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Rate Cuts, Inflation, and the Dollar

Written By Brian Hicks

Posted November 6, 2007

War fighting may be tough on boots, but it’s murder on the wallet. Unfortunately, that’s a lesson that Captain Allan McClain needed to learn the hard way. Incredibly, he had to lay out $600 for new a set of footwear. And to add insult to injury he was charged a whopping $10 for a simple spool of thread.

And while that hardly seems like a fair deal for an American fighting man, it really did happen. The year was January 1781.

Captain McClain wasn’t fighting terrorists but chasing the Redcoats around a new nation. He was a soldier in the Continental Army and he was paid in Continental Dollars. Needless to say, he probably deserved better.

Created in 1775, the Continental Dollar was a series of notes designed to support the revolution. Its plates were crudely engraved by Paul Revere himself and printed on such thick paper that the Brits referred to it derisively as "the paste board money of the rebels."

Clearly, The Brits were on to something.

At the behest of Congress, two million dollars worth these of "paste board" notes were to be created. And by July of 1775 they became part of the currency of the day.

More Dollars = More Inflation

But to the surprise of no one, those two million notes weren’t nearly enough to cover the bills. So almost as soon as those new "dollars" hit the street, the Congress decided to print some more of them, and by the end of 1775 there were over six million of these notes in circulation. The money supply had more than tripled.

But guess what? It seems that even our sainted founding fathers simply couldn’t help themselves when it came to money. So much so that by its final printing the aggregate amount of Continental Dollars in circulation had skyrocketed to a stunning $242 million in as little as five years!

Needless to say, this massive devaluation of the currency through the inflated money supply simply devastated the notes. In fact, it was so bad that by the end of 1781 it took $16,800 to purchase a mere $100 worth of gold.

In the end, the Congress never did redeem the bills and their part of the debt was not assumed by the new U.S. government. So in six short years the Continentals became completely worthless.

Sadly, what was true in 1775 is still true today. Bankers love to print money.

The reasons for this are twofold. One is that central bankers believe they can somehow "manage" the economy through the manipulation of interest rates and the money supply.

The second is that the government printing press is necessary to monetize the escalating federal debt that politicians not only hunger for but thrive on.

You see, we don’t sell war bonds or raise taxes anymore. That would be too restrictive.

Besides, why bother when you’ve got tons of paper and the keys to the printing presses?

In short, it’s a combination of hubris, greed, and blind ambition and it cannot end well.

Other countries, of course, can see this too, and because of it they are moving away from the dollar as fast as they can.

Rate Cuts Crush the Almighty Greenback

But few Americans actually get the picture yet. How could they?

After all, we don’t remember the Continental, and our modern nation has never suffered from inflation so severe that it destroyed the dollar. That’s something that happens in other countries.

And what we know about the Fed, for some reason, couldn’t fill a thimble. Ben Bernanke is by all accounts the second most powerful person in the country, and the vast majority of Americans could not begin to tell you a single thing about what the Federal Reserve actually does. (Why is that?)

So instead we believe the bankers and the politicians. We see soft landings.

We have lived our whole lives at the top of the world heap. How could tomorrow be any different?

The truth is it could be very different. The rapid expansion of the money supply ensures it, because when we devalue the currency by creating huge volumes of dollars out of thin air, the result is inflation.

In 1781 it was $600 boots. Today it’s $96 dollar oil and $800 gold. Inflation is a monetary phenomenon and history proves it.

In fact, a dollar from before the creation of the Federal Reserve is now worth only about four cents.

That’s why the soaring prices of gold and oil are not just some anomaly. It’s a worldwide vote of no confidence against the Fed and its dollars. That was the case in 70s, and it is the case today.

Heck, even a supermodel can figure it out. Along with Warren Buffett and Jim Rogers, Gisele Bündchen is also bearish on the dollar. She recently demanded that Proctor & Gamble pay her in Euros.

So as long as the world is restless over our increasing money supply, our trade deficits, our unfunded liabilities, and the complete inability of Congress to rein in government spending, the price of gold and oil will continue to rise as the dollar continues its freefall.

In fact, Helicopter Ben is just getting warmed up with his cuts. Bailing out the banks will take rates much lower than the current ones.

Of course, the dollar likely won’t have the same fate as the Continental, but it won’t be pretty.

It’s called inflation and its coming to a boot store near you.

Wishing you happiness, health and wealth.


Steve Christ, Editor 

By the way: Here are three great charts that tell the story better than I can. One is of oil. One is of gold. And the other is the greenback. Look at what happens to value of all three in August when the Fed started to cut rates. One down big. Two up big. It’s no coincidence.




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