Monetary Inflation: How Increased Paper Wealth Can Translate into a Lower Standard of Living

April 17, 2008

Consider this. If you owned a prime piece of real estate in 2001 that was valued at $1.8 million that cost 7,200 ounces of gold to buy it back then (at a price of about $250 an ounce), and if you could now sell that same property and receive $2.6 million for it, even at this inflated price, it would now require less than 2,800 ounces of gold (at about $930 an ounce). So while you may have become richer in the paper currency of U.S. dollars, this increase in paper dollars does not mean much if this increase in paper will enable you to buy less “stuff” today. Certainly, despite the inflated price of this property in paper dollars, you have become much poorer in ounces of gold (real currency). Thus, Central Banks, by inflating money, create the illusion of growing wealth when in fact they are stealing wealth from right underneath our very noses. This is EXACTLY what Alan Greenspan meant when he said “deficit spending is simply a scheme for the confiscation of wealth”. By the way, Mr. Greenspan was only bold enough to make such a statement in 1966, decades BEFORE he knew that he would eventually became the Chairman of the U.S. Federal Reserve.

Perhaps, an even easier way to understand the above illustration is as follows. If you had liquidated that $1.8 million of real estate in 2001 and bought a basket of goods that contained a couple of luxury cars, a small condominium, food for a couple of years, a two week vacation somewhere, all your entertainment expenses and other assorted goods, and now liquidated that $2.6 million property today and bought the EXACT same basket of goods as you did back in 2001, you probably would discover that due to monetary inflation, that same basket of goods would now cost you in excess of $3 million, if not in excess of $3.5 million.This is the exercise that would truly tell you what inflation is, NOT the ridiculous CPI figures that the government releases.

That is why, even with the current unsustainable “solutions” being implemented by the Feds today, even should a miraculous upward surge in U.S. and other global stock markets occur, it can only incur because the U.S. dollar is being purposefully and greatly inflated. Thus, those that truly understand the game of monetary policy that is imposed upon financial markets by Central Banks today would have no problem understanding that a game of financial Russian roulette has been thrust into our laps as the preferred solution to the financial crisis we face today.

Even in a so-called “best case” scenario for U.S. stock markets and major global markets with strong ties to the U.S., you may very well still end up losing substantial wealth if you truly understand the inflationary tactics that are being implemented in an attempt to manufacture another up leg in U.S. markets. Still, despite the intervention (or some would say meddling) of the U.S. Federal Reserve in free markets, I hold strong reservations as to whether another strong leg upward in U.S. markets is possible. Despite the excessive monetary inflation tools that Central Banks have at their disposal ever since the U.S. Federal Reserve decided to take the world off the gold standard, decades of manipulation have led us to the verge of a tipping point that even excessive inflationary policy may not be able to prevent. If you understand this, it’s quite easy to understand why certain elements of the investment and financial industry desperately want you to view gold, silver and other precious metals as “speculative” and “risky” and paper driven assets such as traditional stocks and paper currency as “safe”. A simple understanding of global monetary policy dictates that the exact opposite is true.

[tags]monetary inflation, hyperinflation, U.S. Federal Reserve, financial crisis, U.S. dollar crisis, gold bull, commodities[/tags]

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