Monetary Digest, February 1975
Presently the U.S. dollar is undergoing its worst beating ever in the foreign exchange market. Dropping to an all-time low, the dollar literally has had no buyer on some days.
Commenting on the situation, Treasury Secretary William Simon voiced confidence that the dollar would rebound later in the year if an upturn in the American economy materializes. Mr. Simon envisions a tax cut which would make a second half economic recovery “more solid and more certain.”
The weakness in the dollar is attributed to last years $3.7 billion trade deficit which was recently announced. However, it must be noted that the dollar started its skid before the trade figures were announced. While it is true that the trade figures probably caused some selling in the dollar, the real reason for the dumping is because foreigners anticipate a continuation of the same trend. With continued deficit spending, financed through “selling” bonds to the Federal Reserve System (also known as printing press money), we can anticipate a continued weakness in the dollar abroad and at home.
Jobs are Disappearing Rapidly
Since October, over 1-1/2 million people have lost their jobs. This is undoubtedly the largest three-month decline in the post-war era. Unfortunately, further job losses appear to be in store.
New claims for unemployment benefits have reached an all-time high. Besides jumping 20% in one week, this weekly total was the highest since unemployment insurance began during the great depression.
The remedy for unemployment, as taught by Keynesian economists, is to stimulate the economy by increasing the money supply. Increasing the money supply is a euphemism for printing money. This is what President Ford, in his State of the Union address, told us he plans to do over the next 18 months.
Consumer prices, as measured by the Consumer Price Index, continued upward in December. Officially, at year end the CPI stood at 155.4% of the 1967 average. The December increase was slightly more than 7/10 of 1% and the year’s increase was 12.2%.
New York City in Trouble
A Wall Street analyst, speaking to members of the Wall Street Financial Community concerning New York City’s pathetic financial condition, sated that reorganization under Chapter 9 of the Bankruptcy Act may be “the only way ou.” The city’s practice of borrowing for non-productive purposes, for political expediency, has resulted in a lower credit rating for New York City. Recently, New York was forced to pay a near-record 9.4% to raise $620 million of one years funds.
New York City officials have been meeting with leading investment dealers to discuss ways of “improving the city’s image” in the financial community. Apparently, improving the city’s financial condition is near impossible.
Prime Rate Continues to Drop
The prime rate, defined as the rate of interest charged to the most credit worthy large corporations (General Motors, American Telephone & Telegraph, IBM, etc.) continues to drop. Currently, at many banks, it stands at 9.5%, down from the high of approximately 12% which it reached in the Fall of 1974.
The decline in the prime rate can be attributed not as much to a decline in demand for money as a result of our current recession, but because of the increase in money made available be the Federal Reserve through its open market policies and the reduction in the reserve requirements of commercial banks. Some predict a prime low of 7-1/2 to 8% by mid-year.
A recent poll to determine the “mood of American” was taken by Sindlinger & Company. One of the questions was, “Are you dipping into your savings to get by?” 49.6% answered ‘Yes,” 47.1% answered “No.”
Perhaps Sindlinger & Company should have asked those who answered no, “Do you have any savings left to dip into?
International Monetary Symposium
The purpose of the IMS, which was held in Miami Beach, Florida, on January 5,6,7 and 8, was to gather together some of the esteemed “hard money economist and doomsayers so that they could help us prepare for the “certain monetary chaos ahead.” Such esteemed “Austrian school economists” as Professor Hans Sennholz and Donald Kemmerer, Drs. Henry Hazlitt, Norbert Einstein and Elgin Groseclose were there to reaffirm the importance of hard money. DoomsayerJim McKeever told us that when the chaos comes, it will be every man for himself.
Congressman Philip Crane told us what we already knew — that Washington would continuue with deficit spending — but he did an excellent job of telling us. Dr. Nico Diedrichs, Finance Minister of South Africa, predicted that gold would continue to re-establish its importance as money, in spite of all efforts to “demonetize” it.
Other speakers of less fame added to the IMS, but space permits us to touch upon only a few of the topics which were discussed.
IF YOU WOULD LIKE OUR COMPREHENSIVE, MULTIPLE-PAGE IMS REPORT ON THE INTERNATIONAL MONETARY SYMPOSIUM, PLEASE CONTACT CERTIFIED MINT. WE WILL BE HAPPY TO MAIL IT TO YOU.
Dr. Hans Sennholz, a dynamic and moving speaker, had many messages, but the two most important were: (1) inflation is a re-distribution of wealth, a re-distribution from America’s middle class to those who are able to understand inflation and are taking advantage of their knowledge; (2) he predicted “monetary reform” in 1978. Dr. Sennholz’s remarks are covered thoroughly in our IMS REPORT. He further added that America’s middle class will be wiped-out financially by 1978 and will turn mean and ugly and look for someone on whom to seek revenge. Dr. Sennholz painted an unpleasant picture for “middle-America.”
But, perhaps the most pervasive topic at the IMS was re-confiscation of gold by the federal government. Henry Mark Holzer, attorney and Brooklyn Law School Professor, spoke on, “Gold, The Law And The State.” Professor Holzer not only said private gold ownership is in danger, but that the government has procedures for determining who is acquiring gold. He further added that “Big Brother” does not recognize our “right” to own gold, but considers it a privilege which is revocable by Congress.
How to avoid the pitfalls of gold ownership is covered extensively in our IMS REPORT.
Dr. Henry Hazlett maintained that the problem of rising prices will be aggravated as the general public begins to anticipate further inflation and therefore demands higher rates of interest or simply gets rid of its money for any tangible items. With the Federal Reserve forcing lower interest rates on the market, the public will probably “simply get rid of its money.” This will be hyper-inflation.
Inflation and Deficit Spending
Increases in prices are directly related to increases in teh amont of money in circulation. The amount of money in circulation is influences to a great extent by the amount of deficit spending which the Federal Government does. Price increases do not occur simultaneously with the deficit spending, but follow.
Most government officials now recognize that we are in a recession. As a result, they plan to “fight the recession” by massive deficit spending. Officially, the White House projects deficits of $32-$34 and $45-$47 billion for the fiscal years ending June 30, 1975 and 1976, respectively. The 1976 figures could jump to $60 billion if Congress refuses to cut expenditures. During the next eighteen months, the government will be borrowing between $60 and $75 billion!
Since much of this money will have to be “borrowed” from the Federal Reserve System, we can expect the amount of money in circulation to increase by enormous amounts. This, coupled with the Federal reserve System’s lowering reserve requirements and the discount rate, spells trouble. The years ahead could bring 25%, 30% or even 40% rates of inflation.
Many people know that deficit spending results in inflation. Yet, they do nothing. It is not enough to recognize an economic trend, you must do something.
The only idealistic thing to do is to vote responsible people into office. But more realistically, the thing to do is to convert your paper dollars, and instruments redeemable in paper dollars, to hard money — gold and silver. First protect yourself, then do the idealistic.