The debate currently taking place between gold bulls and gold bears is whether or not the central banks of the world are adding to the money supply of the world, or if money supply is contracting.
If bankers are increasing the supply, then the price of gold will rise in terms of this inflated money, (although gold does not really rise in price, it simply holds its value while fiat money loses value, thereby giving the appearance of rising).
One way to determine whether or not money supply is increasing is to look for reasons why the money supply would be increasing. This is because we are not sure if we can trust governments to tell us ‘the truth, the whole truth and nothing but the truth’ when they publish their reports. We know for sure the US CPI and unemployment reports are continually ‘under-reported’, so why not the money supply? After all the FED refuses to open its books to Congress.
This chart courtesy Federal Reserve Bank of St. Louis shows the US government is running the worst deficits in more than 100 years. If the Federal Government were a family or a business faced with this kind of a deficit it would have to reduce spending and increase revenue or go bankrupt. A family or business has no other options. (Borrowing money only delays the inevitable).
The US government, along with many other governments, decided years ago that they would not consider a reduction in spending. The most important goal for the average politician is to get re-elected. Spending keeps the voters happy and happy voters tend to re-elect.
“When plunder becomes a way of life for a group of men in a society, over the course of time they create for themselves a legal system that authorizes it and a moral code that glorifies it."
Frederic Bastiat.
The central banks oblige the politicians by printing the money and then loaning it to the government so the politicians can spend it.
Since we cannot count on governments to reign in spending, would it be possible for them to increase revenue in order to reduce the deficit?
Historically governments almost always raise taxes when they can justify it to the voters by claiming: “we have no other options”, or “it’s for the good of the country.” Unfortunately a deficit as large as the one facing the US and a dozen other countries cannot be covered by increased taxation.
Since governments have the ability to print money (an option not available to families and businesses), we can reach the conclusion that governments will continue to print money. To stop doing so would mean the end of a lucrative career for a good many politicians who have never had a job outside of public service.
Since the financial problems facing the US and Europe cannot be solved without extreme and unpopular hardships, and since the ‘solution’ to this point has been to ‘print baby print’, we can be almost certain that the printing presses will continue to ‘print away’.
This chart courtesy Federal Reserve Bank of St. Louis indicates that the M2 money supply continues to rise almost exponentially. In view of the fact that the CPI and unemployment numbers are ‘massaged’, it is possible that the actual M2 might even be greater than 8.5 trillion. Whenever Mr. Bernanke is asked “who got the TARP money”, he refuses to give a specific answer.This chart courtesy Federal Reserve Bank of St. Louis shows state and local tax receipts to be in freefall. As long as weekly first time unemployment compensation claims remain above 400,000 and businesses continue to contract, this trend is not likely to turn back up any time soon.
Although this chart covers only state and local taxes, the trend in federal tax take is very similar. Meanwhile the demand for social services from the Federal Government is increasing, acting like a two-edged sword (see below).
