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The Coming Dollar Devaluation

In the good old days, the government paid investors interest to buy bonds. Yesterday, however, the investors paid the government for the privilege of buying Treasury bonds. This is the first time that has happened since 1940.

http://us.ft.com/ftgateway/superpage.ft?news_id=fto120920081842157035

In other words, investors these days are only too happy to lose a mere half percent per year on their investments (not including the inflation factor, of course, on which they lose a whole lot more).

With a dollar devaluation looming, it seems incredible that people would actually buy bonds now, when it is guaranteed that they will lose money. Perhaps this is Babylon's version of the Wise Men showing up at Christmas. Babylon's wisdom looks a bit foolish to me.

So far, the incredible amount of money created in the past three months by all the bailouts has not hit the streets yet, and so the move from deflation to hyperinflation is yet to begin. Right now, we have deflation, which is the result of a shortage of money among average consumers. The stage is being set, however, for the next phase of the economic problem, and it is hyperinflation.

Right now, most of the money created by the Potomac Currency Printers, Inc. has been "sequestered" in bank vaults, according to James Conrad's The Manipulation of Gold Prices,

http://seekingalpha.com/article/109210-the-manipulation-of-gold-prices?source=article_sb_popular

He writes,

"The Federal Reserve has embarked on the biggest money printing surge in history, though the world economy has yet to feel its effect. To prevent the newly printed dollars from causing immediate hyperinflation, these newly printed dollars have been temporarily sequestered into the banking industry's reserves, rather than being released for general use. This was done in a number of creative ways."

"The extent of manipulations engaged in by this Federal Reserve is mind numbing. The total number of sequestered dollars has now reached well in excess of $1.2 trillion dollars. That means that Fed credit, so far, as been effectively increased only by about 10%, over the last 2.5 months, rather than 150% that appears on the surface of the Fed balance sheet. The rest is temporarily sequestered."

The way this has been done is a big technical. If you are interested, you can read how it is done by clicking on the site above.

Then Conrad speaks of Treasury bonds, which are now being sold at negative interest rates:

"At the same time, the U.S. Treasury has been very busy selling newly printed Treasury bills to anyone foolish enough to buy them. To a large extent, the fools reside overseas, but some reside inside this country, and the sale of these U.S. bonds has resulted in a substantial inflow of foreign reserves to the Treasury."

"Anyone who buys long term Treasury bills is going to lose a fortune of money in the long term."

The government manipulation apparatus has been developed over a period of years. The stock market is controlled by the government's so-called "Plunge Protection Team." These the ones charged with the responsibility of keeping the DOW over 8000. That way, every time the market naturally goes down, it always seems to bounce up after hitting a low of 8000. It has nothing to do with market fundamentals. It is about an artificial price-fixing scheme that is designed to defy all logic. Conrad says,

"If the DOW falls below 8,000 for any significant amount of time, most big American insurance companies will be forced to recognize huge losses on their portfolios, and will become insolvent. Insolvent insurers, like insolvent banks, must be closed by regulators as a matter of law. Obviously, mass insurer bankruptcies would be yet another major destabilizing slap in the face to an increasingly unstable economy."

Conrad then tells us the dilemma that the Fed faces today in having to choose between a rising stock market and keeping gold prices low:

"The Federal Reserve must now make a tough choice. In the past, Federal Reserve Chairmen may have felt it necessary to support regular attacks on gold prices to dissuade conservative people from putting a majority of their capital into gold. Now, however, the world economy needs much higher gold prices in order to devalue paper money, not against other currencies in a 'beggar thy neighbor' policy, but against itself. This can jump start the system. If the Fed continued to support gold price suppression, that would collapse the stock market far deeper than they can afford, most insurers will end up bankrupt, and there will be no hope of avoiding Great Depression II."

In other words, the Fed and its banker friends have been manipulating the price of gold (and silver, too) in order to make gold an unattractive investment for people. This keeps people from investing in gold, and so the money naturally flows into the stock market to prop it up. The problem is that the price of gold has already been manipulated to the bottom of the barrel, and people are so spooked by the stock market that they are starting to buy or hold on to their gold.

This has caused "backwardation" this month, as reported earlier. The pressure to devalue the dollar (i.e., to raise gold prices) is increasing. Without such a devaluation worldwide, the financial system could see "financial catastrophe." Conrad tells us that Ben Bernanke has written articles indicating that his "long-term plan involves devaluing the dollar against gold," following Roosevelt's plan in the 30's. At that time, the value of gold increased from $22.50/oz. to $33/oz. as soon as Roosevelt had confiscated all the gold he could get his hands upon.

Apparently, the bankers are well aware of this. "Both JP Morgan Chase's and Citibank's analysts, for example, are predicting a huge rise in the price of gold," Conrad writes. He says that although Goldman Sachs has been a primary manipulator of gold prices (downward), "this month, both HSBC and GS took lots of deliveries of gold from COMEX."

In other words, some banks are breaking free of the pack and are stocking their vaults with gold, believing that Goldman Sachs will not be able to continue its manipulation of gold prices at its current low level. This is, no doubt, part of the reason for the "backwardation" of gold lately. Conrad says,

"Backwardation is always the first sign that a huge price rise is about to happen. In the absence of backwardation, there is no rational explanation as to why HSBC, Bank of Nova Scotia (BNS), Goldman Sachs, and others are forcing COMEX to make large deliveries."

So it appears that we are nearing the collapse of the government-bank-manipulation of gold prices. Conrad thinks that gold will hit $2000/oz rather quickly and then go to much higher levels over a period of time. If that happens, silver will follow, because the manipulators will have been crushed under the brute force of global demand.

We will know soon if Conrad is right.