There is actually. The Fed could
actually cause inflation in about 15 minutes if it used it.
How?
The Fed can call a
board meeting, vote on a new policy, walk outside and announce to the world
that effective immediately, the price of gold is $5,000 per ounce.
They
could make that new price stick by using the Treasury’s gold in Fort Knox and
the major U.S. bank gold dealers to conduct “open market operations” in gold.
They will
be a buyer if the price hits $4,950 per ounce or less and a seller if the price
hits $5,050 per ounce or higher. They will print money when they buy and reduce
the money supply when they sell via the banks.
The Fed would target
the gold price rather than interest rates.
The point
is to cause a generalized increase in the price level. A rise in the price of
gold from $1,350 per ounce to $5,000 per ounce is a massive devaluation of the
dollar when measured in the quantity of gold that one dollar can buy.
There it is — massive
inflation in 15 minutes: the time it takes to vote on the new policy.
Don’t think this is
possible? It’s happened in the U.S. twice in the past 80 years.
The first time was in
1933 when President Franklin Roosevelt ordered an increase in the
gold price from $20.67 per ounce to $35.00 per ounce, nearly a 75% rise in the
dollar price of gold.
He did
this to break the deflation of the Great Depression, and it worked. The economy
grew strongly from 1934-36.
The second time was
in the 1970s when Nixon ended the conversion of dollars into gold by U.S.
trading partners. Nixon did not want inflation, but he got it.
Gold went
from $35 per ounce to $800 per ounce in less than nine years, a 2,200%
increase. U.S. dollar inflation was over 50% from 1977-1981. The value of the
dollar was cut in half in those five years.
History shows that
raising the dollar price of gold is the quickest way to cause general
inflation. If the markets don’t do it, the government can. It works every time.
But what
people don’t realize is that there’s a way gold can be used to work around a
debt ceiling crisis if an agreement isn’t reached in the months ahead.
I call it
the weird gold trick, and it’s never seen discussed anywhere outside of some
very technical academic circles.
It may sound weird,
but it actually works. Here’s how…
When the
Treasury took control of all the nation’s gold during the Depression under the
Gold Reserve Act of 1934, it also took control of the Federal Reserve’s gold.
But we
have a Fifth Amendment in this country which says the government can’t seize
private property without just compensation. And despite its name, the Federal
Reserve is not technically a government institution.
So the
Treasury gave the Federal Reserve a gold certificate as compensation under the
Fifth Amendment (to this day, that gold certificate is still on the Fed’s
balance sheet).
Now come
forward to 1953.
The
Eisenhower administration actually had the same debt ceiling problem we have
today. And Congress didn’t raise the debt ceiling in time. Eisenhower and his
Treasury secretary realized they couldn’t pay the bills.
What happened?
They
turned to the weird gold trick to get the money. It turned out that the gold
certificate the Treasury gave the Fed in 1934 did not account for all the gold
the Treasury had. It did not account for all the gold in the Treasury’s
possession.
The
Treasury calculated the difference, sent the Fed a new certificate for the
difference and said, “Fed, give me the money.” It did. So the government got
the money it needed from the Treasury gold until Congress increased the debt
ceiling.
That ability exists
today. In fact, it is exists in much a much larger form, and here’s why…
Right now, the Fed’s
gold certificate values gold at $42.22 an ounce. That’s not anywhere near the
market price of gold, which is about $1,330 an ounce.
Now, the
Treasury could issue the Fed a new gold certificate valuing the 8,000 tons of
Treasury gold at $1,330 an ounce. They could take today’s market price of
$1,330, subtract the official $42.22 price, and multiply the difference by
8,000 tons.
I’ve done the math,
and that number comes fairly close to $400 billion.
In other
words, tomorrow morning the Treasury could issue the Fed a gold certificate for
the 8,000 tons in Fort Knox at $1,330 an ounce and tell the Fed, “Give us the
difference over $42 an ounce.”
The Treasury would
have close to $400 billion out of thin air with no debt. It would not
add to the debt because the Treasury already has the gold. It’s just taking an asset and marking it to market.
If the
debt ceiling isn’t raised, this gold certificate trick could finance the
government for almost an entire year, because we have about a $400 billion
deficit.
It’s not a fantasy.
It was done twice. It was done in 1934 and it was done again in 1953 by the
Eisenhower administration. It could be done again. It doesn’t require
legislation.
Is the
government working on this gold trick I just described? I don’t know.
But it’s suspicious
that Treasury Secretary Mnuchin recently went to inspect the Fort Knox
gold. He was only the third Treasury secretary in history to visit Fort
Knox, and the first since 1948. The visit was highly, highly unusual.
The real message is that the solutions to
current debt levels are inflationary.
They
involve a dollar reset, or a dollar reboot. That means revaluing the dollar
either through a higher gold price or marking the gold to market and giving the
government money.
There’s a lot of moving parts here, but they all point in one
direction, which is higher inflation. It’s the only way to keep America from going broke.
Unfortunately, it will also make your money worth less.
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