Gary North

January 31, 2009

With the Federal Reserve's adjusted monetary base up by over 100% since last September, we are now seeing the outside possibility of mass inflation in the United States within a year: prices rising above 50% per annum. To grasp the magnitude of what the FED did in 2008, watch this spectacular 4-minute video:

The Federal Reserve System can stop the rise in the monetary base from producing a rise in prices. All it needs to do is to impose a higher reserve requirement on banks: 20% instead of today's 10%. Operationally, this has already happened voluntarily. Banks have deposited most of the FED's increase in the monetary base with the FED, where it is not lent out. This has kept the money multiplier negative. For a chart on this, click here:

Banks are losing money by holding these excess reserves. They are being paid the federal funds rate, which has fallen to one-tenth of one percent. Ts see the latest range of federal funds, click here:

The spread between interest earned (low) and interest paid to depositors (high) will eventually bleed the largest banks into bankruptcy. They must move that money into interest-paying loans, or else have to get many more injections of capital from the Treasury.

When banks pull money out of the FED and lend to anyone, the money multiplier will reverse. M-1 will soar. Prices will soar within a few months. There is a lag time of up to a year. But not for gold, which will rise in anticipation of this increase.

I believe this is the reason why gold has risen in January 2009. Markets are preparing for monetary inflation on a huge scale. This is not a bubble move. This is a defensive move against serious price inflation (10% to 50%).

If price inflation rises above 20% for more than a few months, the U.S. economy will be doomed in its present form. But gold will protect those who own it from financial destruction.

Buy bullion gold coins (not numismatic coins) before you buy gold in any other form.