That James Turk quote is at least partially wrong. One of the very first things Roosevelt did, in his first month in office, was rescind the right of anyone to turn their paper dollars into gold. Not only that, he actually pushed through a law to confiscate all privately held gold in this country. For a neutral source on this, see en.wikipedia.org So the dollar was not tied to gold as he claims for any US citizen, and the government also made foreigners pay $35 to get an ounce, instead of the previous $20.
The clear intent of these measures was to induce inflation, which was thought would help the economy, but it didn't work. The dollar did rise in value against all commodities, goods, and services, as Turk claims, but that is just another way to say that a deflationary collapse was happening. Such a thing remains quite possible over the next few years--I am not saying it necessarily will happen, but it certainly can't be ruled out.
This is too simple for a real economist, but here is how I think of it: inflation, as traditionally measured in terms of the cost of a basket of goods and services, has been very mild for the last 25 years, which is consistent with the modest growth in M1, M2, M3, etc. over that time period. Yet over the same 25 years, stocks, bonds, real estate, art, you name the asset and its price has zoomed well in excess of inflation. That is because of another "M" at work, let's call it "M99", that counts not only the standard M numbers but also the total of how much they get levered up. Assets have been manufactured, bought and sold, by taking something that started out as real and simple, say a mortgage against a house, and then combined them with others into a security. That security is now an asset that can be borrowed against, and the cash extracted was used to buy more of them, or similar paper or real assets. As certain trends in society, like the increase in service versus manufacturing businesses, tended to make the economy less volatile, people would be comfortable reducing their savings and increasing their debt even more since the risk of a sharp decline seemed less. So this hypothetical M99 kept growing rapidly and kept pushing up the prices of assets around the world, even as the value of goods and services measured by the traditional inflation numbers showed no more than modest increases.
The rise in M99 was an upward spiral--the more assets rose without any significant corrections, the more it seemed rational to leverage oneself to the hilt and buy more of them, since the trend was so strong and all drops were temporary. Now we seem to be early in a downward spiral, where asset prices steadily drop and the rational thing to do is sell them, or at least pay down debt against them. Just as the real world was positively affected by the upward spiral (homebuilding, banks, furniture stores, etc., and everyone they employ, in this decade's real estate bubble), it ought to be affected negatively as the spiral turns down. In that environment, the Fed may lower rates to zero and try to pump up the money supply, but its attempted additions to M1, M2, and M3 may be dwarfed by the decline in this M99 stuff.
To quote Turk "...in the Great Depression high-quality bonds that kept making their payments rose in value while the bonds of weaker borrowers collapsed", in the next few years it could be US Treasuries that are the high quality bonds (only because the US government owns a printing press and can always run off more dollars to pay principal and interest, even if those dollars are dropping against gold.) Your negative bet on treasuries will work out great if non-US economies stay strong, and the dollar plummets against their currencies. But if their economies follow us down, as they could well, the US dollar could rise against other paper, even as all paper drops against gold, and long term treasuries could be priced to yield 1%, as they did in the 1930s, and in the 1990s and beyond in Japan in the aftermath of its collapsing bubbles. |
