By Patrick A. Heller
Commentary on Precious Metals Prepared for CoinWeek.com
Five years ago, the M2 definition of the US money supply (including coins, currency, checking and savings accounts, CDs and money market funds) was about $7 trillion. At the beginning of 2011, it was near $9 trillion.Today it is approaching $10 trillion.
This inflation of the money supply, completely unrelated to the growth of the economy, is not sustainable forever. At some point, the market will react to this depreciation of the US dollar. So, it is important to ask just what the US government is trying to accomplish with this monetary expansion and if there are any plans to rein in the problem before an inevitable crash.
There are some, with whom I largely agree, who think that the US government has gone so far into debt that it is no longer possible to ever pay it off in current-value dollars. In this scenario, the US government can pretend to pay off its currently existing tens of trillions of dollars of future Social Security, Medicare, and Medicaid benefits with a future dollar that is close to worthless.
There is also the possibility that the US government could be pushed so far into debts and deficits that it will take an extreme measure to try to forestall the outright collapse of the dollar. Among these options would be to require Americans to turn in their gold. I don’t think there is much prospect for this to happen until near the final collapse of the dollar. If the US government tried to call in gold too soon, that would be a clear signal to the holders of trillions of dollars of US dollar-denominated assets that they face the imminent loss of value of their holdings. In such circumstances, the US dollars outside the US would come rushing back to America’s shores to be exchanged for goods and services of actual value. In effect, calling in gold would actually make the problem worse for the US government, not better.
However, I do think the US government may confiscate the trillions of dollars of assets in private retirement accounts and replace them with US government bonds. I expect the confiscation of private retirement assets is a measure that would be taken before calling in gold for two reasons. First, the value of the retirement assets is much larger than the gold held by Americans. Second, such a move would politically be easier to impose on Americans because it could be sold as a measure to “protect” peoples’ retirement assets.
Still, even if (when?) the US government seizes private retirement assets, that will not be a permanent rescue of the dollar. Instead, it will only postpone the inevitable failure of the US dollar rather than be a permanent rescue of the currency.
Finally, it is possible that the US government may try to rescue the dollar by making it convertible into gold,although at a price many times higher than today. If, for instance, the government declared gold to be worth$25,000 per ounce, I would also expect some exchange regulations to punish Americans who were smart enough to own precious metals. Although this step might technically save the dollar in name, the value would be just a tiny fraction of today’s purchasing power.
For those who may be more optimistic, maybe there is some prospect that the US government could quickly clamp down on its huge deficits and debts. However, just look at what happened last week when the March13 Federal Open Market Committee minutes were released. The minutes stated that the US economy might be recovering, which suggested that there would be little to no need for further quantitative easing (meaning inflation of the money supply). As a result, the Dow Jones Industrial Average, which had been approaching record high levels, fell more than 3% in the past week. As much as the US government is locked into the continuing inflation of the money supply (which also means depreciation of the US dollar), so are private investors. I don’t see any politician in Washington, with the possible exception of Congressman Ron Paul, who say they are willing to make the spending cuts that would be needed to avoid the eventual destruction of the US dollar.
In my mind, no matter what the US government is trying to accomplish with the actions it is taking with the US dollar, I think those who hold an insurance position in physical gold and silver will be very happy that they have done so.
Patrick A. Heller owns Liberty Coin Service and Premier Coins & Collectibles in Lansing, Michigan and writes Liberty’s Outlook, a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at Numismaster (http://www.numismaster.com under “News & Articles). His award-winning radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 AM Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com.