Jim Rickards: The Fed’s “Nuclear Option”: $4,900 Gold, $100 Silver, $200 Oil
- The Fed’s “Nuclear Option”: $4,900 Gold, $100 Silver, $200 Oil
by Chris Campbell, Jan 17, 2017, https://lfb.org/
“The final weapon in the Fed’s arsenal,” Jim Rickards, author of The Road to Ruin: The Global Elites’ Secret Plan For the Next Financial Crisis, wrote this week, “is the financial equivalent of nuclear war.”
The Fed’s “nuclear option,” Rickards warns, is… wait for it… gold.
We bring this up today because this nuclear option could have a yuge (sometimes spelled “yooge”) impact on the price of not only the midas metal (see below), but of silver ($100) and oil ($200), too. And we want you to have plenty of time to ready yourself.
7 Federal Reserve Tools and Why They’re All Flawed
In recent decades, the Fed has engaged in a series of policy interventions and market manipulations that have paradoxically left it more powerful even as those interventions left a trail of crashes, collapses and calamities.
The following is a survey of seven Federal Reserve tools in the Fed toolkit to stimulate the economy if recession or deflation gains the upper hand and why their toolkit is flawed.
The image of the Fed printing paper money, and dumping it from helicopters to consumers waiting below who scoop it up and start spending is a popular, but not very informative way to describe helicopter money. In reality, helicopter money is the coordination of fiscal policy and monetary policy in a way designed to provide stimulus to a weak economy and to fight deflation.
The Nuclear Option — Gold
The final weapon in the Fed’s arsenal is the financial equivalent of nuclear war. The Fed could instantly create inflation and achieve nominal if not real growth by massively devaluing the dollar when measured as a unit of gold.
This was last done in 1933–34 and was highly successful. Stocks rallied and commodity prices boomed in the middle of the Great Depression (1929–1940). This boom was not sustained because the Fed and Treasury prematurely tightened monetary policy and fiscal policy in 1937, which put the U.S. economy back into a severe technical recession from 1937–1938.
The Fed could use this nuclear option by coordinating with the Treasury to make a two-way market in gold using printed money. This would work exactly like quantitative easing, except the Fed would buy or sell gold instead of Treasury bonds.
The Fed would set an arbitrarily high fixed price for gold such as $5,000 per ounce. The Fed would make that price stick by offering to buy gold from any seller at $4,900 per ounce and selling gold to the market at $5,100 per ounce. This amounts to a 4% band or spread around the target price, a classic pegging technique.
Gold could be removed from or added to the U.S. hoard at West Point, NY, and money would be created by or destroyed by the Fed in order to make the target price stick.
If, for example, the price of gold was $1,300 per ounce before the operation, the effect would be to devalue the dollar from 1/1,300th of an ounce of gold to 1/5000th of an ounce of gold, a 75% devaluation of the dollar. This devaluation would not take place in isolation.
A 75% dollar devaluation in gold would signal devaluation in all other goods and services and result in $100 per ounce silver, $200 per barrel oil, etc.
This is obviously an extreme measure and would only be used in the face of strong persistent deflation. Yet, the fact that that technique exists and has been used in the past is one reason to conclude that deflation will not in fact persist beyond certain limits because the Fed and Treasury have the ability to stop it as they did in 1933.
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