If we want to know where we're going in life, it's very often instructive to take a look back and see what we can learn from previous experiences.
It's true that history never repeats exactly, but as Mark Twain once famously said, it does rhyme.
So, what can a trip down memory lane tell us about the possible future direction of our economy and the likely effects on our personal financial situations? In my view, in order to answer these questions there are a number of key turning points in the history of the Western financial system that we could potentially examine - from the creation of the US Federal Reserve way back in 1913, to Roosevelt's 'New Deal' in 1933 and perhaps the Bretton Woods agreement of 1944.
However, the date that sticks in my mind, and the one which I believe is likely to shine the brightest light on where we might be headed in years to come, is the 15th August 1971.
This was the date when US President Nixon closed the so-called 'gold window' - an act that I believe will eventually be recognised by historians as one of the greatest economic blunders, and even tragedies of all time.
To cut a very long story short, the consequence of Nixon's action was to break all links between paper money and the anchor of gold.
In other words, for the first time in the history of human civilisation, all money, wherever it was issued in the world, would no longer be backed by gold which, historically, had always served as both a reliable means of exchange and store of value.
From that point on, what we had instead was a worldwide system of floating paper currencies backed by nothing but government promises - promises to act responsibly and preserve the purchasing power of our money.
So, freed from the externally imposed financial discipline of a gold standard, how well have our governments managed to live up to their promises during the last 39 years? Well I did a bit of digging and I'm afraid I came up with some rather disturbing results.
According to the most recent data I could find on the web (and my thanks go to Mike Hewitt and Krassimir Petrov at the Dollardaze website for their impressive in-depth research), between August 1971 and December 2008 the supply of US dollars in the world increased by 16.
8 times and the purchasing power of those dollars has decreased by 81.
1%.
If, like me, you're a UK citizen, then you've done even worse - although the supply of pounds has only increased by a relatively modest 12.
6 times in that period, the purchasing power of those pounds has decreased by a devastating 88.
3%! Remember, these figures date from December 2008 which was well before the world went into money-printing overdrive with the recent rounds of 'quantitative easing'.
So much for government promises.
So what about gold? How has that performed as a store of value over the period in question? Well, its supply increased by just 1.
8 times over the period, roughly equating to the increase in world population, but its purchasing power actually increased by 310.
4%!! This should really come as no surprise, since governments can't print gold out of thin air (thus increasing its supply and decreasing its value).
So far, so interesting - but so what? These figures teach us that gold functions far better as a store of value than government paper, but what do they tell us about our financial destiny? Well, in order to try and answer this question we have to take another trip back in the time machine to the 1970s and look at how governments responded to the declining 'real' value of their currencies.
Bear in mind that governments aren't completely stupid - not when it comes to acting in their own best interests at least.
After abandoning the gold standard back in 1971, politicians found that people were losing faith in paper money as price inflation spun out of control.
Once gold, the competitor to paper money, shot up to a new all-time high of $850 an ounce in 1980, governments' instincts for self-preservation kicked in - they knew they had to act fast.
If people were turning away from their paper and considering using alternative forms of money, then governments feared they'd lose all authority and influence over people's lives - hence their power would evaporate.
After all, there'd be no point in taxing people if the 'money' used to pay the taxes was just a pile of worthless paper.
That simply couldn't be allowed to happen.
What did happen is that in 1981 the forces of paper money sent their champion into the ring to do battle with gold.
His name was Paul Volcker and he was the Chairman of the US Federal Reserve Bank at the time.
His mission was to restore people's faith in paper money - at all costs - and thus administer a devastating knock-out blow to gold.
The costs were indeed very high: by June 1981, interest rates in America had risen to an eye-watering 20%! Whole swathes of US manufacturing industry went bust and the so-called rust-belt was born.
At the time, Volcker was probably the most unpopular man in America and it was no surprise to see people burning effigies of him on Capitol Hill.
In the end though, he did achieve a stunning victory over gold.
By raising interest rates to such painful levels, he managed to convince people that he was serious about preserving the value of paper money.
Since gold paid no interest it simply couldn't compete and its price dropped steadily over the following 20 years.
Had Volcker not taken such drastic action, people would have lost all faith in the government's paper and, without doubt, Weimar-style hyperinflation would have ensued.
So Volcker won that particular bout and, once again, paper money looked like an attractive thing to hold.
However, the only reason that Volcker could even consider going into battle with gold in the first place was because he had the powerful weapon of high interest rates at his disposal.
Back in 1981, the amount of US federal debt was far lower than today, amounting to a fairly manageable 30% of GDP.
With that amount of debt in the system, 20% interest rates were extremely painful, yet still politically and economically acceptable.
So that was the past.
Now let's fast-forward to the present day.
As a result of all the reckless 'stimulus' spending by both the Bush and Obama administrations, US federal debt is now approaching 93% of GDP and interest rates are at all time lows of 0.
25% (0.
5% in the UK).
Once again, just like it did back in the 1970s, gold is responding to this abuse of paper money by government and has just jumped to new all-time highs close to $1300 an ounce.
If Volcker's successor at the Federal Reserve, Ben Bernanke, were to pick a fight with gold now and try raising interest rates to 20% (or higher, because the debt, and therefore the threat to the credibility of paper money is far greater now), how long do you think it would be before he hit the canvas? The truth is, he's too scared to even get in the ring.
He knows that the level of outstanding debt in the economy is so enormous that just raising interest rates by 1 or 2 percent would collapse the whole system.
So that's where we are at present: we have gold on the rise, paper money on the ropes and powerless central bankers cowering in their vaults.
Oh, and the politicians are pretending to everyone that they have a solution to all of this, either, as in America, by adding more debt to existing debt ('stimulus'), or as in the UK and parts of Europe, by claiming that the enormous debts we've run up can be paid off with a bit of belt-tightening.
They're both wrong - the debt is just too big and they've already lost the war.
So what about the future? Well, it should be pretty clear by now that, for politicians and bankers at least, raising interest rates this time around is simply not an option.
If it were even attempted, it wouldn't just be the effigies of politicians burning on Capitol Hill or outside the Palace of Westminster.
As I said, politicians' first instinct is for self-preservation.
So if they won't raise interest rates, what does that leave? Well the sensible, but from the politician's point of view, completely unacceptable option, would be a simple, honest, open default on the debt.
I know that is quite a shocking statement and it's certainly no panacea - not in the short-term at least.
In fact for most people, the immediate consequences of a government default on all debt owed to foreigners would be terrifying.
Consider that:
Having cleared the decks of all the debt and thrown all the bankers with begging bowls overboard they'd have a wonderful opportunity to start afresh and build the solid foundations of a long-term, prosperous future.
They'd be able to restore honest money i.
e.
the gold standard and thus put a stop to the bankers' credit games.
They'd be able to drastically simplify the tax system with an across-the-board flat tax of around 12% thus removing at a stroke the need to pay for the army of parasitic tax officials and finance professionals.
Moreover, with the tax and debt shackles removed, new businesses would quickly take off, thus creating the solid, sustainable jobs of the future.
Most importantly of all though, the corrupt, immoral system we have at present whereby as yet unborn citizens are indebted to pay for the lifestyle of the current generation would be scrapped.
So although it's certainly a case of 'no pain, no gain', I believe that an honest default is the only way to go.
However, that's not what we're going to get.
The immediate future as I see it is more of the same.
This current generation of politicians have no new answers - they will ride this particular runaway train to the end of the line and continue to 'stimulate', bail out, borrow, spend and print along the way.
Paul Volcker will not be riding to the rescue of paper money this time around, so I'm afraid "your last station-stop" will be hyperinflation central.
That's just inevitable.
In fact, we're already seeing the early signs of this hyperinflation with the recent up-tick in commodity prices - oil prices are stirring again and agricultural prices rose 17% between June and September 2010 which is putting us on course for annualised rate of about 62%.
Just wait until that feeds through to the check-out at Asda! So it's time to start protecting yourself and your family.
I don't think it's being too alarmist to suggest that laying in some long-term supplies of tinned and dried foods might be a wise move - just in case.
As for investments, as my regular readers know, I believe gold and silver make sense when nothing else does and that gold will end up as the 'undisputed champ' over the bankers' paper money.
Just make sure you get your share while it's still for sale.
Mark Twain was right: history isn't repeating - but unfortunately he never gave any guarantees that you'd enjoy the way it rhymes.
It's true that history never repeats exactly, but as Mark Twain once famously said, it does rhyme.
So, what can a trip down memory lane tell us about the possible future direction of our economy and the likely effects on our personal financial situations? In my view, in order to answer these questions there are a number of key turning points in the history of the Western financial system that we could potentially examine - from the creation of the US Federal Reserve way back in 1913, to Roosevelt's 'New Deal' in 1933 and perhaps the Bretton Woods agreement of 1944.
However, the date that sticks in my mind, and the one which I believe is likely to shine the brightest light on where we might be headed in years to come, is the 15th August 1971.
This was the date when US President Nixon closed the so-called 'gold window' - an act that I believe will eventually be recognised by historians as one of the greatest economic blunders, and even tragedies of all time.
To cut a very long story short, the consequence of Nixon's action was to break all links between paper money and the anchor of gold.
In other words, for the first time in the history of human civilisation, all money, wherever it was issued in the world, would no longer be backed by gold which, historically, had always served as both a reliable means of exchange and store of value.
From that point on, what we had instead was a worldwide system of floating paper currencies backed by nothing but government promises - promises to act responsibly and preserve the purchasing power of our money.
So, freed from the externally imposed financial discipline of a gold standard, how well have our governments managed to live up to their promises during the last 39 years? Well I did a bit of digging and I'm afraid I came up with some rather disturbing results.
According to the most recent data I could find on the web (and my thanks go to Mike Hewitt and Krassimir Petrov at the Dollardaze website for their impressive in-depth research), between August 1971 and December 2008 the supply of US dollars in the world increased by 16.
8 times and the purchasing power of those dollars has decreased by 81.
1%.
If, like me, you're a UK citizen, then you've done even worse - although the supply of pounds has only increased by a relatively modest 12.
6 times in that period, the purchasing power of those pounds has decreased by a devastating 88.
3%! Remember, these figures date from December 2008 which was well before the world went into money-printing overdrive with the recent rounds of 'quantitative easing'.
So much for government promises.
So what about gold? How has that performed as a store of value over the period in question? Well, its supply increased by just 1.
8 times over the period, roughly equating to the increase in world population, but its purchasing power actually increased by 310.
4%!! This should really come as no surprise, since governments can't print gold out of thin air (thus increasing its supply and decreasing its value).
So far, so interesting - but so what? These figures teach us that gold functions far better as a store of value than government paper, but what do they tell us about our financial destiny? Well, in order to try and answer this question we have to take another trip back in the time machine to the 1970s and look at how governments responded to the declining 'real' value of their currencies.
Bear in mind that governments aren't completely stupid - not when it comes to acting in their own best interests at least.
After abandoning the gold standard back in 1971, politicians found that people were losing faith in paper money as price inflation spun out of control.
Once gold, the competitor to paper money, shot up to a new all-time high of $850 an ounce in 1980, governments' instincts for self-preservation kicked in - they knew they had to act fast.
If people were turning away from their paper and considering using alternative forms of money, then governments feared they'd lose all authority and influence over people's lives - hence their power would evaporate.
After all, there'd be no point in taxing people if the 'money' used to pay the taxes was just a pile of worthless paper.
That simply couldn't be allowed to happen.
What did happen is that in 1981 the forces of paper money sent their champion into the ring to do battle with gold.
His name was Paul Volcker and he was the Chairman of the US Federal Reserve Bank at the time.
His mission was to restore people's faith in paper money - at all costs - and thus administer a devastating knock-out blow to gold.
The costs were indeed very high: by June 1981, interest rates in America had risen to an eye-watering 20%! Whole swathes of US manufacturing industry went bust and the so-called rust-belt was born.
At the time, Volcker was probably the most unpopular man in America and it was no surprise to see people burning effigies of him on Capitol Hill.
In the end though, he did achieve a stunning victory over gold.
By raising interest rates to such painful levels, he managed to convince people that he was serious about preserving the value of paper money.
Since gold paid no interest it simply couldn't compete and its price dropped steadily over the following 20 years.
Had Volcker not taken such drastic action, people would have lost all faith in the government's paper and, without doubt, Weimar-style hyperinflation would have ensued.
So Volcker won that particular bout and, once again, paper money looked like an attractive thing to hold.
However, the only reason that Volcker could even consider going into battle with gold in the first place was because he had the powerful weapon of high interest rates at his disposal.
Back in 1981, the amount of US federal debt was far lower than today, amounting to a fairly manageable 30% of GDP.
With that amount of debt in the system, 20% interest rates were extremely painful, yet still politically and economically acceptable.
So that was the past.
Now let's fast-forward to the present day.
As a result of all the reckless 'stimulus' spending by both the Bush and Obama administrations, US federal debt is now approaching 93% of GDP and interest rates are at all time lows of 0.
25% (0.
5% in the UK).
Once again, just like it did back in the 1970s, gold is responding to this abuse of paper money by government and has just jumped to new all-time highs close to $1300 an ounce.
If Volcker's successor at the Federal Reserve, Ben Bernanke, were to pick a fight with gold now and try raising interest rates to 20% (or higher, because the debt, and therefore the threat to the credibility of paper money is far greater now), how long do you think it would be before he hit the canvas? The truth is, he's too scared to even get in the ring.
He knows that the level of outstanding debt in the economy is so enormous that just raising interest rates by 1 or 2 percent would collapse the whole system.
So that's where we are at present: we have gold on the rise, paper money on the ropes and powerless central bankers cowering in their vaults.
Oh, and the politicians are pretending to everyone that they have a solution to all of this, either, as in America, by adding more debt to existing debt ('stimulus'), or as in the UK and parts of Europe, by claiming that the enormous debts we've run up can be paid off with a bit of belt-tightening.
They're both wrong - the debt is just too big and they've already lost the war.
So what about the future? Well, it should be pretty clear by now that, for politicians and bankers at least, raising interest rates this time around is simply not an option.
If it were even attempted, it wouldn't just be the effigies of politicians burning on Capitol Hill or outside the Palace of Westminster.
As I said, politicians' first instinct is for self-preservation.
So if they won't raise interest rates, what does that leave? Well the sensible, but from the politician's point of view, completely unacceptable option, would be a simple, honest, open default on the debt.
I know that is quite a shocking statement and it's certainly no panacea - not in the short-term at least.
In fact for most people, the immediate consequences of a government default on all debt owed to foreigners would be terrifying.
Consider that:
- Governments would no longer be able to borrow, so public sector workers would no longer be paid - certainly at nowhere near current rates.
- For a short transitional period, martial law may have to be imposed and ration cards issued to prevent a breakdown in law and order.
- People would have to look out for one another and at the same time become a lot more self-reliant - which would be no bad thing.
- Foreign powers that lent us the money would not be best pleased and may consider some kind of reprisal.
Having cleared the decks of all the debt and thrown all the bankers with begging bowls overboard they'd have a wonderful opportunity to start afresh and build the solid foundations of a long-term, prosperous future.
They'd be able to restore honest money i.
e.
the gold standard and thus put a stop to the bankers' credit games.
They'd be able to drastically simplify the tax system with an across-the-board flat tax of around 12% thus removing at a stroke the need to pay for the army of parasitic tax officials and finance professionals.
Moreover, with the tax and debt shackles removed, new businesses would quickly take off, thus creating the solid, sustainable jobs of the future.
Most importantly of all though, the corrupt, immoral system we have at present whereby as yet unborn citizens are indebted to pay for the lifestyle of the current generation would be scrapped.
So although it's certainly a case of 'no pain, no gain', I believe that an honest default is the only way to go.
However, that's not what we're going to get.
The immediate future as I see it is more of the same.
This current generation of politicians have no new answers - they will ride this particular runaway train to the end of the line and continue to 'stimulate', bail out, borrow, spend and print along the way.
Paul Volcker will not be riding to the rescue of paper money this time around, so I'm afraid "your last station-stop" will be hyperinflation central.
That's just inevitable.
In fact, we're already seeing the early signs of this hyperinflation with the recent up-tick in commodity prices - oil prices are stirring again and agricultural prices rose 17% between June and September 2010 which is putting us on course for annualised rate of about 62%.
Just wait until that feeds through to the check-out at Asda! So it's time to start protecting yourself and your family.
I don't think it's being too alarmist to suggest that laying in some long-term supplies of tinned and dried foods might be a wise move - just in case.
As for investments, as my regular readers know, I believe gold and silver make sense when nothing else does and that gold will end up as the 'undisputed champ' over the bankers' paper money.
Just make sure you get your share while it's still for sale.
Mark Twain was right: history isn't repeating - but unfortunately he never gave any guarantees that you'd enjoy the way it rhymes.
Source...