BofA and Citibank are two of the world’s largest lenders.  If their credit ratings go down, their costs of borrowing will go up, resulting in higher costs for borrowers.  Looks like another barrier to a quick turnaround in the world’s economy.

Meanwhile, Moody’s, the other premier credit rating agency, warned early this month, again according to the Financial Times, that “the triple A sovereign credit rating of the US would come under pressure unless economic growth was more robust than expected or tighter action was taken to tackle the country’s budget deficit.”

The Obama administration’s proposed budget for 2010 forecasts a deficit of $1,565 billion ($1.565 trillion), which is 10.6% of projected gross domestic product, the highest ratio of debt to GDP since WWII.  Even more alarming, projections of the overall debt-to-GDP ratio for the US are seen as rising from 53% in 2009 to 73% in 2015 and 77% by 2020.

Still, Moody’s says this understates the overall US debt level.
“Using the general government measure, including state and local governments as well as the federal government, which is used internationally, this ratio would be over 100 percent in 2020.”

Ironically, a few days ago gold’s sharp price decline was attributed to money pouring into dollars because of concerns of how Greece’s financial problems would impact the European Union and its currency, the euro.  It appears that scared money moved from the weak to the less weak.

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.

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.

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.

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.

Several years ago, the IMF let known its intentions to sell 400 tons of gold and announced that the sale would be in compliance with the Central Bank Gold Agreement (CBGA) so as not to disrupt the market. Instead of selling under the CBGA, the IMF sold directly to the Reserve Bank of India.

Some analysts are saying that they are surprised that the buyer was India and not China. Actually, I think they hoped that China would be a buyer as the IMF sold under the CBGA. Neither China nor India gave any indications of dealing directly with the IMF.

Now, gold market analysts are speculating that China will take the remaining 200 tons. And, it is pure speculation because no analysts have pipelines to the decidafiers at the People’s Bank of China, as China’s central bank is known. More important, though, a major precedent has been set.

The argument against central banks buying gold has been that the central banks would be cutting their own throats. Since they are major holders of dollars, any purchases of gold would be attacks on the dollar because dollars would be eschewed in favor of gold. Now, the Reserve Bank of India has set a precedent: it is acceptable for central banks to convert large quantities of dollars into gold. Who will be next?

Possibly China, but why not Taiwan or Japan, both major holders of dollars.

I have no doubts but that the bullion houses that are short huge quantities of gold on the COMEX, as discussed in Gene Arnsberg’s latest Got Gold Report, were counting on the IMF sales being dampers on the price of gold. As I speculated in my September 12 post, sometimes the big boys are on the wrong side of the market.

This remains a major bull market for gold and silver. Investors already with big positions have the luxury of waiting on price dips to buy. Investors who have not yet entered the market should consider biting the bullet and entering at these levels. The major news about gold is to be bullish, and there is no way of putting a top on this move.

However, as of this writing, the Mint’s web site shows that 86,000 Buffalo Gold Coins have already been sold. Further, wholesalers have placed second orders with the Mint and were given no indications that the coins are in short supply. This seems to indicate that the Mint produced a large quantity before releasing them, and I’m now guessing that mintage of 2009 Gold Buffs easily will exceed 100,000. In 2008, the US Mint sold 172,000; in 2007, 167,500 coins were sold. In 2006, the first year they were minted, the Mint sold 323,000.

As discussed on our web page about Gold Buffalo Coins, packaging remains a problem. Of greater concern is that promotions of First Strike coins have already surfaced.

We caution against paying high premiums for so-called First Strike coins. Actually, since our 2006 expose of First Strike coins, most promoters now call them Early Release coins. By either name, we warn investors not to buy them at high premiums because the premiums on such coins do not hold up in the secondary market.

CMIGS has 2009 Gold Buffaloes in original packaging for immediate shipment. Buffs carry premiums a few dollars higher than the US Mint’s Gold Eagles.

Right now, Gold Buffaloes are priced the same as new 1-oz Gold Eagles. If demand exceeds supply, Buffs may pick up premiums as did 1-oz Gold Eagles during the 2008 financial crisis.

The Gold Buffaloes present an interesting situation. Federal law requires the Mint to produce Buffs every year, but the law does not state the quantity. Further, the Mint did not disclose the number of coins it plans to produce. However, the announcement said that “should demand exceed supply” the Mint will institute “allocation procedures.” Considering the how the Mint worded its announcement, it may not be planning on turning out many Gold Buffaloes.

If the Mint produces only 50,000 to 100,000 Buffalo gold coins, they could be really good buys, with premium potential in future years. Premiums could come from them being a low mintage year as well as from telemarketers promoting them. Telemarketers love to hype low-mintage coins. Of further interest is the Mint’s announcement about fractional ounce Gold Eagles.

Ordinarily, by October the Mint is gearing up for next year’s coins. Actually, in past years in late October and early November, the Mint has stopped selling current-year coins so as to dedicate all efforts to the following year’s production. This year, however, in December the Mint will take orders for 2009-dated fractional-ounce Gold Eagles for the first time this year. As with Gold Buffaloes, mintages of fractional-ounce Gold Eagles coins could be small.

Meanwhile, gold buyers wanting fractional-ounce gold coins should consider the fractional-ounce Krugerrands, which only recently became available. They are priced at government-issued fractional-ounce coin prices. However, the quantity for immediate shipment is not large as the importer has not been bringing in large quantities. The next shipment from South Africa is expected later this month.

If you would like to discuss buying Gold Buffaloes or fractional-ounce Krugerrands, call us at 800-528-1380. Our brokers take call 7:00 a.m. to 5:00 p.m. MST, Mondays through Fridays. If you would like to know more about doing business with CMI Gold and Silver Inc., visit our Doing Business with CMIGS page.

The first shipment is expected to hit the U.S. about September 24, and we expect to begin shipping to buyers the following week. Note: that is what we anticipate. We have absolutely no control over when the coins will arrive, but if the shipment time of these fractional Rands goes as recent imports of one-ounce Krugerrands have gone, the coins should be here as anticipated.

Three sizes will be available: ½-oz, ¼-oz and 1/10-oz. We anticipate the biggest demand for the 1/10-oz Rands and are going to attempt to carry a large inventory of them, which means we will be able to make prompt shipments to buyers—unless the demand is bigger than we anticipate.

We have not been told how many fractional Rands are being imported, and the importer does not know if the South African Mint will turn out additional fractional Rands in the near future.

On another note, as this is written we have ten Specials posted on our Specials Page, all of which are gold items. Generally, the items we put on the Specials Page are lesser-known gold or silver investments, forms of gold or silver that we cannot offer on a regular basis because we cannot always get them.

Still, they are good investments because they are priced much lower than if we had to go into the market to get the items. A good example: Austrian 100 Corona gold coins, which were standard gold bullion coins along with Krugerrands and Mexican 50 Pesos in the 1970s, are put on our Specials Page when available. The Specials Page offers investors opportunities to buy low premium gold.   As the items on the Specials Page are sold, they are removed.

If you would like to discuss buying the fractional Rands or any of the items offered on the Specials Page, call us at 800-528-1380. Our brokers take call 7:00 am to 5:00 pm MST, Mondays through Fridays.