It's Time for America to Take its Medicine

The AP article about gold breaking $1000 that is featured prominently on today's Drudge Report comes tantalizingly close to getting to the root cause of this historic milestone before copping out with a false analogy about 1980 gold prices in inflation adjusted terms and then stopping short of saying it like it is.

The intentional debasement of the US dollar by the Federal Reserve is causing a flight of wealth out of dollars and into the safe harbor of real money.

What is real money? It's anything that has intrinsic value and can be used as barter to procure goods or services. The US dollar is not, by definition, money. Its value is not inherent, it does not represent any tangible asset. It only has value based on perception and supply. If the supply increases (and it does everyday as the print and borrow orgy in Washington continues unabated), then the value goes down.

History is replete with examples of the perceived value of currency collapsing into a pile of worthless paper as it is printed without regard for the simple economic principle of supply and demand in mind, namely that the more of something there is, the demand and, hence, the value of it, is diminished.

There is a precedent for this in our own history. You may have heard the term "not worth a continental." The continental dollar was the first national currency in these United States. The founders estimated that there was about $10 million worth of precious metals in the colonies at the time and proceeded to print notes that reflected that estimate. Unfortunately, as war debt mounted, the natural inclination was to print more currency to cover the costs. Soon the colonies were awash in more than $50 million "worth" of continentals. The currency was so debased that people were using them as kindling as they were now less valuable than dry sticks. Hence the term and a valuable lesson learned.

After the war, during the continental congress, it was agreed that only gold and silver could be used as legal tender, a hedge against a future "continental" debacle. Although this remains the constitutional law of the land, the creation of a central bank, the Federal Reserve, in 1913 and the severing of the dollar from the gold standard during the Nixon administration, has once more exposed our wealth to the inflationary trajectory of a pure paper economy.

With US troops in 130 countries, 2 wars ongoing and 2 more looming, massive new federal spending, out of control entitlements (social security and medicare) along with the mal-investment and inflation caused by the fiscal practices of the Fed and the Bush administration, in the last year alone, the dollar has lost 17% of its value relative to a basket of other currencies and a stunning 43.8% of its value relative to gold.

Without a radical reform program that will divest the Fed of the power to print money through control of interest rates and a return to some sort of value-based currency such as the gold standard, there is little hope that the dollar can be saved. With its demise, the savings and retirements of millions of Americans will be wiped out. It has already begun, but we have only seen the beginning of this catastrophe.