There is much discussion regarding the reasons for U.S. aggression against Iraq. From the first shots fired over Kuwait to the recent return of most occupying American troops, the spectrum of proposals from mainstream media to conspiracy theorists has resulted in a myriad of explanations.

On one hand, if we believe the political spin, Iraq attacked Kuwait unprovoked, prompting the U.S. to come to the rescue of its ally. On the conspiracy side, Saddam was leaked information that the U.S. would turn a blind eye if Iraq attacked Kuwait. They propose that this gave the U.S. opportunity to involve itself more deeply in the Middle-east as Saudi Arabia allowed bases to be set up within their borders.

Later it was proposed that Iraq had weapons of mass destruction, which justified aggressive military action. Conspiracy theorists propose different ideas, including the gaining control of oil fields and establishing a stronger U.S. military presence in Iraq. The mainstream media’s angle is readily to anyone who cares to read the paper or visit their sites (NBC, CBS, CNN, USA Today, etc). The conspiracy theorist ideas are more difficult to find, but can be investigated at such sites as InfoWars and videos such as The New American Century.

Wherever the truth may lie, one thing that’s becoming abundantly clear is that Iran is not Iraq. Saddam had no interest in Muslim rule. Iran is firmly in the grip of Islam. Iraq did not have vast reserves of wealth. Iran has stockpiled gold.

To be fair, efforts against Iraq seem to have been impossible for Saddam to head off, whether they were legitimate or not. With Iran, on the other hand, we’re dealing with a country that has greater strength in leadership, more economic clout, a respectable military presence and apparently enough political awareness, coupled with the grit to wield the resources at their disposal, to possibly turn the tide.

Consider the recent efforts to entrap Iran through an oil embargo. Of course, it’s all proposed under the banner of possible nuclear instability, as if Iran can’t be trusted with nukes like North Korea; and as though the U.S. has some sort of legitimate authority to restrain any country from doing whatever it pleases within its own borders.

The European Union, joining in the embargo in an effort to control Iran, may have stepped out on a limb that is already cut halfway through. As everyone knows, a very oil dependent Europe is already in deep trouble economically, with political stability eroding with every added day of austerity.  Perhaps they somehow figured that an embargo beginning on July 1 would either never need to be implemented, or they would find a source elsewhere.

Iran, however, seems to have slyly outmaneuvered the EU in their own game. In doing so, they’ve made it clear that the ball’s in their court, and intend to hold on to it. Rather than wait around for the July 1 deadline, Iran has “unofficially” stated that it will preempt the embargo with one of their own, refusing to do business with EU countries.

To make matters worse, David Cohen, the US Treasure Department’s undersecretary for terrorism and financial intelligence (now that’s a strange and telling marriage), personally delivered a message pressuring the Society for Worldwide Interbank financial Telecommunications (SWIFT) to cut off Iran from being able to use their services. SWIFT has maintained a solid reputation as a dependable resource for all nations to utilize in world trade. Such a move will undermine this reputation, which will surely have far reaching consequences.

Iran has repeatedly offered to discuss their situation with the UN; an invitation that has been largely ignored. Further efforts to implicate Iran in bombings against Israeli targets have been anything but irrefutable. Pepe Escobar offered an insightful article on this subject in Asia Times, in which he states:

On March 20^th the oil bourse intends to start trading oil outside the U.S. dollar. More reverberations will be felt if they go through with this; reverberations that will harm the U.S. economy and likely strengthen eastern economies. If current sanctions continue to be pressed, oil prices cannot help but increase dramatically, adding additional pressures to European countries and the U.S. alike. Simply put, our economies aren’t in any condition to wage an economic war.

Watch these situations closely. Will the petrodollar see dramatic erosion? Or will the U.S. back off its suicidal economic warpath? Perhaps all-out war will develop, which will certainly reshuffle the cards.

Iran is not Iraq. For Americans, this is a lose/lose proposition. The only “safe” course is integrous diplomacy. But intervention seems to run in our political blood, so such hope may be futile.

For your prosperity,
J. Keith Johnson

The Gold Informant

It seems that the mainstream investment community only takes a break from ignoring gold to berate it: one of gold’s most outspoken critics, uber-investor Warren Buffett, did so recently in his latest shareholder letter. The indictments were familiar; gold is an inanimate object “incapable of producing anything,” so any investor holding it instead of stocks is acting out of irrational fear.

How can it be that Buffett, perhaps the most successful (and definitely the most well-known) investor of our time, believes that gold has no place in an intelligently allocated investment portfolio?

Perhaps it has something to do with his mentor, Benjamin Graham.

Graham, author of Security Analysis (1934) and The Intelligent Investor (1949), is correctly respected as one of history’s most knowledgeable investors. Over a career spanning 1915 to 1956, he refined his investment theories, in time becoming known as the father of value investing. Much of modern portfolio theory is based upon Graham’s work.

According to Graham, while no one can tell the future, there are periods when the valuations of stocks and bonds would deviate from fair value by becoming excessively over- or undervalued. To enhance returns and reduce risk, investors should alter their portfolio allocations accordingly. A quick look at a long-term chart supports Graham’s theory clearly shows periods when one asset class offered a better value than the other:

(Click on image to enlarge)

But what of the periods when both stocks and bonds stagnated or fell together? For much of the 1970s and again from 2001 through today, any portfolio allocated solely between stocks and bonds would have at best treaded water and at worst drowned in a sea of stagflation. To earn any real return, an investor would have needed to seek alternatives.

It’s clear from this next chart that gold was exactly that alternative, a powerful counter-trend investment for periods when both stocks and bonds were overvalued. Yet gold is conspicuously absent from Graham’s allocation model.

(Click on image to enlarge)

But this missing asset class is entirely understandable: for most of Graham’s adult life and the most important years of his career, ownership of more than a small amount of gold was outlawed. Banned for private ownership by FDR in 1933, it wasn’t re-legalized until late 1974. Graham passed away in 1976; he thus never lived through a period in which gold was unmistakably a better investment than either stocks or bonds.

All of which makes us wonder: if Graham had lived to witness the two great bull markets in precious metals during the last 40 years, would he have updated his allocation models to include gold?

We can never know.

We can know, however, that given Graham’s outsized influence on investment theory, there is little question that his lack of experience with gold, and therefore its absence from his observations, has had a profound effect on how most investment professionals view the yellow metal. This, in our opinion, goes a long way toward explaining the persistently low esteem in which gold is held by the mainstream investment community. And, as a consequence, its widespread failure to even be considered as an asset class.

A couple of takeaways: first, perhaps now you can stop wondering why your broker, the talking heads in the financial media, and Warren Buffett continue to misunderstand gold as a portfolio holding. More importantly, however, is that in order to have sustained, long-term investment success, one must accept that an intelligent portfolio allocation needs to include not two but three broad categories of investment – stocks, bonds and gold, with the amounts allocated to each guided by relative valuation.

Investors who understand this tenet have an almost unfair advantage over other investors as it allows them to get positioned in gold ahead of the crowd and enjoy the bulk of the ride, while others sit on their hands.

So when you hear commentators ridiculing gold as a barbarous relic, lamenting that they cannot eat it or smugly asserting that it produces nothing, rest contently in knowing that they’re operating with a severe handicap in their own portfolio. Meanwhile, we’ll prosper, armed with the understanding that gold fulfills a very important and specific purpose in a portfolio, namely as real money that protects net worth during periods marked by excessive government debt and currency debasement such as we are currently experiencing.

Given the powerful influence of Ben Graham and his disciples, his curse on gold will not go quietly into the night. But it should.

David Galland is managing director of Casey Research, which provides independent investment analysis on a subscription basis to a global network of over 180,000 self-directed investors and money managers. Recognizing the emerging bull market in gold early on, in the late 1990s, Casey Research formed a metals and mining division that has grown into a leading provider of actionable gold and resource intelligence. For investors looking to become familiar with the asset category, Casey Research offers a monthly newsletter, BIG GOLD, focusing on undervalued opportunities in mid- to large-cap producers, as well as best practices in buying, holding and selling precious metals. 

As the story goes, those who simply want to pursue business and succeed are often pitted against those who pay politicians in order to “succeed.” On the one hand we have true entrepreneurs with a vision to profit by meeting the needs of those around them. It’s simple supply and demand, coupled with ingenuity and hard work. In a truly capitalistic environment, free of government intervention, manipulation and draconian obstruction, such vision works wonderfully. This is the heart of the Austrian school of economic thought.

On the other hand are men of means, able to lobby in order to control legislation to their advantage. They gain allies within the ruling class, working together to manipulate markets and laws for their mutual gain. The result is difficult to define, but certainly comes close to fascism.

Thus, we have the development of the elite. This results in a sort of de facto caste system, illustrated in the U.S. by the declining middle-class. The uber-wealthy will generally be able to stay in the game by keeping abreast of the manipulations, whether they’re a part of them or not. They can afford expensive tax attorneys, international protection and diversification. Those between the middle-class and uber-wealthy will either adapt, and gain riches, or see their fortunes decline as the tables continue to turn against the common citizen. The middle-class, other than the select few, will continue to see the fruit of their labor decreased due to dropping wages and increasing tax burdens.

Recently presidential candidate Ron Paul discussed this topic at a rally in Kansas City, Missouri. As he put it, “Now we’re slipping into a fascist system where it’s a combination of government, big business and authoritarian rule, and the suppression of the individual rights of each and every American citizen.”

This is not from some far-right rebel pounding his gavel from a MRE laden bunker in the hills. Not that there’s anything wrong with storing extra food, but the point is that this is a man who has served the country as a congressman for decades. It’s not that he doesn’t understand the system. It’s that he’s well aware of the system, and willing to call a spade a spade.

But it actually goes deeper than this. Within certain industries there are agreements to keep labor costs down by refusing to hire employees from the competition. Consider this quote:

In other words, employers are teaming together to keep labor costs low by manipulating the labor market by agreement, if not contract. In effect, this creates a monopoly, of sorts, on skilled labor.

Further manipulations are observed in everything from the cattle industry to the poultry industry to book publishing  to beer, Wall Street and just about any other major industry you can think of. Whether it’s manipulation through industrial favors, legislation or any of a number of mechanisms, free-market capitalism has given way to a sort of conglomerate monopolization of industry.

There are a few measures we can take in response to these mechanisms. Many advocate new laws to break up such empire building. However, legislation has proven to cause more damage in the long run. Rather, consumer advocate groups may be helpful. But, even then, their helpfulness is limited by a populace that’s become accustomed to these manipulations. The lower prices in the marketplace today give the false perception that such organization is good for us. The only solution to this is educating ourselves in regard to how these mechanisms work and the long-term ramifications of their manipulations.

On a personal level, properly diversifying your portfolio is a strong defense against manipulations. While there apparently is manipulation in the precious metals sector as well, since the underlying fundamentals aren’t tied to business, but to inherent characteristics that cannot be controlled, this investment can only be controlled so far. In the end, the natural forces of true capitalism, supply and demand, will have their day. That’s a ride I wouldn’t want to miss.

For your prosperity,
J. Keith Johnson

The Gold Informant

GERMANY – When ripping up a floor, what does one expect to find? A lot of dirt? Perhaps a rodent, some rotting wood or even an occasional tool or construction leftovers. However, for a certain tradesman in Germany, a routine job quickly turned into adventure when he came face to face with a hoard he had never imagined.

While repairing a flat in Hannover, Germany, he found a plastic bag under the flooring. Opening it up he was shocked find, rather than trash, Australian gold coins, nuggets stamped with Degussa, a host of silver coins and some silver flatware wrapped in newspaper.

Early estimations of the value exceed 100,000 euro. The family that owns the house must be extremely grateful for this handyman’s honesty. At this time, whether or not there will be a reward has not been mentioned.

FRANCE – When champagne producer Francois Lange asked builders to renovate a vineyard facility in Les Riceys for him, he had no idea just how profitable his investment would be. As one of the workers tore down the ceiling, gold coins began raining down on him, followed by sacks of gold.

When all was said and done, 497 U.S. $20 gold coins, dated 1851 to 1928, had been counted. The value of this treasure weighs in at just under $1 million. Francois gave half of the find to the workers. It seems that hard work and integrity both paid off.

Johnstown – A collector investigated holes in an upstairs wall, finding a bag of gold. Jeff Bidelman recovered at least 8,500 coins, worth over $200,000.

A search on the internet can uncover story after story of people finding these treasures in old houses. During the depression many families hid their money in the ground, buried in the basement, stashed in attics or walls, because they distrusted the banks so much. Often knowledge of the whereabouts of these hidden treasures would be forgotten or die with the owners.

Some of my family resides in eastern Arizona, with old Indian artifacts often buried just a couple of feet deep. A few years ago my sister uncovered a tomahawk head while digging in her back yard. While not as exciting as a bag of gold coins, it’s still an opportunity at treasure.

There are two lessons for us in this, I think. One, it might be worthwhile to check your house for hidden treasures. Sometimes a thorough sweeping of the yard with a metal detector can reap great rewards.

The other is that much of this treasure is found because it wasn’t stored in a manner that provided access for heirs upon the owner’s demise. It’s wise to hide your treasure in various forms. However, failing to make provision for heirs or relatives to find it may render it lost forever, or place it in the hands of strangers.

For your prosperity,
J. Keith Johnson

The Gold Informant

It was in Greece that great thinkers of antiquity battled for the minds of the younger generations through ingenious rhetoric and cunning debate. Aristotle, Socrates and Plato have been teaching us ever since. And what young man’s heart doesn’t resonate with the last stand of the 300 Spartans in the Battle of Thermopylae? (Historicalredaction notwithstanding)

It was the Grecian Empire, led by the son of Philip of Macedonia, Alexander the Great, that seemed invincible in its quest to Hellenize the world. Under his leadership the phalanx was perfected, bringing warfare to a new level. And because of Greek conquest the entire Mediterranean region grew up speaking a common tongue, Koine Greek.

After years of using long nails as currency, Athens borrowed the idea of coins from ancient Lydia. Thus, Athens, not only known for its great philosophers, also developed one of the first world currencies, the drachma, alongside Aegina and Corinth.

Perhaps the youth of our day will be the first contemporary generation to think of flames when they hear of Greece. Maybe they’ll associate Greece with debt. Perhaps history will somehow blame Greece for the fall of the euro.

There is a certain bitter irony that the historical belly of commerce, philosophy and democracy is now facing its own battle of survival; a battle that involves all of the above. Philosophically, the Grecians are different than many of their European brethren. This has added to the tension in at least two ways; the fiscal policy that works in Germany does not work in Greece, and the pursuit of a solution that satisfies Germany certainly only exasperates the problem in Greece.

But, perhaps the greatest threat now comes in what could only be termed “fiscal slavery.” Yesterday The Telegraph printed an Ambrose Evans-Pritchard article discussing the pressure being placed on Greece today. In what may be one of the most outlandish, oppressive and threatening statements imaginable, Wolfgang Schäuble of Germany apparently demanded that Greece postpone this year’s elections.

Let that sink in. Because of fiscal differences and struggles, the German government (read, ECB) is demanding that the core of the management of the nation of Greece surrender its sovereignty to central bankers and European Union politicians? Is this or is this not a form of fiscal slavery?

Greece is on a precipice. What happens in the next few months may very well decide the fate of the euro, if it’s not decided already. Will Greece default and strike out on its own? Will the ECB find a way to hold on to Greece? Will Greece continue to surrender its sovereignty to central bankers? Will the ECB give Greece the boot?

Whatever happens, the euro is in serious trouble. Perhaps there is no hope for it at this point. Debt is not being resolved, but continually growing. Nations are growing in insolvency rather than prosperity. The euro experiment is a failure. And, rather than placing the burden on the backs of the central bankers that have caused this mess, it’s placed on the bent backs of the people; many of whom must work themselves to an early grave in order to simply put food on the table, even while central bankers sip champagne while raising taxes.

It’s entirely possible that the political reverberations that result from this could have far reaching consequences. May Greece act wisely, for a precedent may very well be set by what happens next. Will freedom prevail? Or will tyranny stamp out freedom as fiscal oppression enslaves the seat of democracy? Make no mistake; you will be affected.

For your prosperity,
J. Keith Johnson

The Gold Informant

China also dumped a great deal of US treasuries last year, down to $1100 billion in December, 2011, from $1173 billion, -6%, just five months earlier. Russia’s holdings diminished from $151 billion to $88 billion, -42%, over the period of one year, ending December, 2011.

Though the significance may be negligible, India, Hong King, Mexico and Israel all reduced their exposure to US Treasures over the past year.

India                                      $40.5 billion to $34.2 billion
Hong Kong                          $134.2 billion to $112 billion
Singapore                            $72.9 billion to $62.5 billion
Mexico                                 $33.6 billion to $27.4 billion
Israel                                     $20.6 billion to $15.8 billion

It’s no surprise that the largest increases came from European countries, most notably the UK, France, Sweden and Spain. Canada and Japan’s holdings increased significantly as well.

As western economies, and governments by implication, cling to one another in pursuit of sustainable support, Asiatic countries appear to be diminishing their exposure to the greenback. It would certainly be interesting to see the holdings of Arabic countries as well. However, they’re merely included in a group labeled, “Oil Exporters,” which includes too many regions to establish a pattern.

Of particular interest are China and Russia, and the implications of their moves. They’ve been very vocal in their desire for a standard trade currency independent of the dollar. At the same time, more countries appear to resent US intervention in the middle-east, seeking ways to trade without harming their US relations.

But how long will sovereign nations continue to dance to the dollar’s tune? The answer, most likely, is tied to how long it is until managing their country without dollars becomes easier, and more profitable, than it is under the current system.

Unless the US changes its current foreign policy, it would seem that dollar sentiment will continue to wane. At what point will such action affect the value of the dollar for trade? That’s a difficult question to answer. But, when it does, one of the strongest legs of this three legged stool will be yanked out from underneath it.

Another question that nags at the mind is in regard to where Russia and China are putting their dollars. They have to be buying something. Could it be gold?

For your prosperity,
J. Keith Johnson

The Gold Informant

Such may be the case in Saudi Arabia. For almost 40 years the Saudis have been friendly with the west. It was the house of Al Saud that partnered with the US in the establishment of the petrodollar.

Currently putting out about 12 million barrels of oil a day, Saudi Arabia is the world’s largest oil producer. Coupled with stockpiles of at least 267 billion barrels, they are positioned well to absorb shortfalls in world oil demand. This has lent to greater stability in oil prices. However, because of the close ties to the US, many think that it’s equally led to suppressed prices in the past. In the world of politics, with a recent Bloomberg report placing the breakeven price on oil around $91 per barrel, it’s very possible.

What many fail to realize, however, is that Saudi Arabia has its own tensions. These are not battles over borders, property rights or even oil production. The battle is centered in religious ideals within the Muslim faith.

Much of this is difficult for those of us in the west to understand. This battle is between the Sunni, who currently control the country, and the Shiites, who form much of the working class along the oil rich eastern region.

There have been tensions in the past. However, the Shiites have close relations with the Iranian Muslims, both culturally and familial. To the Shiites, Saudi Arabia’s willingness to work with western powers, especially in light of current Iranian tensions, justifies their resentment against their Sunni leaders.

The protests have not been peaceful, with violence resulting in many police and several Shiites injured and killed. In other words, the region could very well turn out to be a powder keg if a solution is not reached.

One week ago, demonstrators fired on police for the first time. Such action is, understandably, resulting in heightened security and more aggressive action from the local police.

Some in Saudi Arabia have accused Iran of assisting these dissenters; an accusation that Iran denies. With the Shiites as the minority, and many of their own condemning the violent protests, it is possible that the situation will blow over if the police can get a handle on it quickly enough. If not, these things sometimes take on a life of their own.

Saudi Arabia is in a tough position. Their relations with western governments have a long and prosperous history. It’s certainly been mutually beneficial. On the other hand, they certainly don’t want to be at war with their own people. But religious ideals and idealistic fervor cause division.

The elders are calling for more peaceful methods. The younger population consider themselves discriminated against. Perhaps this is where the fuse lies, and where the attention of the Saudi police should focus.

If tensions are not eased in this oil rich region, oil production will likely be hampered by fighting. This is yet another reason for Saudi Arabia to minimalize the tension. Hampered oil production will lead to higher prices.

This reminds us of our closing remark yesterday, “Whether oil goes up or the dollar goes down, gold is likely to rise. Be prepared.”

For your prosperity,
J. Keith Johnson

The Gold Informant

I am not fan of Iran. It’s not that I have anything against them, in particular. It’s more than I don’t appreciate their religious bigotry or the denigration of freedom that takes place on their shores. Of course, I don’t appreciate the denigration of freedom that takes place on our shores either. And, perhaps, that’s the point of today’s article.

Iran is not telling the US what to do within her own borders. But that is precisely what the US is telling Iran. And, according to statements in The Tehran Times, what the US is doing today is simply par for the course.

For clarity, I’m not anti-war; and I’m not anti-government. There is a place and time for both. However, I am anti-tyrannical war. And I am equally anti-corrupt government. The current posturing in the Strait of Hormuz appears to incorporate both.

Iran is in pursuit of trading oil for assets, commodities and currencies other than the US dollar. Recent embargo efforts certainly aren’t detracting them from such pursuits. If anything, it’s only strengthening their resolve.

We’ve discussed the history of this in some detail. What it comes down to is that much of the dollar’s strength is tied to its currency of choice in the trading of oil. If Iran, as the third largest oil producer in the world, successfully divorces itself from any dependence upon the dollar, there would most likely be a significant drop in the value of the dollar. Perhaps, even more devastating would be the perception of the dollar, and the US, in the eyes of the world. Consider this quote from Garry White’s article in The Telegraph;

Is this the reason for tensions in the gulf? There have certainly been wars for lesser excuses. A falling dollar would obviously be destructive to a US economy already in turmoil. Would war with Iran, in an effort to protect the dollar’s place in oil trade, be a viable economic solution?

The US points to nuclear issues as its reason for being in the region. Perhaps there is some legitimacy to such claims. But does the US really have the right to restrict another nation from such pursuits? Is this a moral, ethical, economic or political matter? Regardless of the truth, unless an amiable solution is worked out in the near future, we should expect oil prices to increase.

If the dollar’s relationship to oil is not hampered, then the status quo will likely be met for the foreseeable future. However, if nations continue to pursue oil trade denominated in anything but dollars, we should expect the dollar to drop significantly in value.

Whether oil goes up or the dollar goes down, gold is likely to rise. Be prepared.

For your prosperity,
J. Keith Johnson

The Gold Informant

There are several resources at the hands of the analysts when they open their charting toolbox. As I look through the tools at my disposal I see various moving averages, Bollinger bands, price channel, Parabolic SAR, Linear Regression Line, various volume indicators, Stochastics, RSI, Chaikin’s Volatility and so forth. In addition, I can use various types of charts, such as bar or pie. Any limitation is only in the imagination and ability of the analyst.

Something changes when we come to gold though. Quite often an article comes along that charts gold. The analyst then attempts to show the patterns for the yellow metal, from which he then in turn attempts to predict the future. And, he does so using the same tools, equations and reasoning that he uses for everything from Google to Microsoft to GM.

Such attempts are generally futile. Of course, charts are useful. We use them whenever we see an opportunity to help the reader understand. Also, there are indicators and careful analysis can bear much fruit in our efforts to understand movements in the precious metals’ markets. And there are some who use indicators such as Elliot Wave Theory with a degree of success. But it soon becomes apparent that treating gold as though it were a stock is a recipe for disaster. We’ll go over a few reasons why.

Financials – Have you ever had the opportunity to look at the books for gold’s balance sheet? What are its financials? How about dividends? P/E ratios? Market cap? You get the point. Gold does not “perform.” It cannot be examined in regard to its assets or balance sheets. And because its value is tied to its intrinsic nature, it is actually a balance sheet, in and of itself, of sorts. Gold sits. Companies perform.

Gold is a monetary asset. In this sense, there simply is nothing like it. Obviously no stock can claim such a title. There are several reasons for this. It is limited (intrinsic value). It is divisible. It is portable. It is durable. In light of the industrial use of every other metal we could possibly trade, nothing comes close to gold.

Nothing trades as widely as gold. While it is available for trade as an ETF (GLD), it’s also traded as a currency on the FOREX. This brings it to markets that stocks aren’t a part of and results in it being traded in ways that they never could. And the fact that silver is so prevalently used industrially puts a slight division between the yellow and white metals.

Gold is accepted everywhere in the world. You can take an ounce of gold from Peru to Uganda to Siberia and cash it in. Furthermore, other than government restrictions, you’ll likely get close to the same amount of value for it regardless of your location.

Gold is not a typical investment. There is a very real sense in which gold is not an investment. It’s certainly a position. And your purchasing power can obviously increase because you own gold. We’ve mentioned often that it’s a great wealth preservation asset. In fact, it’s likely the most reliable wealth preserving position ever.

It’s not a stock. It’s a currency, but not like any other currency on the planet because of its intrinsic value. For years those who embrace Austrian economics have said so. Gold bugs have been scoffed at. Today the Keynesians are being forced to admit that there was something to the Austrian argument. Gold is finally gaining respect from many who used to speak of it with derision. Eventually the whole Keynesian system will be recognized for what it is.

For your prosperity,
J. Keith Johnson

The Gold Informant

When sovereign debt becomes the status-quo of a country’s leadership, they have just a couple of options. One is to print more money (inflation). Another is to raise taxes. This is exactly what we’re seeing in Europe. And Greece is the country that’s bearing the brunt at the moment (all of them are in one way or another).

In an effort to “help” Greece pay back the debt it’s accruing, the EU-IMF demanded that they raise the VAT for food and drink from 13% to 23% this past September. Of course, everyone eats and drinks, so this is a no-brainer, right?

Wrong! In a country strapped for cash, the result was contraction. Rather than see a rise in tax revenues, a 7% drop was realized over the past year. Thus, in the face of draconian Keynesian policy foisted on the people of Greece, their deficit continues to be around 8% of the GDP.

The people of Greece are hurting. And it’s an odd assortment of “their fault,” “not their fault.” On one hand, people are responsible for their own debt. Being a part of the EU has offered them opportunities to raise their standard of living. But too many of them became infatuated with easy money, pursuing debt like a drunk pursues the next drink. And they’ve paid a heavy price already, with over 60,000 small businesses bankrupt since last summer.

[EDIT: I ran across this piece in The Telegraph, written by Ambrose Evans-Pritchard, just a couple of hours after posting this article. It's worthy of consideration.

We learn that:

Greece's manufacturing output contracted by 15.5pc in December from a year earlier.
Industrial output fell 11.3pc, compared to minus 7.8pc in November.
Unemployment jumped to 20.9pc in November, up from 18.2pc a month earlier.

I have little further to add. This is what a death spiral looks like.]

 On the other hand, who can blame them? Easy money was thrust in their faces. They thought they could live in more luxury, so they did. And, thus, the failing of the European Union comes to the fore. Different cultures with different values and differing ways of thinking attempting to harmoniously embrace a mutual and interdependent fiscal policy was an unrealistic dream. And now, as the PIIGS can tell you, it’s turning into a nightmare.

What happens when a country’s deficit is 120% of their GDP? Is there any hope of recovery? Simply put, it’s never happened. Eventually reality will be faced and, in one form or another, Greece will default. It might be through forgiveness of debt. It could be some form of bailout (who’d pay that?). Maybe they’ll just face the music, start over and leave the EU holding the bill. But is that all?

The implications of this are huge. It would be devastating both economically and politically for Greece to default. While the European Bank, US Federal Reserve and other central banks have promised to keep Greece afloat, it has to end somewhere. And the people of Germany and France, not to mention other European countries, have become increasingly more vocal about the tab Greece is racking up.

Who can blame them? Think about it. How would you appreciate having to pay more taxes because a neighboring state had embraced irresponsible fiscal policies?

In case you’ve missed the irony, let’s put it bluntly. Greece is in debt beyond anything they could possibly recover on their own. The EU is striving to help them out, but they keep beating the same drum; a drum that’s resulted in continued fiscal suicide. Everyone is now holding the bill, including you.

The Federal Reserve, on the behalf of the benevolence of the US citizenry, has promised to help the EU through loans. If Greece defaults will the EU pay the Federal Reserve? If the EU defaults will the Federal Reserve simply write off the dollars it’s printed in the name of the United States Treasury? Who foots the bill?

Make no mistake; the bed that Greece is lying in today is the very bed America is making. This is no different than the bank bailouts we’ve seen in the US. These austerity policies are crippling. It’s a form of robbery that only a government – or government sponsored corporation such as the Fed – could possibly get away with.

The bottom line? As we’ve discussed, inflation. Higher taxes, openly and surreptitiously. Of course, a sudden retraction in the money supply could result in deflation. Could a default be written off in such a way? Which would be worse? It’s hard to tell. But something has to give. And whatever gives will bring a great deal of strain to world economies; and the finances of millions of Americans. We’ll do all we can to help you be prepared.

For your prosperity,
J. Keith Johnson

The Gold Informant