Zion, Illinois
By A.B. Dada
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Dr. Ron Paul, candidate for President for 2008, is the only candidate of any party who is warring against the Federal Reserve. The Federal Reseve is a group of bankers and financiers, controlled by the Federal government, who decide regularly to create new money or destroy it. Rarely have they destroyed money (causing prices to fall), instead they usually create new money which causes interest rates to fall, and prices to rise. Prices don’t rise because items become more expensive, instead prices rise because the dollars you hold are losing value as new dollars enter the market. These dollars can be physical (printed) or electronic (injected credit).

Dr. Paul doesn’t go far enough — I believe he should be actively calling for a criminal investigation into the Federal Reserve on a Constitutional basis. There is no basis for the Federal Reserve. Lately, the stock markets in the US, along with the housing market, are on the verge of a virtual crash. Some experts envision a 20% fall, I personally can’t see it stable at any less than a 40% fall. When rents are so far out-of-whack from mortgage payments+overhead (taxes, association fees, maintenance), there is a market deficiency. The Federal Reserve has worked hard to trick consumers into looking around this market deficiency that is solely created by this cartel organization.

Overnight, the Federal Reserve just added another $24 billion dollars to the market, supposedly on a short term basis. They did this because interest rates were growing beyond the rate set by the Federal Reserve. In a free market, interest rates aren’t magically calculated to be the same everywhere — instead, interest rates are set by banks based on how much they need money, or how much money they have. Look at it this way: if a bank needs money from investors in order to loan it out, they will raise rates for savings and money market accounts. This will get people to invest money into the bank, which the bank can loan out. If the bank has a lot of ready cash in their vaults, they will lower interest rates to try to get people to borrow the money. This is how the market works.

When the Federal Reserve tries to target a specific rate, they do so by creating, or destroying money. If rates get ahead of where the Fed wants them to be, they just create new money to loan out, which usually (!) has the effect of lowering rates since there is now an oversupply of money available. The downside of this is that new money created makes your money worth less. The people borrowing the new money are now causing prices for you to rise — you are paying for their loans first.

Dr. Paul is right to want to end the Federal Reserve. This organization has destroyed the dollar since the Fed was created in 1913. The idea is socialist, taking the idea that government knows what is best for your money. Do they? Have you met many government officials who know how to spend your money better than you do? If not, why are you giving them control of your money?

Gary North, academic historian and economist, noted something amazing that many people don’t believe (and that I have been saying for years in a different way): the stock market is a terrible place to make money for most people. Let’s look at North’s example:

If we take the Dow Jones Industrial Average as the benchmark, it was about 1,000 at its peak in early February, 1966. It is about 14,000 today. According to the Inflation Calculator of the Bureau of Labor Statistics, the dollar bought 6.5 times as much in 1966, so dividing 14 by 6.5 gives us about 2,150. So, it took 41 years for the DJIA to double in real terms. That’s about 1.9% per year. There were dividends, of course, but these were taxed as regular income. Dividends after 1982 fell to about 2% or less. If the investor was in a DJIA index fund, he paid management fees: maybe 2% per annum. (There were very few no-load index funds in 1966.) If he invested $1,000 in February, 1966, and sells for $14,000 today, he will be taxed 20% on his $13,000 increase. So, he will take away $10,400 in after-tax profits. Divide this by 6.5. We get $1,600. Over 41 years, that’s a return on investment of 1.15% per annum. In other words, the stock market investor after taxes and fees has just about nothing to show for his 41 years of doing without the use of his money.

Just because your dollar value of a stock has gone up over a period of time does not mean that you earned a profit. The Federal Reserve over that period of time has destroyed your dollar’s buying power, yet the other hand of the State taxes you on a paper profit, even if you can buy less with the new value of the stock. As North shows, in 1966 a $1,000 investment “grew” to $14,000 in 2007. Over 41 years, the investment “grew” 1400%. It sounds good, until taxes bite you: that’s a 20% loss, so your “investment” grew 1300%. During that same time period, the dollar fell in value 650% (and probably more, but those are official government statistics), so your investment really only “grew” 200% in value — over 41 years! Is doubling your money over 41 years worthy of the risk of the stock market? I’d say not.

What is worse is if you put the dollars in your mattress. Over 41 years, your money would have gone from being worth $1000 in 1966 to being worth $71 in terms of what it could buy compared to 41 years earlier. This is the Federal Reserve in action. What a joke — and you voters have supported Democrats and Republicans for decades who love this system. It makes them powerful, it finances their friends and relatives, and it steals from the middle class slowly but surely. Even today I hear friends tell me that they’re happy because they earn $60,000 a year versus their parents earning $6,000 a year just 40 years ago. The downside is that houses are $300,000 today (if you’re lucky) versus $20,000 40 years ago, so you’re actually earning less.

Your money is hitting the toilet, without your knowledge. Your pensions may have no actual investment backing, your stock investments aren’t growing in value even if they’re going in dollars. You’re being suckered by a system that taxes 50% of your income annually at various levels of government, and you’re being suckered by a banking system that devalues your dollar by 5-10% a year without you knowing.

Stop being a sucker. Don’t support these monsters in government — not at the Federal level, not at the State level and not at the City level. We need a political party called The No Party which runs on one absolute position: no more growth in government, unless it is negative growth (firing, closing departments, selling property). Dr. Paul runs on a position to reduce the size of the Federal government, but if he wins, the State governments will grow beyond belief. While I do believe we need a President, and a Congress, like Dr. Paul, we need local governments to stay out of our lives just as much.

A friend of the family called me 2 weeks ago asking me where she can sell all her gold jewelry and coins that she’s inherited over the years. Upon glancing over her collection, I’d say that she has somewhere in the realm of 31 ounces of gold, or the current dollar equivalent of US$20,000. Bookmark this page and visit it in 2 years and see what it is worth then.

Another friend of mine also called me last week to ask about selling his gold that he’s been buying and “hoarding” over the past 3 years. He has approximately 9 ounces.

Why are they looking to sell? They’re tight for money — adjustable rate mortgages have reset 2 points higher, causing a 20-30% jump in their monthly payments. Food prices are higher, entertainment costs are higher, gasoline and utilities are higher, and people want to liquidate in hopes they can “catch up.” Here’s a hint about savings: when you have to liquidate savings to pay for monthly costs, you will end up without your savings, and without the need to pay those monthly costs when you lose that house, the car is repossessed, and your credit card bills go into collections. Savings, in cash, 401K, or hard money form are great to sell when you have a one-time emergency (sickness, accident, etc), not to pay for an ongoing cost.

Gold hasn’t skyrocketed as we hoped, and there’s a good chance gold and silver will fall significantly as homedebtors find themselves needing to make a mortgage payment or two by liquidating assets. It is likely that a vast majority of new gold owners (last 5 years) will liquidate in order to try to save what can’t be saved. This could cause the price to fall.

Yet I still see gold, and silver, as excellent hedges against hyperinflation. Lately, the massive credit the Federal Reserve has expanded has hit various places in the past decade: the housing boom of the 90s, the dotcom boom around Y2K, and the new housing boom that is currently busting at record speeds. Remember, though, that for every homedebtor who is losing their home to foreclosure, there is a previous home seller who likely made a big profit. Those profits, in dollars, is still out there, waiting to be reinvested in other markets. I know 2 people my age (33) who have over $500,000 in dollars in a money market, not going into the stock market, the housing market, or the consumer goods market. Money market investments aren’t generally used by the banks to invest in long term loans, so they don’t create as much price inflation as Federal Reserve expansion does. But when those investments are moved out of savings accounts and into buying other investments, they may rear their ugly heads as price inflation very quickly. Gold hasn’t gone up more than 120% since bottom because it is still an ugly, useless metal to most investors and savers. This will change when yet another investment bubble comes and goes, or maybe through two cycles.

Right now, the Chinese banking industry is looking for help from the United States’ own FDIC. This is because the Chinese banking industry is in as much pain as the US industry is, and the Chinese government is worried of mass liquidation of savings accounts, causing runs on the banks. Most of the Chinese common man’s meager savings are repackaged and loaned to US consumers to buy Chinese goods — those savings aren’t readily available to cash out. We’re already seeing investment runs on international banks, and it won’t be long until we’re seeing similar problems in the U.S. and China. Imagine if those few US savers all wanted to extract dollars from their money market accounts at once? Total collapse.

If the average Chinese saver loses their savings due to China’s malinvestment in the United States consumers, they will look for a truly strong savings mechanism. For 6000 years, that mechanism was gold, and later silver. It isn’t a question of “if” any more, it is a question of when.

The money is out there — all of the money created by all the various central banks over the years. It hasn’t disappeared, even if your home is in the process of foreclosure, or your job is lost, or you can’t afford the food you bought just 3 years ago without thinking twice. It still exists, and it will flood into markets again as the value falls. When that happens, the investment of last resort, gold and silver, will skyrocket, and you’ll wish why you sold a dozen ounces of metal to try to save a mortgage that is long gone from your mind.

If you’re having problems paying your mortgage, get a boarder — someone to rent a room from you. We did it ourselves, finding a great young guy from our local church who also helps me with jobs when I get too busy, and we don’t have a problem paying our housing costs. If you have extra rooms, rent to a few local church kids who just moved out of their parents’ house. That helps.

Before you work on your mortgage, work on your spending. Even those on the verge of bankruptcy still spend like there is no tomorrow. Do you really need new clothes? Thrift store. Do you really need steak and eggs? Hot dogs and American cheese is fine. It might not be a great way to live, but you have to learn sacrifice when you make 30-year investments without thinking. Selling your gold or silver to make that mortgage payment, credit card payment, or car payment will not stop the inevitable. If you’re really that tight, get a second job. Get a third job — they’re out there. There is no reason to liquidate an investment that will overcome any market scare like gold and silver has historically overcome for thousands of years.

Just remember this: gold and silver will likely fall only because there are hundreds of thousands, if not millions, of people in financial trouble who will sell what little they have to stave off losing their excessive consumerism for a month or two. I’ll be the guy buying that excess, at the lower prices, and once that excess is gone, the real value of the metal will show itself as it always has.