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The Return of the Creature from Jekyll Island

For months now, the economy has been balancing precariously between recession and inflation in what Alan Greenspan calls “the worst financial crisis since World War II.” Not surprisingly, the authorities are struggling to reassure the public that everything is under control.

U.S. Treasury Secretary Henry Paulson urges us to remain confident because the economic fundamentals are sound. President Bush says that the United States “obviously is going through a tough time…but will continue to grow.”

And Ben Bernanke, Chairman of the Federal Reserve, said early on, “Given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the sub-prime sector on the broader housing market will likely be limited.”

Then Bernanke opened the monetary valves. He felt a Bear Stearns collapse would have had a domino effect on both cash-strapped banks and securities firms. So once again, the Fed rode to the rescue, and bought up US$29 billion worth of the bank’s most egregious sub-prime loans. The central bank then loaned over 10 times that amount, US$360 billion, to troubled banks.

Happy Go-Lucky Investors Don’t Seem to Care

However, investors are thrilled. Risk premiums are falling between Fannie Mae’s five-year debt and five-year Treasuries. In fact, the difference dropped to just half a percentage point from 1.15 percentage points on the day the Fed bailed out Bear Stearns. Investors are betting that Bernanke will bailout Fannie Mae next. And that’s a near certain bet.

If you consider all this, does it really matter some stability appears to have returned to financial markets after months of turbulence? Just the fact that investors are more confident these days tells you that most market players are short-termers. They don’t understand or care about the longer-term consequences of monetary inflation.

New York Times columnist Paul Krugman argued that it’s time to learn the lessons of the 1930s. “What turned an ordinary recession into a civilization-threatening slump was the wave of bank runs that swept across America in 1930 and 1931. This banking crisis of the 1930s showed that unregulated, unsupervised financial markets can all too easily suffer catastrophic failure.”

Gold Kept Politicians in Check Until 1913

From the founding of the country in 1789 until 1913, gold was money. The dollar was defined as 1/20th of an ounce of gold. When the government wanted to spend more, politicians either had to raise taxes, or sell bonds. As a result, it was basically impossible for the government to fall deeply in debt.

Then politicians and bankers decided the limited supply of gold had become a straightjacket that restricted their spending.

This gold-induced straightjacket was so inflexible that as late as 1913, 124 years after the country’s founding, the total federal debt was a paltry US$2 billion. It wasn’t because politicians didn’t want to borrow. They were simply held in check by the gold standard.

The Greatest Swindle in Monetary History

Unfortunately, they found a solution. In his book The Creature from Jekyll Island, G. Edward Griffin described the super-secret birth of the Federal Reserve. {Visit G&G Associates Audio Library to listen to the Audio Book of "The Creature from Jekyll Island}

In 1910, seven men met on Jekyll Island, a small island on the coast of Georgia. This magnificent seven designed a plan that turned into the greatest swindle in history: the Federal Reserve Act. The Act gave the new Federal Reserve System a legal monopoly on issuing U.S. dollars. They also gave the Fed the authority to back those dollars with commercial and federal IOUs.

Bankers no longer had to hold gold reserves, so bankers could expand loans. Of course, banking profits soared. Politicians were happy. By granting the new Fed the right to back issues with IOUs, they guaranteed a ready buyer for federal debt.

In slightly less than a century, the Federal Reserve has purchased over US$870 billion in IOUs. That entire time, the Fed has paid for them with freshly printed dollars. As the Fed allows banks to hold less than 10% in reserves against deposits, the US$870 billion in IO Us that the Fed has purchased has been multiplied through fractional reserve banking to over US$10 trillion in deposits in the banking system.

Your Dollar is Worth Less Every Time the Fed Rushes in to Help

An ever-expanding money supply, of course, causes a fall in your money’s purchasing power. The country was on the gold standard from 1789 to 1913. In those 124 years, consumer prices only rose a total of 13%. The moment they started backing dollars with IOUs, the money supply began to swell and money’s purchasing power dropped. During the 20th century consumer prices soared by over 1,500%.

Today, the economy floats on a complex sea of IOUs, each secured by other IOUs, and all are secured by the government’s debts. Anyone who thinks about it would understand that government debt is ultimately irredeemable…in the long run, government is the ultimate deadbeat.

Paper money is a giant confidence game, with everything depending on public confidence in those paper promises. And sadly, that confidence can evaporate overnight. Today we’re at the beginning of a correction, and there is a possibility that it could be the mother of all corrections. Or, the monetary authorities may be able to keep the game going a bit longer. Time will tell.

To survive as individuals your first challenge is to understand how this monetary fraud affects your personal wealth. The second challenge is to search out assets that have intrinsic, enduring value. These assets are the least vulnerable to central banks and governments.

I suggest you start by learning how the fraud all took place. Visit G&G Associates "Audio" library and listen to the audio book "The Creature from Jeckyll Island" if you haven't done so already. Next, get mad and stop letting the wool be pulled over your eyes and don't submit yourself to the debt the bankers and government are trying to force on you. Last but not least, set up an appointment with me to go over a plan that could set you up to learn how to obtain those assets that provide intrisic value within your investment portfolio to guard against your ever falling dollar.

Thanks

Gary Gray
Tax & Financial Consultant, RFC
G&G Associates
877-817-6031 toll-free
866-361-3872 toll free fax
www.gngassociates.net

"Those who do not learn the lessons of history indeed are condemned to relive them."

LEGAL NOTICE: This work is based on SEC filings, current events, interviews, corporate press releases and what we've learned as financial consultants. It may contain errors and you shouldn't make any investment decision based solely on what you read here. It's your money and your responsibility. G&G Associates expressly forbids from having a financial interest in any security that is recommended to our subscribers