November 4, 2007 -
There are many similarities between today’s global economic conditions and conditions that triggered past economic crises. An examination of the 1922-23 hyperinflation of the German papiermark, the 1997 Asian financial crisis, and the March 2000 dot com crash all provide extremely strong and compelling arguments for investing in gold and gold stocks today as the only strategy that may not only save your stock portfolio next year and in the coming years, but also may provide the only strategy that will return tremendous profits.
The Hyperinflation of the German Papiermark in 1922-23
In the early 1920’s inflation of the German mark evolved into hyperinflation as speculation and irresponsible Reichsbank (the German Central Bank) policy drove the value of the mark into worthlessness. In 1919 and 1920, after WWI, foreign speculators with large holdings of German marks bet on the recovery of both the German economy and its currency. Foreigners used their holdings of marks to buy real assets such as real estate and stakes in German companies as well as paper assets such as German stocks. However, as the German government kept printing marks to pay off war reparations imposed upon them by the winning countries of the war, eventually the mark’s rapid and continued devaluation discouraged foreign capital flows and the speculation soon completely halted.
Furthermore, protective tariffs slapped on cheap German goods by foreign countries prevented German exports from providing a viable source of repayment for war reparations and a liquidity crunch in the German banking system ensued. With the economy floundering, the German government along with the Reichsbank decided to repay their war debt simply by printing money. Before the war, the highest denomination of German currency was 1000 marks. By October 1923, the German printing presses working overtime had caused severe inflation. Banknote denominations rose from 1000 marks to 100 billion marks, the cost of a loaf of bread skyrocketed to a couple hundred billion marks, and 99% of government income was sourced entirely from the creation of new money. During this time, gold was one of the few assets that held its value.
Today’s Comparable Scenario: Monetary expansion of the U.S. dollar supply (outside of the U.S.) from $600 billion in 1990 to more than $6 trillion today
The U.S. government, unable to pay off its national debt, has raised the national debt ceiling five times since President Bush took office in 2001 (most recently in October, 2007 to $9.82 trillion). This is not to mention that the fact that “official” national debt figures don’t include multi-trillion dollars of unfunded government obligations such as Medicaid and Social Security programs. If one accounts for all of the unaccounted programs that should be factored in, the “true” national debt rises into the stratosphere. For the last four years, there have been no new taxes to fund an increasingly costly war in Iraq. The cost of the Iraqi war is now estimated to be in the trillions of dollars. How is the war being funded? With printing presses that are working overtime, just like in post WWI Germany.
This time around, a financial sector liquidity crunch was created by speculation in subprime mortgage instruments. In order to fend off disaster in U.S. financial markets, the U.S. Federal Reserve again opted not for responsibility, but to bail out irresponsible financial institutions by printing massive amounts of additional dollars. Of course, the bailout plan also included bailing out there own irresponsible fiscal policies for the past couple of decades as well. Though the situation now is not nearly as severe as the German papiermark crisis, the similarities of misguided fiscal policies are astounding. Furthermore, the growth of the $500 trillion gorilla, the derivatives market, has linked financial markets all across the globe like at no other point and time in history. Thus, while the present liquidity crunch may not be as deep as the one that triggered hyperinflation in Germany back in the 1920’s, it certainly is more widespread today.
The U.S. Federal Reserve has grown the money supply of dollars outside of the U.S. tenfold since 1990. Money creation should occur at about the rate of inflation, only 2% -3% a year (Granted the real rate of inflation is two or three times that figure but since this is what the government tells us it is, we will use it for guidance in this example). In 17 years, U.S. dollar money supply should have grown from about $600 billion to about $913 billion. Somewhere along the line, the Feds overshot that figure by $5,087,000,000,000. Furthermore, the super-inflated dollar has encouraged holders of strong foreign currency to invest in U.S. stock markets at super cheap valuations (similar to cheap valuations in Germany after their economy was ravished by war). However, the rise in U.S. stock markets has been triggered by a bunch of hot air and is unsustainable. Soon, foreign investment will stop flowing into U.S. stock markets when foreigners realize that the risk of investing in dollar-denominated paper assets outweighs the current discounts in price. Even though the situation in Germany was exponentially more severe, the steep sell-off in U.S. markets that occur upon this realization will produce the same beneficiary as the post-WWI German economy – Gold. To learn more about the best ways to make a fortune from the coming gold boom, click here.