"Everything you need to know about gold"
PRICE VS VALUE
Can you explain the difference between price and value? Most investors can’t. Neither can most analysts. A few years ago, some people were caught up in the NFT (non-fungtable token) craze. Try explaining price and value as it applies to that former “next big thing”.
GOLD STOCKS – FANTASY
“There is more money to be made in gold stocks compared to gold because gold stocks benefit from a leverage factor that potentially produces gains more favorable than holding gold itself.”
At the end of 2023, the cost to mine gold was estimated at $1342 oz. (World Gold Council, Tomlinson; 16May2024). With gold at the time somewhere near $1950 oz., the implied gross margin was $600 per ounce. As the gold price rises, it is assumed that the mining costs would remain relatively stable, or at least rise more slowly, and not as much on a quantitative basis.
Hence, further increases in the gold price would translate to higher proportionate gains to the mining company on future gold sales. At $255o oz., the expected margin increases to $1200 per ounce. In other words, as the price of gold increases, the margin per ounce continues to rise, thus increasing potential profits.
In the above example, a doubling of the profit margin ($600-1200 oz) might be expected to fuel higher stock prices for mining companies that would far surpass the profits to be earned by investing in gold in its finished form and holding it for a relatively smaller gain of 30% ($600/$1950).
In addition, “because gold mining stocks are currently underpriced compared to gold bullion, the potential profits are even greater than might be expected otherwise”.
GOLD STOCKS – REALITY
Below is a chart (source) which shows the month-end ratio of the NYSE Arca Gold Bugs Index (HUI) compared to the price of gold bullion back to 1996. The higher the ratio, the more favorable has been the performance of gold mining stocks; the smaller the ratio, the more favorable has been the performance of gold bullion…
In December of 2000, the gold price was at $271 oz. From that point over the next 3 years, the gold price increased to $406 oz., a gain of fifty percent. Gold stocks performed even better, rising six-fold over the same time period. The net out-performance of gold stocks is shown on the chart above with the gold stocks-to-gold ratio rising from .15 to more than .60.
Alas, that three-year period of super success for gold stocks compared to gold was followed by 22 years of declining performance, thus far. The current gold stocks-to-gold ratio is .11, just slightly above the .10 mark touched in 2024, and prior to that in 2015.
The reality of the decline in the ratio from .60 down to .10 is exacerbated by the fact that not only are gold stocks underperforming gold bullion on a long term basis, they are net losers over the past 14 years, even in the face of a sharply higher gold price. See the chart (source) below…
Since the peaks for both gold and gold stocks in 2011, the gold price has increased by more than 50% ($1900 – 2900); whereas, gold stock prices have declined by 50%.
As far as gold stocks being undervalued relative to gold bullion, well… of course they are. If they continue to underperform so drastically as has been seen, then how could they not be undervalued? Those who claim that gold stocks are undervalued mean that their prices have not gone up as much as expected, and, therefore, should increase substantially to make up for their failure to meet expectations. Good luck with that.
CONCLUSION
There are a several reasons to not own or invest in gold stocks, except on a short-term, very speculative basis. They are underfunded operations (in most cases) subject to a host of external risk factors including labor strikes, shut downs, nationalization, etc. The biggest risk factor for most investors is the continuation of historical long-term underperformance, coupled with the risk of outperformance on the downside.
The biggest declines in gold stocks come when gold and/or stocks in general fall precipitously. That has been shown clearly with gold stocks versus gold 1980-2000; and with gold stocks versus stocks in general (most recently in 2020 and 2022).
Earlier this year, I included gold stocks on my list of five investments to avoid in 2025. The reason for that warning is that I believe the risks outweigh the potential rewards. I still do.
If anything has changed, it is that the risks are greater now than at the time (December 29, 2025) I wrote the article.
Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED
In my article “Trade Tariffs – The Worst That Could Happen” this past December, I said the following:
“Tariffs are taxes imposed on imported goods, ostensibly to protect domestic industries or gain a competitive edge. They are usually recommended and promoted by those who think they have identified an “unfair advantage” existing between trade partners.
Trade tariffs harm small businesses and result in inefficient allocation of resources. Trade tariffs hinder productivity and economic growth; and, they can lead to trade wars. The end result is always higher costs for consumers.
As the economy slowly grinds to a standstill, the expectations of worsening inflation continue to rise. “Stagflation”, you say? Possibly; but, there is another risk that is greater than stagflation. And, the prospects are much gloomier than those envisioned by a scenario which features an ordinary recession accompanied by marginally higher prices.
THE EFFECTS OF INFLATION
Inflation is the debasement of money by government. As governments (via their central banks) create money by expanding the supply of money and credit, it cheapens the value of all the money in circulation and causes a loss of purchasing power in the currency (dollar, euro, etc.). The loss of purchasing power results in higher prices for goods and services.
All governments purposely inflate and destroy their own currencies. Over time, the inflation takes its toll and its effects are cumulative, volatile, and unpredictable. The Fed and other central banks think they can control (“manage”) the effects of the inflation which they create, but they end up spending most of their time reacting to and trying to contain those effects.
Today, the U.S. dollar is worth less than 1 penny compared to the dollar of a century ago. Theoretically, the dollar’s decline in purchasing power can continue indefinitely. Hence, some predict the inevitability of hyperinflation and complete repudiation of the dollar. (see Two Reasons Hyperinflation Is Unlikely)
RISK OF DEFLATION AND DEPRESSION
There are dangers to the world economy which transcend those of hyperinflation and dollar destruction. Those dangers include wholesale deflation and a full-scale depression. The onset of deflation and depression could be triggered by a credit collapse. Or, we might continue to sink slowly and less obviously into a pit of financial quagmire. At some point, recognition of the awful reality would be obvious, but, too late for a reasoned response.
A certain amount of inflation is necessary to keep things from cascading downward. Over time, the effects of inflation are less obvious, so, additional money creation is required periodically in order to maintain the status quo. Beyond that, there is less of the stimulation that was intended. It is very similar to the vicious cycle of a drug addict.
The dependency on the drug (money) is heightened over time. The drug’s effects wear off more quickly and the dosage needs to be greater just to maintain stability, let alone get the desired effect as originally intended. The symptoms of withdrawal are often so bad as to prompt further addiction, rather than endure what is necessary stop the habit.
THE END OF INFLATION
Historically speaking, periods of entrenched inflation always end in economic collapse. There are examples of ridiculously high inflation rates which ended up at dramatically lower levels after a collapse. And, the economic collapse can happen either with, or without, experiencing runaway inflation.
Weakening economic conditions and a stubbornly strong U.S. dollar are not indicative of worsening inflation. Credit market problems and liquidity issues shift the emphasis from the supply side (too much money) to the demand side (not enough money).
As the demand for cash increases, people begin to sell things – anything and everything. It will require a deflationary collapse to heal completely and to recover from the ill effects of Fed inflation over the past century.
Deflation means that the dollar would buy more, not less; however, there would be fewer dollars available. The demand for money would supplant the fears and concerns associated with the effects of inflation. (see The End Of Inflation?)
RISKS FOR INVESTORS
It doesn’t matter much what you own at this point. If there is $ sign which indicates its value, that value will be significantly less (by 50% or more) in the event of a credit collapse and the onset of deflation. The biggest losses will come early; and they will be difficult to reverse.
In the past, quick response by the Fed has allowed for varying degrees of restoration and recovery. The long-term addiction described earlier has made it less likely that any Fed response to the next financial and economic catastrophe will offset the tidal wave of credit collapse and bankruptcies that ensue.
The popping of investors’ inflation-supported balloons (stocks, bonds, commodities, real estate, cryptocurrencies, etc) will be devastating.
Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED
GOLD HEADLINES
There are three headline news items which have attracted a significant amount of attention in the gold space lately. They are as follows: 1) gold “shortages” in London, 2) gold reserves at Fort Knox, and 3) revaluation of U.S. gold reserves. Both the headlines and the stories are rooted in fantasy and hyperbole. A more realistic take on them follows…
LONDON GOLD SHORTAGES
The news about transfers of gold held in London almost immediately turned into nonsense about shortages of the yellow metal. How so? Did the gold just disappear?
A little bit of digging (just a pun) by Ross Norman of Metals Daily offered a healthy dose of common sense to the unenlightened who were basking in their inappropriate fantasies about obscene gold price projections. Here is what Norman said…
“…so this is a logistical and conversion problem … fine ounces of gold are needed in one location (New York) > which needs to be converted into another form (in Switzerland) > and then shipped across the pond. Of course there are limitations on the Swiss refineries melting capacity to convert 400 ounce gold bars into the kilobars, as well as limitations on metal handling. Again … big deal. You’ve been in a car … temporary log-jams happen.
And if 435 tonnes of kilobars are now in New York then surely the problem is as much about surpluses on one side of the Atlantic, as much as so-called ‘shortages’ on the other. Taking the 10 year average, the US purchases only about 20 tonnes of physical gold bars each year – so 22 years worth of bullion bars have just washed up on their shores. Likely as not, like last time (covid), these bars will simply be flown home to London (via the Swiss refineries where they are converted back into standard bars) over the next few months. Nice business for some.”
Read the entire article at metalsdaily.com
GOLD AT FORT KNOX
For decades, people have been fascinated by the prospect that there might not be any gold stored at Fort Knox. Calls for an audit have been sounded often for more than fifty years.
An audit was performed in 1974 and various reports since then have certified the existence of the gold; yet, doubts remain.
The Sound Money Defense League says there has not been “a complete review of Fort Knox’s gold reserves…since the 1950s”.
The amount of gold supposedly stored at Fort Knox is approximately 8000 tonnes (metric ton). The total world gold supply amounts to 190,000 tonnes; although estimates vary widely.
In other words, the amount of gold (if it is there) held by the United States, represents about 4% of the total world supply of gold. That amount might seem small; however, the United States is still the country with the largest amount of gold reserves.
If an audit is conducted, we may not learn anything new. The gold stored at Fort Knox represents about half of U.S. gold reserves. If there is no gold at Fort Knox, it’s not a total loss. More important though, is that whether or not the gold is there and can be verified, any discrepancies at this point are likely well-discounted in the world market price for gold.
REVALUATION OF GOLD
The term “revaluation of gold” is incorrect. What is meant involves a repricing of gold reserves held by the United States on its own balance sheet. Since 1971, the official price of gold as far as the United States is concerned, is $42.22 oz. Gold reserves shown on the balance sheet are listed at $42.22 oz., seriously underpricing gold reserves continuously for the past six decades. Why?
When former President Nixon terminated convertibility of dollars for gold at the officially agreed upon price, maintaining the official gold price of $42.22 was an attempt to save face. The United States government had inflated the U.S. dollar beyond any reasonable limits, and previous repricing efforts had not worked as intended. To reprice the gold would be official recognition of what everyone else already knew – the U.S. dollar was losing purchasing power at an alarming rate.
Without the promise of convertibility, the government could continue to inflate its currency without having to give up a valuable asset at a previously agreed upon cheaper price. Since that time, the global markets for gold determine its price, which is a reflection of the ongoing deterioration in the U.S. dollar.
Why is a “revaluation of U.S. gold reserves” such a focus of concern now? Here is where the BS comes in…
Treasury Secretary Bessent recently promised that the United States would monetize assets on the U.S. balance sheet. A repricing of gold reserves from the current $42.22 oz. to an actual market price of $2900 oz. would increase the $value of the gold reserves from about $11 billion to as much as $765 billion. Some have said that such a move would result in an increase of $750 billion for the Treasury. No.
The gold already exists; presumably. The world gold price already tells us how much the gold is worth. What difference does it make whether the U.S. stupidly clings to its last official price; or, throws in the towel and admits that the market price for gold is the real deal?
Contrary to the claim that the move “would add $750 billion to the Treasury overnight”, I say BS. For the U.S. to take advantage of this in any meaningful way, the Treasury would either need to issue more debt in amounts that exceed what it issues on an ongoing basis already. Or, it would need to sell some of its gold at the higher market price.
Well, bully! Do you think the U.S. alters (or will alter) the issue amounts of new Treasury debt based on its own official price for gold? Of course not! And, if the U.S. wanted to sell some of its gold, it would get the market price for it; regardless of what the U.S. “official” price is. And, furthermore, Treasury could issue huge new amounts of debt now, or sell gold now, if they wanted to – without repricing the U.S. gold reserves.
So, what has changed? Nothing.
MORE BS & CONCLUSION
Someone exclaimed errantly that “Monetizing the asset side of U.S. balance sheet WILL SEND GOLD & SILVER SOARING”. No, it won’t. Monetizing the asset side of the U.S. balance sheet is a non-event. Any actions that would disrupt or alter to any degree the ordinary market activity for gold and silver are independent of any actions taken by the U.S. to reprice its own assets.
Unrealistic expectations for the gold price which are based on any of the above “news” items are likely to be a source of disappointment for investors.
Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED
PRICE VS VALUE
Most investors do not understand the difference between price and value. If they did, the prices they are willing to pay to invest in certain things would either be higher or lower, depending on the fundamentals. Usually, though, an investor is more likely to overpay; either out of ignorance or as the result of wishful thinking. Case in point: Bitcoin.
BITCOIN AND OTHER CRYPTOCURRENCIES
As an investor, I need to be able to analyze and assess real fundamentals in order to arrive at realistic valuations for prospective investments. Only after the valuation process can a price be applied which is a reasonable estimate of value.
The typical Bitcoin investor doesn’t have a clue as to what the value of his investment is. What he does know, is that its price has gone up – a lot. The price action is what attracts the typical investor; not the fundamentals.
As a result, the price of Bitcoin bears practically no relationship to its fundamental value.
So, what is the value of Bitcoin? First, it is important to note that the value of Bitcoin is not a function of the token itself, or the limited number of tokens. This is also true of other cryptocurrencies. The value of Bitcoin and other cryptocurrencies is that they can be exchanged between individual parties PRIVATELY on a decentralized blockchain. That is a hugely positive characteristic which is the primary basis for realistic valuation of most cryptocurrencies.
However, we live in a highly regulated society. Our financial system is the epitome of stringent regulation and control. That control is evident in the process involving financial transactions and the transfer of money, including taxation.
Financial transactions on the blockchain are unregulated and can go unreported. As the dollar volume of transactions increases, so does the potential loss of tax revenue.
It is naive and short-sighted to think that any government which claims to have regulatory authority, either directly or through one of its agencies, would not take steps to intervene in areas where financial activity is perceived as a threat to its own control and power. (see Janet Yellen Re: Cryptocurrencies And Terrorists)
A QUESTION FOR INVESTORS
If the value of Bitcoin lies in the private transfer of ‘money’ between investors, and that value is the same basic fundamental that applies to other cryptocurrencies, then why is the Bitcoin price at or near $100,000 while the price of XRP is only $2? Is Bitcoin wildly overpriced; or are other cryptocurrencies underpriced?
There are unique characteristics for various cryptocurrencies and there are differences that make certain ones more attractive than others depending on useful value to individuals. These include fees, transaction speed, conversion costs, stable value tokens, etc. Nevertheless, the decentralized private transfer between individuals remains the common attraction and basis for value in most cryptocurrencies.
IS BITCOIN MONEY?
Bitcoin has been described and characterized as a form of money. But, is it?
Money has three distinct characteristics: medium of exchange, measure of value, store of value. Bitcoin and other cryptocurrencies are, to a limited extent, mediums of exchange. But, they are not measures of value.
Money is used to value other items – by price. Under our current monetary system, we place a relative value on various goods and services by attaching prices to them. The goods and services we buy and sell, our own labor, education, etc. – all have value. The value of various items is determined and a price is affixed using a commonly accepted medium of exchange. Currently, that medium of exchange is the US dollar. For Bitcoin to be considered money, it would need to function as a measure of value. In other words, how many Bitcoins will it take to purchase your next vehicle? or dress? or steak dinner at your favorite restaurant?
We don’t know because there is no reasonably reliable application of value for Bitcoin. In other words, how much is Bitcoin worth? At least with US dollars – for now, anyway – they serve as a medium of exchange and a measure of value.
There is no possibility for Bitcoin to be considered a store of value. Being a store of value requires a retention of purchasing power over long and indefinite periods of time. It is impossible to determine Bitcoin’s value because there is no history of sufficient length to provide evidence that it serves as a store of value. Sufficient evidence would require centuries.
How do you determine a value for nothing, i.e., Bitcoin? A house has value. Companies that produce and provide goods and services have value. Real money (i.e. gold) has value. The much-maligned US dollar, a paper substitute for real money, has a commonly accepted, implied value, even though it continues to lose purchasing power.
Bitcoin is a digital creation which has no value in and of itself. As such, it can never be used as a measure of value for anything else. Think of it this way: How many Bitcoins is your house worth? How many Bitcoins will your next car cost? If you can answer those questions without any calculations, you will know that Bitcoin has become “a generally accepted form of money”. (see Is Bitcoin Money – Does It Have Value?)
CONCLUSION
What is the value of a tulip bulb? (see Tulip Mania: About The Dutch Tulip Bulb Market Bubble)
Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED
A long-time friend of mine, a staunch free-market and free-trade advocate, emailed me shortly after I posted the article Trump’s Tariffs – Just More Bad News. An excerpt from his commentary follows:
“…while I still believe in free trade as a basic tool for maximum prosperity, especially in a perfect world, I have changed my view, and now I believe that under many circumstances, tariffs and even subsidies are crucial to our national security. Free trade is fine when talking about sweaters, stuffed animals, plastic bowls, and maybe even automobiles. But do we want to depend on China , or even Japan, for our steel, ammunition and pharmaceuticals? I think not.”
I agree in principal that there may be occasions where selective use of tariffs and “even subsidies” might serve a protective purpose in our national interests.
TRUMP’S TARIFFS
President Trump has now followed through on his earlier threats to impose tariffs on trade partners and neighbor countries, Canada and Mexico. In so doing, he has accomplished nothing that will result in anything positive or worthwhile.
Tariffs are never justified and never produce the presumed results. They are self-inflicted open wounds that continue to fester. The action immediately raises the prices of certain imported goods which Americans buy from those countries. That forces negative financial decisions by consumers that will result in harmful economic consequences.
In addition, the danger of retaliation is heightened in this case because Trump’s actions are in blatant disregard for the existing USMCA treaty ratified by Congress during his first term in office. Actions and reactions by the countries involved escalate into trade wars that affect not just the specific countries but the entire global supply chain. There are many variables, including which particular goods are taxed, how long the tariffs are in place, etc., but the effects are always negative.
CONCLUSION
After passage of the Smoot-Hawley Tariff in 1930, America’s trade partners responded with their own tariffs. The results were historically horrible. Global trade fell by 65% and the Great Depression worsened. Some say it contributed to the beginning of World War II.
Hopefully, things will not get that bad. Just remember that nothing good will come of Trump’s tariffs. (also see Trade Tariffs – The Worst Is Yet To Come and The Danger of Trade Tariffs)
Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED
At his press conference earlier this week, Fed Chair Jerome Powell said the following… “The public should be confident that we will continue to do our work as we always have, focusing on using our tools to achieve our goals, and, really, keeping our heads down and doing our work,” he added. “That is how we best serve the public.”
Powell’s repeated use of the personal pronoun “our” rates special attention. I don’t think he means it in the collective sense. In this case, “our” means them – not us. Admittedly, his appending claim “…how we best serve the public” is meant to allay fears and present himself and the Fed in a more positive light. Nevertheless, investors and others need to know and understand some things about the Federal Reserve’s origin and purpose.
From The Creature From Jekyll Island (G. Edward Griffin)…
“Back in 1910, Jekyll Island was completely privately owned by a small group of millionaires from New York. We’re talking about people such as J. P. Morgan, William Rockefeller and their associates. This was a social club and it was called “The Jekyll Island Club.” That was three years before the Federal Reserve Act was finally passed into law. It was November of that year when Senator Nelson Aldrich sent his private railroad car to the railroad station in New Jersey and there it was in readiness for the arrival of himself and six other men who were told to come under conditions of great secrecy. For quite a few years thereafter these men denied that any such meeting took place. It wasn’t until after the Federal Reserve System was firmly established that they then began to talk openly about their journey and what they accomplished. Several of them wrote books on the topic, one of them wrote a magazine article and they gave interviews to newspaper reporters so now it’s possible to go into the public record and document quite clearly and in detail what happened there.”
PURPOSE OF THE FED
The purpose of the Federal Reserve is to provide a structured system whereby its member banks can create and lend money in perpetuity. The Fed accomplishes this by continually expanding the supply of money and credit.
The Federal Reserve exists for the benefit of the banks and bankers. Its purpose and motivation is not aligned with ours. The Fed’s objective is to facilitate the ongoing creation of money and loans which generate interest income. (see The Federal Reserve – Purpose And Motivation)
Our financial problems are the result of intentional inflation created by the Fed. Cheap and easy credit has exacerbated the fragility of the entire banking system.
Why in the world would the United States Congress approve a bill which authorized the inception of a private institution whose purpose and goals had nothing at all to do with serving the public? Besides, the government (President Andrew Jackson) had promised there would never be another National Bank. Here is why the Federal Reserve exists today…
COLLUSION AND SECRECY
In order to allay the fears of the American public, and convince Congress that it was in the best interests of the country to authorize by law the existence of this ‘private’ institution, it was necessary to effect a campaign at two specific levels: grass roots, i.e., the American public; and, behind closed doors, i.e., politicians and the U.S. government.
The message delivered was that the mission of the Federal Reserve was to actively manage the stages of the economic cycle – recession, depression, recovery, prosperity – and, thus, avoid the extremities of panics and crashes that had plagued the banking industry and put depositors at continual risk. (This has morphed into a two-pronged goal of focusing on 1) maximum employment and 2) stable prices.)
The statement of intention to manage the stages of the economic cycle was born out of necessity. Members of Congress would not vote in favor of any bill authorizing existence of a central bank without their constituents approval. If the American public thought there were benefits that could outweigh their fears, and if enough members of Congress felt similarly, and perceived that public support was sufficient, then possibly the bill would pass.
Support of business and the general public notwithstanding, approval was not assured. In exchange for support by the government (Wilson administration including Treasury officials and others), another secret meeting was held at which an agreement was made that if the Federal Reserve was granted a legitimate birthright, all future government funding was assured.
In other words, the Federal Reserve underwrites and guarantees that the US Treasury/Government will get whatever funds it needs; a promise made over one hundred years ago. (see U.S. Government Is Beholden To The Fed & Vice-Versa)
PRIVATE INTERESTS VS PUBLIC POLICY
So, what did the bankers get out of this? The answer is found in one word. Money.
More specifically, they got control over the money. They were now legally authorized to be everyone’s sugar daddy, and, ostensibly, they had the support of the United States government and its citizens.
Banks lend money to individuals, companies, and governments. They also lend money to countries, revolutionaries, and global conglomerates.
The Fed is not particularly interested in the profitability or welfare of smaller, individual banks, though. It was intended originally that the Federal Reserve could better supervise and contain damages spawned by errant actions of independent banks, but the primary goal was to create an environment that would allows the banks, especially big, power center banks, to operate and function without interruption, and on a hugely, profitable scale.
With the inception of the Fed, the bankers could protect the interests of their elite hierarchy and retain control over the money supply, lending activities, funding their own special interest activities, and make tons of money doing it.
JEROME POWELL VS DONALD TRUMP
President Trump is now demanding (again) that the Fed lower interest rates. This is what Powell had to say about it…
“I am not going to have any response or comment whatsoever on what the President said,” Powell replied. “It is not appropriate for me to do so.”
Fed policy (and purpose) is not designed to support off the wall “demands” by politicians (or investors, for that matter). A similar “demand” was made during Trump’s first term. It went nowhere. Two years into his successor’s term in office, the Fed began raising rates; much to the chagrin of a majority of outspoken enthusiasts from both political parties.
The current difference of opinion between Mr. Powell and President Trump could be entertaining, though.
CONCLUSION
Regardless of claims to the contrary, the Federal Reserve does not exist to serve the public interest. The Federal Reserve is a banker’s bank which exists for the purpose of 1) creating and lending money and 2) collecting interest in perpetuity.
As valid as are the calls to end the Fed, it likely won’t happen. The United States government would lose its pipeline to unlimited funding. The result would be financial and economic pandemonium.
The road ahead, though, will bring financial and economic devastation anyway. Right now, the Fed has everything it can do to handle the unintended consequences of its own errant policies over the past century. Fighting the negative effects of more than one hundred years of intentional inflation is a full-time job. (see Federal Reserve – Conspiracy Or Not?)
Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED
LIQUIDITY PROBLEMS – 1929
In 1928 and 1929, the Fed raised interest rates for the purpose of curbing rampant speculation in stocks. At that time, investors could borrow as much as 90% of the stock price for their proposed investment. The banks were just as aggressive as investors and were happy to oblige.
Raising rates did not slow stock speculation by investors or banks, however.
What it did do was cause a slowdown in economic activity. Thus, as economic activity declined, the stock market continued its rise, unabated.
As the decline in economic activity continued, both businesses and consumers were affected negatively. The money was available for investors to buy more stocks, albeit at a higher cost; but, businesses and consumers struggled with liquidity problems.
STOCK BUBBLE BURSTS
The crash in the stock market brought illiquidity issues to light. Layoffs in the financial industry were numerous and swift. The ranks of the unemployed ballooned.
If you were an investor who had purchased stock with 10% down, it would take only a 20% decline for you to have lost twice as much as your original investment.
Now, imagine the plight of the banks who had lent money to investors using stocks as collateral. The collateral was worth as much as 30% less after one day of trading. Bank failures became almost commonplace during the Great Depression that followed.
FED RESPONSE
As might be expected, the Fed did purchase government securities in the open market and lowered the discount rate. It also assured commercial banks that it would supply needed reserves.
Unfortunately, “too little; too late” became the common descriptive phrase used when referring to Federal Reserve response to the crisis which it had caused. That is because the economic devastation was overwhelming.
Unemployment soared to as much as 25% and prices declined (deflation) by more than one-third. The aggressive, free-spending social programs of the 1930s government could not stop the slide and contributed to the length and breadth of the depression. At the depths of the Great Depression in 1932, the stock market had declined by 90%.
The stock market crash was not the cause of the Great Depression, though. The Great Depression was caused by a Fed policy of higher interest rates. Whatever the intention or merits of the action (the higher rates were imposed for the purpose of curbing rampant stock speculation), it led to a reduction in economic activity which was well underway before stocks crashed.
INFLATION, DEFLATION, AND THE FED
The Federal Reserve officially implemented an interest rate policy of “higher for longer” almost three years ago. Rates moved up rapidly and bond prices have lost one-third to one-half of their value since then, depending on length of maturity. (see “And So Rates Will Be Higher” – Jerome Powell)
It matters not what the intention was or whether it was correct. What matters at this point are the circumstances in which the Fed finds itself now.
Most, or all, of our serious financial and economic problems are the result of a century of intentional inflation. The effects of that inflation lead to a loss of purchasing power in the currency (U.S. dollar). When the Fed intervenes in the markets either directly (by purchasing or selling securities) or indirectly (manipulating interest rates), it creates distortions which have ripple effects and are amplified.
In addition, those effects are unknown with regards to extent, duration, and timing. Remember being surprised at the higher increases in consumer prices post-Covid and economic shutdown. Those increases are attributable to government (and central banks) actions in response to the ‘pandemic’.
The economic shutdown was forced upon society by government – rightly or wrongly. As a result, the decline in economic activity led to huge financial and economic problems for society, including supply chain issues. These problems were met with phenomenally huge financial largesse (inflation) by governments and central banks, which, in turn, led to higher consumer prices (effects of inflation).
After more than one hundred years of trial and error, it is apparent that…
CONCLUSION
There is no path to financial stability from the current point that does not involve a cleansing of huge magnitude. The cleansing will be accompanied by serious financial and economic pain. The Fed is continually dancing with its own devils amid music which is horribly out of tune. The only option left is to wait until the music stops. (also see If The Markets Turn Quickly, How Bad Can Things Get? )
Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED