There’s so much confusion in the short term markets regarding QE and its ilk, that it’s easy to get whipsawed into oblivion – or at least complete frustration. You must maintain a steady fix on the big picture. Regardless of what the mainstream media experts would have you believe, none of the problems of the last four or forty years have been solved. In fact all of them are now worse.

We live in a period of unprecedented global debt. As Margaret Thatcher famously observed: the problem with socialism is that eventually you run out of other people’s money. Well here we are. We are now officially out of money and only artificially low interest rates are allowing the music to continue. But where to from here? QE or not QE?

Every market and every trade now hinges on attempts to read the tea leaves left behind by the Federal Reserve and its central banking brethren. Market forces, fundamentals, earnings, etc. are all irrelevant in a centrally planned global economy. The only question that remains: what is the future value of government money?

There are several ways to attempt to answer this question. We can look at history for examples, we can study human nature, or we can listen closely to what George Soros says about the Euro.

The following 19 minute clip reveals much about the future of money printing in Europe, and by extension, the rest of the world.

But first he breaks out Paulson’s bazooka and warns that a failure to save the Euro would lead to an end of the common market and the European Union itself, leaving the continent in a potential state of warring nations. This must be avoided at all costs.

“You first somehow have to get back to normal. In other words you have to invent some nonexistent device that will get us back to… closer to the Maastricht criteria. And that’s normally what central banks are supposed to do… to preserve the system. And in a crisis they sometimes do things they’ve never done before… and I think that that is the only way.”

Preserve the system, the system being one in which the central banks control all of the debt and all of the money creation. They have the power to save themselves and they will use it regardless the cost to everyone else. If that’s not clear enough an answer about the future of QE, then this should clear it up:

“A sovereign that can print the money can’t default. It will never default”

The real challenge the central banks face isn’t what to do, but how to do it such a way that the public will accept a “solution” that the public pays for via a reduced standard of living. In other words, it must me marketed with a sufficient level of obfuscation that plain old QE no longer provides.

Soros puts on his thinking cap and comes up with a potential (temporary) solution. How about creating a holding company to run a fund that purchases some of the debt using the ECB’s seignorage rights? The average Joe might have figured out QE, but good luck sorting through that one.

When asked whether his proposal complied with the letter and spirit of the law which prohibits the ECB from purchasing government bonds (monetizing the debt). He explained that there is no problem as the holding company is not the ECB but rather the ECB shareholders. Got that? Good.

And as a final word of warning, Soros breaks out the old central banking chestnut of “driving Europe into this deflationary debt trap.”  But remember that deflation to a banker has a very specific meaning – the writing off of unpayable debt at the expense of the bank’s bondholders.  In other words, deflation is nothing more than the free market ridding itself of failed banking institutions. Once you understand this basic fact, it’s easy to grasp the implications of Soros’ observation that, a sovereign – or more accurately, a central bank – that can print it’s own money, can’t default.

It’s QE to infinity as Jim Sinclair says.

I highly encourage you to read the latest interview with Hugo Salinas Price.  Mr Price is a retired billionaire who made his fortune via a chain of appliance stores in Mexico.  He is also a tireless advocate of sound money.  His plan to reintroduce silver as a competing currency in Mexico would make it the most sought after money in the world bar none. It is well worth your time to understand the details of how he proposes to do this.

But what I really want to draw attention to is a point that Mr. Price frequently makes that you very rarely hear anywhere else – the fact that the limitless trade imbalances of the US and its subsequent de-industrialization and loss of quality jobs can be laid at the doorstep of the fiat dollar.  Consider his point: />

“I see no fundamental reason why silver cannot support international trade; it did at one time, and can do it again: it is a question of a natural rise in the price of silver to reflect the tremendous depreciation of paper currencies that has taken place through the years. But we must remember that international trade has to be self-liquidating: exports are collected in the form of imports, and imports are paid for with exports.

No amount of silver (or gold) would be sufficient to allow chronically UNBALANCED trade. So this brings with it, the revival of JOBS. Jobs growth has become so scarce in the West because all that the East exports can be paid with dollars or euros, whose supply is inexhaustible. Eastern exports have removed millions upon millions of Western jobs and hundreds of industries, because those incoming goods can be paid with unlimited amounts of fiat paper money. I cannot see how any Western industrial economy can survive in the long-term, under the paper money system. Europe is gravely affected by the loss of industries and jobs, and only a return to gold can bring them back.

Jobs will NOT return until TRADE IS BALANCED and trade will not be balanced until silver and/or gold is made the international means of payment – paper unacceptable.”

This is perhaps difficult to intuitively understand without some explanation.  First consider a global trade system that works entirely on a barter system.  Imports must equal exports.  No country will give away its valuable goods without an equal value of goods in return – nor would any individual in a barter economy.  This is easy to understand.  Now let’s introduce money in the form of gold.  Gold has value all over the world as a recognized store of value and as such a country would be willing to trade its goods all or in part for gold.

Since gold is sound money, meaning that new gold cannot be summoned into existence by a central banker, a trade imbalance offset by gold can only be a temporary condition.  If a particular good, say an automobile, is cheaper to buy as an import than domestically produced, then many consumers will pursue this option resulting in a net outflow of gold from the country.

A decrease in a country’s gold supply is deflation by definition.  The result is an increase in its value, most commonly observed as a general drop in prices.  At some point this drop in prices will make the domestically produced automobiles more attractive to those in other countries, and they will begin to import more of them, thus reversing the trade imbalance along with the net flow of gold.

Gold as money in the settlement of international trade has a natural balancing effect.  A fiat dollar produced by the Federal Reserve has no such property.  Since dollars can be produced in unlimited quantities, trade imbalances can be maintained for as long as these dollars are accepted.  Unfortunately, the net flow of manufacturing and good jobs from the West to the East can also be maintained for just as long.  The Federal Government likes this arrangement as many of these dollars flooding the world have no where else to go but to come back the US to fund additional government debt.

In 1971, when the US government defaulted on its obligation to redeem dollars for gold with its trading partners, it set our fate into stone:  A near endless de-industrialization, a loss of quality jobs, a massive rise in the size and power of government, bankruptcy, and ultimately the destruction of the dollar as the world’s reserve currency.

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Well, here’s an interesting tidbit from the Treasury Borrowing Advisory Committee (TBAC) compliments of Zerohedge.  Their latest letter to Timothy Geithner contained the following paragraph:

“There was a lengthy discussion regarding the bid-to-cover ratios at recent Treasury bill auctions. It was broadly agreed that flooring interest rates at zero, or capping issuance proceeds at par, was prohibiting proper market function. The Committee unanimously recommended that the Treasury Department allow for negative yield auction results as soon as logistically practical.”

It’s probably the perfect summary of our insane monetary system in which common sense and everything else has been turned on its head.  Here we have a group of Wall Street bankers “advising” the Secretary of the Treasury to implement a system for allowing negative interest rates as soon as possible.  Yes, real life negative interest rates all in the name of allowing proper market function. /> Market function is the one thing that we have been sorely lacking for the last ten years with two once-in-a-lifetime bubbles brought about by non-market interest rates set by our central planners at the Federal Reserve. And now our global “markets” are little more than casinos betting on what the central banks will decide to do next.

Yes, proper market function is what we need most to clean out a system that been gummed up with unsustainable levels of debt and an insolvent banking system. But, negative interest rates aren’t going to do that.  What they will do is light a fire under the price of gold.

Real negative interest rates, in which the loss of purchasing power due to price inflation is greater than the interest earned, have been a powerful driver of the gold price for many years now.  But, what happens when actual interest rates go negative?

Well, what happens is that large portions of the investment community, who have been trained to believe in the infinite safety of the dollar, will start to shake off their stupor and realize that, at some point in the future, gold will be the only store of value left standing.  At that point the game will be on.

It’s little wonder that so few people in the United States and Europe can think straight about basic economics with the constant flow of misinformation coming from the media and universities.  Here’s an interesting piece out of Scotland from an Oxford and Harvard trained editor titled “When inflation could be good for you.”

This one is interesting because it contains a bit of a head fake to start off.  When I first saw the title, I expected an immediate launch into an economic fallacy, but its author actually states the opposite:

“So could an inflationary inoculation work in economics, providing strong medicine for a serious economic ailment?

“With our economics strongly influenced by the experiences of the 1970s, the answer tends to be ‘no’. Inflation feeds on itself, workers chase higher wages to keep up with prices, costs spiral, companies lose the confidence to invest, and anyone on a fixed income – notably, pensioners – are the ones who suffer most.”

I guess by leading off with a little bit of truth, readers are expected to let their guards down in order to accept the information that follows.  When he states that “the the answer tends to be no,” we are immediately back on alert that fallacies are soon to follow.

But first he gives another nugget of truth:

“While interest rates remain at a historic low, with the base rate still at 0.5% and expected to stay there for a while yet, that means a negative real interest rate.

“To put it simply, the interest you get on holding money in a savings account is not enough to stop the value of your savings eroding.”

But he then uses this to conclude that a real negative interest rate policy is good because it encourages people to consume and not save their money.

“If inflation is officially encouraged to go a bit higher, real interest rates would fall, and people’s expectations of falling value of their savings could encourage them not to save but to get consuming again.”

So here we are again with the classic fallacy that consumption is the basis for economic growth. The idea that the only thing standing between us and a rip roaring economy is that we just need to stop saving and buy stuff. And if we really want to be prosperous, then we go into debt to buy stuff that we don’t really need.

This is, of course, complete nonsense.  Savings and production are the basis for economic growth. Standards of living are raised via increased productivity.  The more efficiently goods can be produced, the lower their cost. Wealth and financial independence are achieved by being productive and consuming less than you produce, not the opposite.

If this concept is not intuitively obvious, I highly recommend reading the first part of Irwin Schiff’s cartoon book “How an economy grows and why it doesn’t (Download PDF)“.  Schiff derives from first principles – or actually three men on an island – how an economy actually grows. Once you “get it,” the hazy concept of economic growth comes into sharp focus.

Ultimately the cry for more consumption is another attempt to kick the can down the road and extend the Ponzi central banking/fiat money scheme.  Particularly if we can extend it long enough to bail out the Too Big to Fails:

“Then, why-oh-why would we want to penalise thrift and savings, to encourage consumer demand, when excessive consumerism is precisely what got us into this mess?

“The answer is that – to misuse a political slogan from 2010 – we’re all in this together. Responsible behavior may have to be penalised so that savers, alongside everyone else, can get out of the current economic predicament.”

And there you have it.  If we allow our failed banking system to actually go bankrupt, it would result in a major recession.  So in order to muddle through this, the banks must be made whole again at the expense of the prudent folks who lived within their means.

And just in case those folks start getting any ideas about opting out of this arrangement, he states that:

“There’s not a savings product on the mainstream market that matches the current rate of inflation.”

But the last time I checked, gold has been doing exactly that and more for the last eleven years.

Here’s an excellent interview with former Dallas Fed Vice President Gerald O’Driscoll in which he exposes the Federal Reserve’s recent dollar swaps with the European Central Bank for what they are: a continued bailout of Europe’s banking system by the US central bank.  It’s unusual to see such forthright honesty about what is going on from someone formerly associated with the central banking system.  Mr. O’Driscoll does not mince words or shy away from calling a bailout a bailout.

The subject at hand is the recent arrangement between the Fed and the ECB to swap dollars for Euros.  According to O’Driscoll this indirect loan method was necessary because the Fed was embarrassed by the court upholding of FOIA (Freedom of Information Act) requests in which the Federal Reserve was forced to reveal their direct bailouts of foreign banks and corporations.  In this case there is an extra layer of obfuscation as dollars are provided to the ECB and the ECB then engages in the bailouts. /> /> The important takeaway from all of this for precious metal investors is that it is clear that, one way or another, the central banks are going to attempt to devalue their way out of this mess through the creation of new money and credit.  Keep an eye on the balance sheets of the central banks.  As long as they are continuing to to go up then the answer to the ultimate question of deflation or inflation seems very clear.  And as you can see from the graphs below the monetization of debt and near worthless assets continues unabated. />    />

Last week, the History Channel’s series Decoded, took on the question of whether Fort Knox actually contains any gold.  It is available on Youtube in three parts, in case you missed it.  Admittedly I had pretty low expectations for the mainstream media’s treatment of the topic.  Of course the question is never answered, but by the time it was over I was reasonably impressed at to how well they managed to communicate the crux of the issue at hand.  Namely that our entire economic and financial systems are kept afloat by nothing more than confidence that the dollar will hold some future value. Confidence that would likely be shattered if it were revealed that the United States was not the largest holder of gold in the world.

It was interesting to watch the progression of reactions by the hosts as they gradually came to understand the precarious nature of our current situation.  What initially began as quirky bemusement in reaction to claims of gold market rigging by GATA’s Chris Powell, eventually transform into a round table discussion in which they voice genuine fear and concern over the implications of the missing gold.

It’s good to see the topic being presented to the public, because the problem, and solution, are easily grasped by even the most casual observer.  If the gold exists then show us.  What could be simpler?  The fact that there exists a clandestine body of control that steadfastly refuses any oversight, begs the question:  What are they hiding?

Obama still doesn’t get it – Government can’t create economic growth, only prevent it.

Can I make a small request? Before we go throwing more good money (American Jobs Act) after bad (American Recovery and Reinvestment Act of 2009) can we review some basic economics?

Let’s start with what economic growth is and what it isn’t. Contrary to what the evening news would have you believe, GDP is not a measure of economic growth, as GDP is positively impacted by reckless government deficit spending. Politicians like this fact because all they have to do to claim success – in the short term – is to waste more money than the last guy. To date, no president has been more successful in this regard than Obama.

So what is economic growth really? Very simply, economic growth occurs when the overall productivity of society increases. In other words, the average individual’s labor produces more goods and services than it did previously. As more “stuff” is produced by the same amount of people, that “stuff” becomes more affordable. On average, the standard of living increases. That it positive economic growth.

The key to maximizing this productive output is to correctly align capital with the needs of the market. The good news is that this is exactly what the free market does all by itself. Profit is the critical signal that directs resources to where they are needed the most. Excessive profits indicate that demand has greatly outstripped supply. And it is these excessive profits that attract competing capital to provide additional supply and lower prices. Hence the old axiom, high prices are the best cure for high prices.

Another wonderful attribute of a free market is that those who are most skilled at increasing productivity are rewarded with the most new capital to deploy. Those who prove to be incompetent in such endeavors are swiftly punished through insolvency, as no new capital comes their way.

I consider the electronics and computer industries to be the closest thing to a free market that exists today. At least in part because government bureaucrats are unable to keep up with its complexity and rate of change.

Take a look at those who run Apple Computer. They have been extremely successful at aligning their capital investments to produce what the market wants. As a result, the market rewards their competence with additional capital to deploy. Each year they use these new resources to provide better products at lower prices. Each year they create sustainable, long term jobs. The economy and society benefit from their success.

Now let’s compare this to how the government creates jobs: Step 1) borrow money. Step 2) create make work projects. Step 3) pay people to complete said projects.

There’s really only one thing that you need to understand to shatter the whole myth of government induced economic prosperity: Governments have no wealth of their own. Any money the government has, must either be collected through taxes, borrowed, or printed. But regardless of the exact mechanism, all wealth possessed by the government is capital that is deprived from the private sector.

Had this capital been allowed to remain in private hands, it would have eventually made it to those who have the demonstrated skill at creating real economic growth (increased productivity). This leads us to a fundamental understanding; the mere act of creating jobs has no fundamental link to economic growth.

It is a trivial matter for government to provide 100% employment. This is exactly what the communist Soviet Union did. However, it suffered from virtually no real economic growth. Their standard of living was horrific compared to capitalistic countries.

And so we find ourselves on the path to a reduced standard of living, as each year, more and more private capital is miss-allocated to feed such political boondoggles as the American Jobs Act. If Obama had only a modicum of economic knowledge, he would understand that the greatest thing the government could do for the economy would be to slash its spending and simply get out of the way.

Perhaps you’ve noticed that gold was under attack before the $165 price drop 9/22, 9/23.  So what, isn’t gold always under attack by the Establishemnt?

What’s particularly interesting is that the most recent attack occurred precisely as the the Swiss National Bank announced the peg of the franc to the euro. What should normally be immensely bullish news for gold, is being held in check. Even the illustrious Paul Krugman has joined the fray with his latest blog piece for The New York Times: Treasuries, TIPS, and Gold (Wonkish).

In an inadvertent moment of truth, Mr Krugman let it slip that

“I have no idea what drives the price of gold,” but then it’s quickly back to the business at hand.

“Why not think about what actually should be driving gold prices? And I mean think about it, rather than going for slogans about inflation, debased currencies, and all that.”

Slogans about debased currencies? Could it not be the debased currencies themselves? Now that the Swiss National Bank has committed the franc to the wrecking yard of paper monies, isn’t it just a question of simple math and counter party risk? If every central bank in the world states that their policy is to continually reduce the purchasing power of their currencies, then why wouldn’t a rational person choose to store their wealth in gold?

The real problem here for Mr. Krugman is that the situation is becoming increasingly clear to too many people. Gold is a way for the average person to opt out of the global ponzi scheme of fiat money and unsustainable debt.

Time for a little obfuscation from the master:

“OK, how do we think about gold prices? Well, my starting point is the old but very fine analysis by Henderson and Salant (pdf), which was actually the inspiration for my first good paper on currency crises. H-S suggested that we start by modeling gold as an exhaustible resource subject to Hotelling pricing.

“Here’s how it works. Imagine that there’s a fixed stock of gold available right now, and that over time this stock gradually disappears into real-world uses like dentistry. (Yes, gold gets mined, and there’s a more or less perpetual demand for gold that just sits there; never mind for now). The rate at which gold disappears into teeth — the flow demand for gold, in tons per year — depends on its real price: graph.

“Crucially, at least for tractability, there is a ‘choke price’ — a price at which flow demand goes to zero. As we’ll see next, this price helps tie down the price path.

“So what determines the price of gold at any given point in time? Hotelling models say that people are willing to hold onto an exhaustible resources because they are rewarded with a rising price. Abstracting from storage costs, this says that the real price must rise at a rate equal to the real rate of interest, so you get a price path that looks like this: graph.

“Obviously there are many such paths. Which one is correct? Given rational expectations (I know, I know) the answer is, the path under which cumulative flow demand on that path, up to the point at which you hit the choke price, is just equal to the initial stock of gold.”

Now that’s more like it! This is how a Nobel Prize winning economist goes about attacking the truth. He employs a highly sophisticated form of econo-babble designed to leave any potential dissenters in a catatonic state. A single PhD trained economist can easily defeat an entire population through this powerful form of mind control. Throw out a few choice phrases like flow demand and choke price and within seconds eyes begin to glaze over and minds start to wander. Soon enough, the great unwashed masses are just begging for the “experts” to decide their economic fates for them.

And, so Mr. Krugman dutifully earns yet another paycheck. His work as chief propagandist for the central banking system is done here.

If you’ve made it this far, be sure to check out one of the most important articles you’ve never read: Priceless: How the Federal Reserve Bought the Economics Profession.

Over the last 100 years, Americans have completely lost control of their Constitutional money; to the point where they must pay a tax to essentially make change. Imagine breaking a twenty dollar bill and only getting a ten and a five back, with the other five going to the government. This is the potential problem one encounters when attempting to spend gold or silver money. It’s no accident. The laws are specifically set up to force everyone to use fiat currencies.

In order to restore sound money to the market, there are a couple of laws that need to be changed. One is the repeal of legal tender laws, but perhaps more importantly, is an end to the taxation of gold and silver.  This is precisely what the Sound Money Promotion Act does. Senators Jim DeMint R-SC, Rand Paul R-KY, and Mike Lee R-UT are the sponsors.

The objective of the current system is to force everyone to store their wealth in dollars, where it can be surreptitiously taxed via inflation. To paraphrase Keynes, not one man in a million will recognize the nature of this game. This enables the government to run enormous deficits and provides a bailout mechanism for the banks whereby their losses and can added to the public debt.

In order to spend gold or silver money, one must first convert them to dollars. If you were coginzant enough not to store your wealth in a depreciating currency, then you are legally required to pay a penalty for that. When you convert gold to dollars, you are not paying a tax on the ”gains” in gold, but rather the losses in the dollar that you would have suffered through its debasement. Think about that for a second. It’s a critical point of understanding.

Currently we are all trapped in a global currency war in which every country believes it can solve its problems by debasing its currency the fastest. A difficult game to win for sure, and one that tends to destroy middle classes in the process. More and more people are waking up to this reality every day. They are opting out of paper money as a store of wealth and choosing gold and silver.

I’ve consistently noticed an interesting reaction as people begin to save in precious metals. They start to enjoy the process of saving and accumulating real money. I predict that even after the fiat currency crisis passes, that many will not want to part with their real money. That they will want to continue to store their wealth in gold and silver. And ultimately, the thought will occur to many, “why can’t I just spend my money directly? Why must I first convert it to paper and suffer the losses”?

Right now, most people still don’t know what sound money means, or why it’s so important. As a result, the current version of the Sound Money Protection Act will likely go nowhere. But a critical lesson, as to why gold and silver have been money for thousands of years, will soon be taught again. Perhaps then enough people will understand, and we will have our Constitutional money returned to us.

Congressman and presidential candidate Ron Paul recently introduced legislation calling for the federal government to cancel the $1.6 trillion debt held by the Federal Reserve.  Such a move creates legal challenges, one of which would be that the Fed would openly acknowledge that it is a private entity and that fedgov has no authority confiscate its assets.  (Fedgov had no “authority” to call in gold in 1933, but legal tests to that stood up.)

Yet the $1.6 trillion in Treasury debt was obtained via the Fed creating money “out of thin air,” to use an old and established description of what the Fed does when it buys debt (or other securities that it now owns).  Banks do the same when they make loans to consumers via fractional-reserve banking.

Another argument that can be expected: if the Fed has no debt to sell, it cannot shrink the money supply if it deems it appropriate.  This would be a smoke screen; it is highly unlikely we will ever again see the Fed decrease the money supply.  QE3 is right around the corner.