In moves that should have surprised no one, last week Zimbabwe defaulted on debt repayments and the United States raised its debt ceiling limit to avoid defaulting.

Zimbabwe owed Caledonia Mining a mere $3 million. Because the debt was in US dollars and could not be printed (at least not by the Zimbabwean central bank), Zimbabwe could not pay.

Had the debt been in Zimbabwean dollars, the Reserve Band of Zimbabwe (RBZ) could have printed more worthless Zim dollars and given them to Caledonia Mining. Instead, the RBZ simply told Caledonia , “We’ll pay you later.” Good luck with that, Caledonia.

Meanwhile, the US owes about $12.3 trillion, a number that is increasing daily by about $3.83 billion. If the Senate had not voted to raise the debt ceiling limit, the US would default in a few months. There is a big difference, however, between Zimbabwe and the United States.

Zimbabwe is a socialist basket case, which was the jewel of Africa when it was known as Rhodesia. Its currency has not enjoyed acceptance outside Zimbabwe in decades. No one wants Zim dollars, not foreigners, not Zimbabweans. The more Zim dollars they print, the higher the rate of inflation, which hit a monthly rate of 79.6 billion percent in late 2008. One index put Zimbabwe’s rate of inflation at 89.7 sextillion percent. (Frankly, I don’t believe any degree of accuracy can be relied upon when calculations result in such numbers. Basically, the RBZ has inflicted hyperinflation upon Zimbabwe.)

The United States, while not yet a basket case, is, nonetheless, on the road to socialism, and its currency is being inflated just like the Zim dollar, albeit at not the same rate. And, at this time, the dollar is the world’s primary reserve currency. In not too recent time, the dollar was the world’s only reserve currency, but those days are gone. Massive government spending on domestic programs and the costs of undeclared wars resulted in deficit spending and gargantuan debt that knocked the dollar from its lofty perch.

While I am not ready to predict a fall for the US dollar as precipitous as the one suffered by the Zim dollar, our politicians and “leaders” have embraced socialism, a forced economic system that destroys the incentive to produce. When the private sector ceases producing desirable goods, the nation’s currency become less desirable .

It is evident to anyone with eyes open that governments are not capable of producing the goods that people want. In Zimbabwe, next to nothing is produced, the government having destroyed the private sector. Next to nothing is imported as no one wants Zim dollars. Zimbabweans suffer.

The US dollar remains the world’s primary reserve currency partly because it once was redeemable in gold and because today the US still produces goods wanted by the marketplace. To shoppers, this may seem unbelievable because it is next to impossible to find retail goods not manufactured in China. But, the US remains a major manufacturer in the world despite China having captured the retail sector. All of which means dollars will still buy some things. Another demand for dollars: most oil sales are still priced in dollars.

While the US dollar is not yet set to become a Zim dollar tomorrow, the potential is there. Zimbabwe went completely socialistic in less than three decades, with the government taking over nearly all aspects of economic life. Less than thirty years from prosperity to ruination. But, Zimbabwe is a small nation.

In the US, socialists have been grinding away since the War Between the States, and they made huge strides under Woodrow Wilson with the formation of the Federal Reserve System and the implementation of income tax. So accepted has become socialism that some 40% of the American people seem eager to have the government take over control of health care. And, sadly, General Motors is now known as Government Motors.

Another fifty pages could be used to note the socialistic programs in the US, everything from agriculture and energy to banking and retirement. (Yes, Social Security is a socialistic program.)  Most readers are well aware of the trend toward socialism in the US. The point is that as socialism grows, the productive sector weakens as government destroys the incentive to employ capital and take risks. As our ability to produce goods dies, the dollar will die also. For foreigners—and Americans for that matter—to want to hold dollars, there must be products consumers want. F.A. Hayek, who was awarded the 1974 Nobel Prize in Economic Science (back when the Nobel Prize meant something), called socialism The Road to Serfdom.

To solve today’s economic woes, (at least that is what they think they’re doing) politicians simply raised the debt ceiling so that the Treasury can sell more debt to fund make-work programs and our war efforts. The big buyer of US debt today is the Fed. And, where does the Fed get the dollars with which it buys US debt? The Fed creates them out of thin air. If the Fed creates too many dollars, the dollar will go the way of the Zim dollar. But when?

I know of no one who claims to know the answer to that question, but insomuch as the socialists have been pounding away for 150 years, the dollar could, from this point, go down in less time than it took for the Zim dollar to become worthless.

The Federal Reserve System, the Fed, is the most important financial institution in the nation.  Yet few Americans understand the Fed’s real purpose for existence and the dangers it presents to our nation’s financial well-being.  However, Congressman Ron Paul’s book End the Fed, a New York Times bestseller, is changing that.

Simply, the Fed is a central bank, which has the legal authority to “create money out of thin air.”  As Congressman Paul notes, as have other critics of the Fed have noted, it is an inflation machine.  Rising prices across the board are not—and have never been—the fault of OPEC, unions or greedy corporations.  Inflation is a monetary phenomenon that lies primarily at the door of the Fed.  Fractional reserve banking deserves its share of the blame for inflation, but fractional reserve banking is exacerbated by the very existence of the Fed.

First elected to Congress in 1976, Ron Paul became a thorn in the side of the Fed, annually introducing a bill to dismantle the Fed.  In no year could the Congressman find even one cosponsor to his bill.  The Fed is held with such esteem by members of Congress that no one will stand alongside Dr. Paul on this issue.  He was a voice crying in the wilderness, and I don’t doubt but that many members of Congress ridiculed him for his position on the Fed.  Now, Ron Paul may be David, about to slay Goliath.

When the Fed created literally trillions of dollars to bailout large financial institutions and Ben Bernanke, Fed Head, had the audacity to tell Congress that he was not going to reveal who got the money much less how much they got, there was an uproar across the country.  For perhaps the first time ever, the Fed was the focal point of public criticism, and Ron Paul called for a real audit of the Fed with HR 1207.

So intense have been the attacks on the Fed that for the first time it hired a lobbyist to defend its position on Capitol Hill.

Paul’s Audit the Fed bill has 55 cosponsors and passed out of the House Financial Services Committee by a vote of 43 – 26.  The Senate companion bill, S 604, has 31 cosponsors.  Suddenly, Congressmen and Senators climbed on board the Ron Paul wagon.  Undoubtedly, cosponsors climbed aboard not because they suddenly saw the evils of the Fed but because they saw the handwriting on the wall.

For nearly a hundred years, the Fed pretty much successfully concealed that it was the beast that its critics had said it was.  To this day, most Americans do not know that the Fed, with its loose money policies of the 1920s, was the cause of the Great Depression of the 1930s.

In the 1970s, when prices rose at double digits rates, only Austrian economists correctly saw the Fed as responsible.  The media, which by then had become fairly much the Fed’s lapdogs, blamed the “oil shock.”

Other times, rising price levels were attributed to “cost-push inflation,” a spurious theory that blamed businesses.  When the CPI and GPI rose “only” 2%-3%, Americans were told “a little inflation is good.”  Now, though, Ron Paul has told the truth.
 
The Fed is not a beneficent organization established for the good of mankind but exists solely for the benefit of big banking.

End the Fed is Ron Paul’s assessment of an institution whose machinations he has sought to expose since before becoming a member of Congress.  He relates how he came to realize the immorality of the Fed and the inflation it creates.  And, he tells of his conversations with Fed Heads Greenspan and Bernanke when they appeared before House committees.

Paul pulls no punches.  He lays the blame for the financial crisis of 2008 and the housing crisis squarely at the feet of Alan Greenspan.  “History will show that Greenspan, during his years as Fed chairman (1987-2006), planted all the seeds of the financial calamity that erupted in 2007 and 2008.”

Further, Paul declares Obama’s “solution” to the problem not a solution at all.  “. . . the inflation and debt accumulation of the Obama years will not inflate our way out of it.  This depression will likely last and last.  (Note that Paul calls our present economic woes a depression, not a recession.)  If the depression lasts a decade or more, its length cannot be blamed solely on Greenspan.  That blame will be placed on the current Federal Reserve Board, Congress, the President, the Treasury, but above all on Keynesian economic policy, the same philosophy that gave us the Great Depression of the 1930s.”

Many persons familiar with Ron Paul’s assessments of our problems are quick to point out that he is a doctor, “not an economist.”  To that, I would remind them that Ron Paul has studied economics his entire adult life.  Further, he has hobnobbed with some of the foremost economic thinkers of the Austrian economic school, such greats as Murray Rothbard, Hans Sennholz, F. A. Hayek and the master himself, Ludwig von Mises.

Additionally, Ron Paul has authored at least ten books on economics and political thinking.  The Revolution, a Manifesto, like End the Fed, became a New York Times bestseller.  With Lewis Lehrman, Paul coauthored The Case for Gold, which was a minority report to the 1981 U.S. Gold Commission, a Ronald Reagan initiative to study the role that gold should play in our monetary system.   (The commission was stacked with anti-gold members and the minority report was one of only two benefits to come from the commission’s work.  The American Eagle bullion coin program was the other.)

Ron Paul’s grasp of economics and understanding of the political process make him eminently qualified to write about economics and to make economic forecasts.  Sadly, Paul is not optimistic about the immediate outlook for our economy.

End the Fed is only 210 pages, divided into fifteen chapters.  Although Paul’s explanation why this depression likely will “last and last” is scary, his Chapter 4, Central Banks and War, is a shocker.  Simply put, central banks facilitate war and give politicians fewer reasons to seek political solutions to differences with other nations.  “It is no coincidence that the century of total war coincided with the century of central banking.”  Before the days of central banks (European as well as our Fed), wars resulted in higher taxes and shortages as resources were diverted from the domestic economy to the war effort.

When politicians have to tell the people that the wars they are about to embark upon will raise taxes and create shortages, political solutions become viable alternatives.  When the costs of the wars can be hidden through the creation of new money via central banks, political solutions are less likely.  Sadly, many investment banking houses actually agitate for war as they stand to make billions of dollars issuing and trading in the bonds and securities that are sold as a nation gears for war.

Ron Paul’s End the Fed is must reading for anyone seeking to survive today’s financial turmoil.  Understanding the problem is the first step toward solving it.

Rob McEwen, who can almost be called a living legend in the gold mining industry, says gold prices may reach $5,000 an ounce – and as soon as 2012 but maybe not until 2014.  McEwen sees loss of faith in the dollar being the reason for gold’s coming rise.

“Money supply has expanded so rapidly that there are a lot more dollars looking for a steady home,” McEwen said in a Bloomberg Television interview. “Governments cannot help themselves. They want to help the economy. They are printing money. They are going into debt on a horrific scale, and that will depreciate the value of the dollar.”

The coming price rise represents a “once-in-every-300-years” phenomenon, McEwen said. He maintained his previous forecast that gold will rise to $2,000 an ounce by the end of this year.

Such forecasts have been made by numerous newsletter writers and usually can be dismissed as hype.  Often, those predictions come in advertisements for their newsletter.  But, McEwen’s prognostication carries weight.

McEwen invests tens of millions of dollars in his beliefs.  Many of the newsletter writers are trying to make their first million.  Still, there are credentialed newsletter writers who have called for gold prices in the multiple thousands of dollars.

Richard Russell, editor of Dow Theory Letters, has written that before this primary bear market in stocks is over, the Dow and the price of gold will meet.  Basically, Russell expects that somewhere in the future we will see something like 3,000 on the Dow and $3,000 gold, but maybe it will be 4,000 on the Dow and $4,000 gold.  Or, maybe it will be 5,000 on the Dow and $5,000 gold.

Jim Sinclair, not a letter writer but an acclaimed commodities investor, sees $1,650 gold this year.  Not as optimistic as McEwen, but nonetheless a rosy outlook.

Philip Manduca, Head of Investment and Chairman of the Investment Committee for ECU Group (London), sees gold topping $2,000 “before 2010 is out.”

Although gold production has fallen in recent years, that is not the driving force behind gold’s price rise over the last decade.  The reason for gold’s ascent is concern about the dollar—and other fiat currencies for that matter.  Considering Washington’s “solutions” to today’s financial woes, investors have reasons to be concerned about the dollar.

The outlook for gold—and silver—is bright.  Rob McEwen says it is very bright.

A long-time client, and successful commodities trader I add, sent the below:

The following comments come from a Merrill Lynch publication today.

“To repeat our Mantra:
1) Whatever MUST happen, WILL happen.
2) In a debt crisis, inflation is the ONLY solution.
3) The FED + US Treasury can create inflation.
4) As such, there WILL be Inflation.

In this light, we will remind you that whenever you hear someone whisper to you that “It is different this time,” we urge you to grab your wallet and run. It is never truly different, only the flavor and the timing have been altered. Concurrently, we will note that “Pigs can fly, when shot out of a large enough cannon”.

As such, the ability of the FED+US Government to simultaneously print money and lower interest rates can only end in tears. If this were NOT the case, then Zimbabwe would be a paradise and the Weimar Republic would still exist.”
If I have read and understood this message correctly, I believe it suggests HARD ASSETS are the things to own. I believe this so I am adding HARD ASSETS during periods of weakness, such as we have this week.

Always do you own due diligence.

Friday evening, December 4, 2009 my wife and I will be honored to hold a reception for the world’s most popular congressman, Ron Paul. The good doctor will be in the Phoenix area in support of Campaign for Liberty, an educational organization that sprang from Dr. Paul’s exhilarating 2008 campaign for the presidency.

Earlier Friday, Dr. Paul will address the Arizona State University chapter of Young Americans for Liberty at ASU’s Hayden Lawn. Following the address, he will sign copies of his bestseller, End the Fed. The reception will be held at our home 6:00 p.m. to 8:00 p.m. A $250 donation to Campaign for Liberty earns entrance. Attendance will be limited to 80 persons.

I’ve often joked about why I should support Ron Paul’s efforts when, if he were successful, his programs would effectively put me out of business. Dr. Paul believes in the gold standard, under which people could redeem their paper dollars (digital dollars nowadays) for gold at their local banks, as was the case before Roosevelt’s 1933 Executive Order # 6102, which called for all Americans to turn in their gold and gold certificates to the government.

Prior to 1933, U.S. paper currency was freely redeemable in gold coin coins, the most common of which were Double Eagles ($20 Liberties and $20 St. Gaudens), Eagles ($10 gold coins) and Quarter Eagles ($5 gold coins). Yes, that means that before Roosevelt’s dastardly deed, a $20 bill could be exchanged for a $20 gold coin. Today, a common-date circulated $20 Double Eagle carries a paper dollar price of about $1500.

Actually, though, if Ron Paul were successful and there were no need for CMI Gold & Silver Inc. to be in business, I and my staff would have to find other forms of employment. Maybe I would become a furniture maker and increase the wealth of our country (and the world) ever so little. As is it, my economic activity creates no wealth.

I’m not apologizing for making it possible for Americans to convert their dollars into gold. I see the ownership of gold (and silver) as essential to financial survival nowadays. But, if the nation were on the gold standard and banks redeemed paper money for gold, I would have to do something else, and maybe that something else would be positive, like producing something to be consumed.

Further, and obviously, Dr. Paul wants to End the Fed, as his bestseller is titled. Because the Fed is an inflation machine, ending the Fed (at least its money creation ability) would also lessen the need for gold bullion dealers to exist, thereby possibly adding more workers to the productive sector.

For those readers who live in Arizona and would like to attend the reception, I urge them to make the $250 donation ASAP. (Be sure to mark the $250 Event Ticket radio button at the bottom of the page.) I’m optimistic that we will reach the 80 person limit, and I am certain it will be an exciting evening with great conversation with a lot of good people.