Greed, War and the Dollar’s Demise Part – 3
Run, Bay, Run Bank runs are also enormously deflationary events because when you deposit one dollar into the bank, the bank carries that dollar as a liability on its books. It someday owes that dollar back to you. However, under a fractional reserve system, the bank is then allowed to create currency in the form of credit (loans), in an amount many times that of the original deposit which it carries on its books as assets. This is normally not a problem, as long as the bank isn’t loaned-up to the maximum amount permitted. With just a small amount of “excess” reserves, the bank can cover they-to-day fluctuations because most of the time deposits and withdrawals come close to balancing out. But a serious problem can develop when too many people show up to make withdrawals at the same time without the counterbalancing effect of the relatively same amount of people making deposits. If withdrawals exceed deposits, the bank will draw from those “excess” reserves. Once those “excess” reserves have been used , however, fractional reserve banking is then thrown into vicious reverse. This was what was happening in 1931, and it was one of the major contributing factors to the collapse of the U.S. currency supply. By November 1930, bank failures were more than double the highest monthly level ever recorded. Over 250 banks with more thann$180 million in deposits would fail that month. But this was only the beginning. The largest single bank failure in U.S. history happened on 11 December 1930. The sixty-two-branch Bank of the U.S. collapsed. This failure would have a cascading effect, causing over 352 banks with more than $370 million in deposits to fail in that month alone. Worst of all, this was before deposit insurance. People’s entire life savings were lost in the blink of an eye. Then to top it off, 21 September 1931, Great Britain defaulted from the gold exchange standard throwing the world into monetary chaos. Foreign governments, along with businesses and private investors from the U.S. and around the world, began to fear that the U.S. might follow suit. Suddenly, there was a dash for cash. Within the US, banks were running out of gold coin, and at the same time tremendous outflows of gold began to leave the vaults of the Federal Reserve, destined for far-off lands. The pyramid scheme that was the gold exchange standard, began to crumble. To stop the bleeding, the Fed more than doubled the cost of currency in the U.S. raising the rates from 1.5 to 3.5 percent in one week. As a result, between August 1931 and January 1932, 1860 banks with $1.4 billion in deposits suspended their operations. However, 1932 was an election year. Three long years into the Depression people were desperate for a change and, in November, Franklin Delano Roosevelt was elected president. Even though his inauguration wouldn’t be until March, rumors started flying that he would devalue the dollar. Again gold flowed out of the vaults as foreign governments, foreign investors, and the American public lost faith in the dollar, and the most devastating bank run in American tory began. But this time the American public wouldn’t be fooled. As Barron’s put it in its 27 March 1933 issue: “It has been aptly observed that the stages of deflation since 1929 have been the flight from bank deposits into currency and finally, a flight from currency into gold.” Incredibly, the currency supply of the U.S. was falling so fast that if it continued at that pace for a year on 22 percent of it would remain. The U.S. economic outlook was dire, and it seemed as if the dollar would fall into oblivion. From the book: “Guide to Investing in Gold and Silver” by Michael Maloney
Greed, War and the Dollar’s Demise Part – 2
The Rise of Credit Culture During the 1920s, many Americans stopped saving and started investing, treating their brokerage account as a savings account, much like many Americans treated their homes in our most recent housing bubble. But a brokerage account is not a savings account, nor is a house. The value of a savings account depends on how many dollars you put in. But the value of a brokerage account or a house depends solely on the perception of others. If someone thinks your assets have value, then they do, but if they don’t think they have value, then they don’t. In a credit-based economy, whether the economy does well or poorly, is largely based on people’s perceptions. If people think things are great, then people borrow and spend currency, and the economy flourishes. But if people have the least bit of anxiety, if they have doubts about tomorrow, then watch out! In 1929, the stock market crashed, the credit bubble burst and the U.S. economy slid into depression. The Mechanics of a Depression The popping of a credit bubble is a deflationary event, and in the case of the Great Depression, it was massively deflationary. When we take out a loan from the bank, the bank does not actually loan us any of the currency that was on deposit at the bank. Instead, the second the pen hits the paper on that mortgage, loan document or credit card receipt that we are signing the bank is all to create those dollars as a book entry. In other words, we create the currency. The bank is not allowed to do it without our signature. We create the currency, and the bank gets to charge us interest on the currency we created. This brand-new currency we just created then becomes part of the currency supply. Much of our currency supply is created in this way. But when a home goes into foreclosure, a loan gets defaulted on, or someone files bankrupt, that currency simply disappears back into currency heaven where it came from. So as credit goes bad, the currency supply contracts, and deflation sets in. This is what happened in 1930-1933 and it was disastrous. As a wave of foreclosures and bankruptcies swept the nation, one-third of the currency supply of the U.S. evaporated into thin air. Over the next three years, wages and prices fell by one-third. From the book: “Guide to Investing in Gold and Silver” by Michael Maloney
Greed, War and the Dollar’s Demise Part – 1
With the outbreak of World War 1, as with all the historical examples we’ve covered in this book, the combatants halted redemption in gold, increased taxes, borrowed heavily, and created additional currency. However, because the United States did not enter the war for almost three years, it became the major supplier to the world during that time. Gold flowed into the U.S. at an astounding rate, increasing its gold stocks by more than 60 percent. When the European Allies could no longer pay in gold, the U.S. extended them credit. Once the U.S. entered the war, however, it too spent at a rate far in excess of its income. The U.S. national debt went from $1 billion in 1916 to $25 billion by the war’s end. The world currency supply was exploding. After the war, the world longed for the robust trade and economic stability of the international gold standard that had worked so well before the war. Thus, throughout the 1920’s most of the world governments returned to a form of the gold standard. But the standard employed wasn’t the classical gold standard of the prewar period. Instead, it was a pseudo-gold standard called gold exchange standard. Building Pyramids After the war, the United States had most of the world’s gold. Conversely, many European countries had large supplies of U.S. dollars (and depleted gold reserves) from the world’s central banks and that the US dollar and the pound will be redeemable in gold. In the meantime, the U.S. had created a central bank (the Federal Reserve) and given it the power to create currency out of thin air. How can you create currency out of thin air and still back it with gold, you ask? You impose a reserve requirement on the central bank (the Federal Reserve), limiting the amount of currency it creates to a certain multiply of the units of gold it has in the vaults. In the Federal Reserve Act of 1913, it specified that the Fed was to keep a 40 percent reserve of “lawful money” (gold or currency that could be redeemed for gold) at the U.S. Treasury. Fractional reserve banking is like an inverted pyramid. Under a 10 percent reserve, one dollar at the bottom can be expanded, by layer upon layer of book entries until it becomes $10 at the top. Adding a fractional reserve central bank, underneath fractional reserve commercial banks, is akin to placing an inverted pyramid on top of an inverted pyramid. Before the Federal Reserve, commercial banks, under a 10 percent reserve ratio, could hold a $20 gold piece in reserve and create another $180 of loans, for a total of $200. But with the Federal Reserve as the foundation under the banking pyramid and having a reserve requirement of 40 percent, the Fed could put $50 in circulation for each $20 gold coin it had in the vaults. Then the banks, as the second layer in the pyramid could create loans of $450 for a total of $500. Now there was an inverted pyramid, on top of an inverted pyramid, on top of an inverted pyramid. This was highly unstable. Ultimately the gold exchange standard was a faulty system that governments imposed on their citizens, which allowed the governments to act as if their currencies were as valuable as before the war. This system was destined for failure. From the book: “Guide to Investing in Gold and Silver” by Michael Maloney
What can we expect from gold and silver in 2023?
See if this review of 22 things that happened with gold and silver in 2022 helps you prepare for 2023… Gold #1. Central banks bought more gold through Q3-2022 than any year since 1967. History buffs will recall the US was on a gold exchange standard at the time. According to the World Gold Council, the demand has been “primarily driven by a flight towards safer assets.” Central banks have been net buyers of gold since 2009. This is a good example of “do what they do, not what they say.” #2. China, for the first time in 3 years, bought more gold for its official Reserves. It purchased 32 tonnes in November, when prices were around $1,650. China’s “official” gold reserves now stand at 1,980 tonnes. #3. The US dollar pummelled markets this year, even weakening the gold price. Some investors concluded the dollar and the Fed were indeed in control. #4. “It won’t be just another recession,” says Economist Mohamed El-Erian. “We’re headed for a profound economic and financial shift.” That is quite the warning coming from a mainstream economist who’s not prone to hyperbole. To whatever extent he’s right, gold ownership is one of the strongest financial assets we can own to get through it. #5. A Social Credit Score gained some popularity earlier this year. Given the vulnerabilities of the current monetary system, we think a Hard Money Credit Score is more important. #6. A Central Bank Digital Currency (CBDC) may be gaining steam with some governments, but this automatically raises concerns about personal privacy. Physical gold and silver, on the other hand, are outside the banking system, can’t be “programmed,” and are tangible hold-in-your-hand assets. #7. Has anything changed with the 3 D’s? Debt is at all-time highs, Deficit spending has become a way of life for politicians, and stubbornly high inflation Devalues our fiat purchasing power every month. This is not a time to sell gold but to buy it. #8. Gold holds purchasing power, but in many instances can gain purchasing power. It did that very thing with US Savings Bonds. Silver #9. The gap between annual silver supply and demand has ballooned, creating the biggest deficit in decades. Supply at the LBMA is also dropping precipitously. #10. Could silver really hit $500?! I picked the brain of a grizzled industry veteran at a conference this fall, and he told me why he thinks silver will indeed reach that lofty level. He even gave me a timeframe. #11. How long can silver remain cheap? Not much longer, says this clue from the primary silver producers. #12. A spike in silver is coming, as comprehensive research on the gold/silver ratio shows. #13. Silver’s DNA is boring-boring-BOOM! That’s what history clearly demonstrates. Monetary Uses and More #14. Wanna buy a beachfront condo with gold? Or how about a new car, new boat, beer, wine, or luxury resort stay? These could all become more affordable in the near future—but only if you use gold, not depreciating fiat currency. (DISCLAIMER: Mining stocks are covered in this video and should not be considered recommendations to any investor). #15. If you think a recession or stock market crash is coming, you may want to consider what history shows about gold’s hedging abilities. #16. “PermaCrisis” was the Collins Dictionary word-of-the-year, referring to “an extended period of instability and insecurity.” Very apropos, and with a “decade of volatility” ahead of us, gold should be a cornerstone asset in every portfolio. #17. Will the Fed pivot in 2023? My research says they will be forced to, starting with an end to rate hikes long before the CPI reaches their 2% goal. #18. More currency creation is virtually guaranteed. The easiest “solution” to central bankers is to print currency, a strategy they employ almost every time they run into a problem. It signals we should buy the one asset that can’t be diluted, debased, or destroyed. #19. Mike Maloney’s best quote of 2022 is a warning: “What’s coming will be the weirdest, most twisted thing you’ve ever seen, something that will be very hard to predict. So, the more educated you are on history the better chance you have at surviving it.” #20. More conference and mine tour invitations… the number of conferences I’ve been asked to speak at and the number of mine site visit invitations I’ve received definitely jumped in 2022. While the recent drop was due to Covid, there is clear interest building in the industry. That bodes well for 2023. #21. Can you guess the top selling silver product at GoldSilver in 2023?! Based on the number of orders, it may surprise some investors to learn that it wasn’t Eagles or Maple Leafs, nor the 100-ounce bar (last year’s winner). It was InstaVault Silver. And it’s easy to figure out why: with silver premiums still stubbornly high, it’s a way to own physical metal at a much lower premium. #22. What was the top selling gold product at GoldSilver.com? It’s still the 1-oz American Gold Eagle Coin (common date). Ready or Not… A high degree of uncertainty surrounds us—with the markets, the economy, the monetary system, geopolitics, and even the increased possibility of a black swan. We hope, like us, you’re prepared for whatever may happen in 2023. Article courtesy of Jeff Clark from GoldSilver
