money velocity and change inflation expectations?
Inflation in 15 Minutes
Here’s how they can do it:
- The Fed can call a board meeting, vote on a new policy, walk outside and announce to the world that effective immediately, the price of gold is $5,000 per [troy] ounce [i.e. ozt].
- They could make that new price stick by using the Treasury’s gold in Fort Knox and the major U.S. bank gold dealers to conduct “open market operations” in gold.
- The Fed would be a buyer if the price hit $4,950/ozt or less and a seller if the price hits $5,050/ozt or higher. They would print money when they buy and reduce the money supply when they sell via the banks.
- The Fed would target the gold price rather than interest rates.
…A rise in the price of gold from $1,900/ozt to $5,000/ozt…[would be] a massive devaluation of the dollar when measured in the quantity of gold that one dollar can buy…[and cause] massive inflation in 15 minutes: the time it takes to vote on the new policy.
It’s Happened Before
- The first time this happened was in 1933 when President Franklin Roosevelt ordered an increase in the gold price from $20.67/ozt to $35.00/ozt, nearly a 75% rise in the dollar price of gold. He did this to break the deflation of the Great Depression, and it succeeded. The economy grew strongly from 1934-36.
- The second time was in the 1970s when Nixon ended the conversion of dollars into gold by U.S. trading partners. Nixon did not want inflation, but he got it. Gold went from $35/ozt to $800/ozt in less than nine years, a 2,200% increase. U.S. dollar inflation was over 50% from 1977-1981. The value of the dollar was cut in half in those five years.
History shows that raising the dollar price of gold is the quickest way to cause general inflation. If the markets don’t do it, the government can. It works every time. Would the government and the Fed consider the gold trick I just described? They may have no choice ultimately….[because] it’s the only way to keep America from going broke and falling into a sovereign debt crisis.
Unfortunately, [raising the dollar price of gold would] also slash the value of the dollar. Your savings would quickly evaporate, and your standard of living would suffer…[so] I recommend you put around 10% — but no more than 20% — of your investable assets into physical gold. I also recommend select gold stocks, which can massively leverage the spot price of gold to produce enormous returns. …[The above actions would] give you the protection you need to safeguard your wealth and grow it.
Editor’s Note: The original article by Jim Rickards, has been edited ([ ]) and abridged (…) above for the sake of clarity and brevity to ensure a fast and easy read. The authors’ views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.
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