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Governments Printing Money Can't Make Money

Commodities / Gold & Silver 2009 Mar 28, 2009 - 08:13 AM GMT

By: The_Gold_Report

Commodities Best Financial Markets Analysis ArticleJay Taylor, who shares the results of his investment research with subscribers to his widely read Gold, Energy & Technology Stocks weekly e-newsletter, has just added a weekly radio program to his array of tools investors can use to survive in these dark days on Wall Street and Main Street—maybe even thrive. It's called “Turning Hard Times into Good Times,” and aired for the first time on March 24. In this interview, he talks about the program's focus, and reiterates what he told The Gold Report readers in December—that gold stocks represent the best investment these days. Buying gold stocks may be riskier than holding bars or coins, but the upside potential of owning mining shares is commensurately that much greater as well. Jay also argues against the folly of thinking we can cure what ails us by running the printing presses faster and faster to pump more and more paper currency into the economy.


The Gold Report: What's the premise behind your new radio program, Turning Hard Times into Good Times?

Jay Taylor: The notion is in order to fix a problem, you have to understand it. You have to understand its origins and its pathology. In my view, the difficulties we're having in the U.S. economy and the global economy have been diagnosed incorrectly. Our problem is really due to a monetary system that in essence has no foundation. It's a fiat monetary system unlike the commodity-based monetary systems of the past that put some limit on the amount of credit or debt, if you will, that could be issued.

Of course, Roosevelt took Americans off the gold standard in the 1930s, but once Nixon took us off the international gold standard in 1971, there was no longer any limit to the amount of money that could be created. So the central bankers of this world, the politicians and the bankers in general, have had one heck of a party and we have created enormous amounts of credit. We've created so much credit, in fact, that we have reached the level where it is no longer serviceable.

The solution that the policymakers are coming up with is more of the same, more credit. I was talking to Congressman Ron Paul earlier; he was suggesting that Roosevelt's New Deal did not work in the 1930s. His Secretary of the Treasury admitted that it did not work, that it was a total failure. From 1929 through the first eight years of the first Roosevelt administration, we had as much unemployment as we had at the start of the administration, and huge amounts of debt to boot. Well, it didn't work in the '30s, but we're making the same diagnoses now. The policymakers are trying to solve the problem with more of the very thing that caused the problem and that is enormous amounts of debt. This is the view of the Austrian School of Economics that I'm bringing to my radio show.

TGR: Could you describe that view in a nutshell?

JT: The Austrian perspective is at odds with the mainstream Keynesian and monetarist economics view, which suggest that all you really have to do is print more and more money faster and faster. If there was a problem in the '30s, the Keynesians argue, it wasn't the treatment—it was that there just wasn't enough of it fast enough.

I believe that's wrong and, in fact, back in 2000 my newsletter started to invest on the basis that we were in for big problems. With that approach, we'd tripled the value of our model portfolio by the end of 2007, whereas, the S&P 500 had not gained anything. It was actually down a little bit. Last year we took a big hit; we lost a lot of money, unfortunately, but we almost doubled our portfolio while the S&P 500 now is down to half of where it was at its height. So I think we're doing something right.

The point is that we need to understand the nature of the problem in order to prescribe the right remedies for individuals. I would take it one step further and say that as a nation, we must understand that you cannot create prosperity by printing money, but in fact we have to work hard and create things and save money. Unless the nation understands that and comes to grips with it, we're not going to go anywhere. So that's the premise of my radio show, Turning Hard Times into Good Times . We need to understand the problem properly and then provide some solutions for individuals to preserve their wealth and hopefully expand their wealth at a time when most people unfortunately are buying into the establishment solutions. And again, those solutions are just to prescribe the same remedies that caused the problems in the first place.

TGR: So you're thinking that the U.S. government, in following the Keynesian view, is really just going to prolong the problem? That the hard times are really going to last longer and potentially go deeper?

JT: Yes.

TGR: Given that scenario, how do you turn even harder times into good times?

JT: You begin by understanding that what they're doing is creating enormous amounts of money out of thin air, in essence. They're not creating wealth; they're creating units of currency. They're increasing the supply of the currency. It's just like increasing the supply of anything else. All other things being equal, when the supply increases, the value decreases.

TGR: So the dollar is going to decrease in value against what?

JT: Maybe not against other currencies, of course, because the same thing is happening with other currencies. The question is which currencies inflate more rapidly, and the dollar actually has been gaining strength recently. It's been gaining against other currencies—but not against gold. Gold has been rising against all currencies. So people must understand the basic fundamentals of what's causing our problem and then invest accordingly. What will hold its value against paper money? What could actually increase versus paper money and then go into those sectors.

TGR: Does that limit people to the precious metals? Is it just precious metals that will increase in value versus currencies, or do you see other potential opportunities?

JT: At the moment, I'm interested in gold more than any other precious metal. The reason is that I believe we're still looking at a very significant deflationary event. We've seen a little rally recently, but I think it's frankly just a bear market rally. The stock market in general is just getting murdered. The stock market and all manner of investments are way down. If the bond market turns and heads into the secular bear market, I think it's “game over” for paper assets in total.

Certainly the financial markets are deflating, the bank stocks, financial assets of all kinds. Most commodity prices have taken a really big hit; oil prices are down threefold versus gold, for example. Housing prices, of course, is a really big one. As long as we continue to deflate and prices continue to decline, I think gold is the place to be.

It's very interesting. Bob Hoye, an analyst from Vancouver, has gone back and studied six major credit expansion periods over the last 300 years, the current one being the latest and the prior one being before the Great Depression of 1930s, when that expansion bubble collapsed. In those six timeframes, gold was a very bad place to put your money during credit cycle expansions. But during the contractions of those cycles, gold was the very best place to be. Why? Because gold gained real purchasing power.

TGR: So how high could gold prices go in this contraction?

JT: The nominal price of gold doesn't matter so much. Actually, I try to get away from answering that particular question. I believe the right question is “How much will an ounce of gold buy?” Let's put that in some context. September 12, 2008, was a Friday. It was the beginning of the next week, after the Lehman Brothers collapse, that the bottom fell out of the credit markets. From that time until now, an ounce of gold will buy three times more oil. It will buy more than twice as much of the Rogers Raw Materials Fund. It will buy more than twice as much copper. So gold has gained real purchasing power.

A lot of the copper and zinc and other base metal mines have closed with the collapse in those prices. Labor is available to gold mining companies now; which was not the case when those mines were open. So, just as in the 1930s, gold mining is one of the few places where you can really make money. We saw some very good 2008 earnings reports coming from Goldcorp (TSX:G) (NYSE:GG) and some others. I don't know of any other sector, aside from perhaps companies that produce guns, that is really reporting substantially higher earnings. A few companies such as Netflix may be doing well; but for the most part very, very few industries are doing well right now except gold because the real price of gold stays high. The real price of gold does not decline during these periods.


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