As Gold Hits $1000 Per Oz.

Once again Peter Schiff at Euro Pacific Capital has a bleak outlook on the fiscal stimulus. It appears that he's caught the gold bug. (read)

The latest spending, signed into law yesterday by President Obama, came on top of $300 billion committed to Citigroup, $700 billion for TARP 1, $300 billion for the FHA, $200 billion for TAF and some $300 billion for Fannie and Freddy. Just over the last six months, which excludes the initial Bush stimulus and several massive, unfunded Federal guarantees, nearly $5 trillion has been committed by the government to the financial industry. Rational observers cannot be faulted for concluding, despite Administration claims to the contrary, that the government is merely throwing money at the problem.

Although the rhetoric has managed to convince many observers of the possibility of success, the gold market appears to clearly understand the implications of this unprecedented spending.

The feeling that the government has no idea how to proceed has created palpable panic. In response, pragmatic investors are seeking the ultimate store of wealth. In 2009, as has occurred countless times throughout history, that store will be stocked with gold. Thus, whether the Federal government's interventions will succeed or fail will be anticipated by the price of gold. Right now, the market is screaming failure.

Prior to the latest round of Federal spending, the Federal government had committed $4 trillion to postpone bank collapses and to lay the groundwork for subsequent restructuring. But has any of this activity actually rescued the banking system? In light of the evidence of deepening recession, is it likely that the additional $787 billion in the latest stimulus will instill enough confidence to restore economic growth? If not, what damage will it do to the eventual recovery?

How true. This stimulus has done nothing to restore confidence. Even at these low prices, does anybody feel like pouring their life savings into the stock market now? Or buying your dream house? No way. Gold sovereigns and guns are looking blue chip to me.

Hat tip: Pat

US Dollar Devaluation? History Shows:

Avner Mandelman in the Globe and Mail, with inspiration from the book Fiat Money, Inflation in France, written 50 years ago by Andrew Dickson White, sees some distressing similarities of today's situation and post-Revolutionary France:

What evidence is there that today resembles that particular past so much that the ending is bound to be similar? First, in 1789, power shifted from those who had money to those who mostly didn't – similar to today. Second, the revolutionary French government tried to pay the debt racked up by the deposed regime with freshly printed money – again like today. Third, any dissenting voices in the National Assembly were shouted down with dire warnings of a “catastrophe” if the stimulus package were not approved – once more, like today.

But fourth and worst, as soon as the freshly printed money was used, the cry arose that it was not enough – and so more was printed. Then more, more and more.

That last part is not yet in evidence today. However, once the recently approved U.S. stimulus is used up, more will be demanded of Congress, just as it was in 18th century France – you can bet on it.

Hat tip: Pat, who adds:

"My late father-In-law knew all too well about paper money. He was German. He told me his father had the money reduced to zero four times in his life. We were talking about this right after a Ruble "revaluation" in Russia. In Zimbabwe they recently issued a 1 trillion dollar note."

Stuffing Money Under the Mattress

Anne Applebaum has an article in Slate about how schemes like the Madoff fraud will erode trust and make doing business much more difficult. (here)

Worst of all, everyone who invests anywhere will think just that much harder, take that much longer, demand that much more documentation. And they will do so not only because of Madoff, but because of the subprime lenders, Wall Street investment banks, and Enron fraudsters who have worked so hard to erode our faith in the reliability of our system.

...

Madoff's pyramid scheme, far broader than anything MMM dreamed up, was made possible by our own tradition of lawfulness. And now he will help bring that tradition down. Here's a prediction: In the coming years, American capitalism will become slower, more cautious, less productive, and less entrepreneurial. We're still a long way from Eastern Europe of the 1990s or from the Latin America or Russia of the present. But maybe not as far as we think.

Who can you trust these days with your money? Is burying gold in your backyard the soundest investment strategy?

On a related note: It's troubling to me that the government of Canada sold off virtually all of its gold holdings. Is our entire Treasury based on questionable paper?