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Inflation Awaits

We’re living in a nation that is teetering on the brink of a pandemic-based economical disaster. The country has a severe debt of $27 trillion and counting! Every 11.5 seconds, the national debt is increased by an additional $500k… visit usdebtclock.org and grab a stopwatch and time it yourself. This debt would be acceptable if our economy were at $50 trillion. Unfortunately, we have around a $21 trillion economy. When debt is larger than the economy, inflation awaits.

Historical studies by renowned economists like Carmen Reinhart and Ken Rogoff span hundreds of years show that varying countries and empires have defaulted on debts. When this happens, a dollar of debt generally yields below a dollar of output. This is a case when the debt goes against growth. When you look at the current US debt-to-gross domestic product (GDP), you see a recent increase from 105% to about 130% (a spike that is primarily due to the 2020 Covid-19 pandemic).

While it would seem tax cuts and structural changes to the economy combined would manage the problem, most see the issue as too big to solve this way. This leaves only one outcome: inflation. How do we solve it?

History Proves this Action

The Fed could vote on new policies and literally announce a gold price increase to $5,000/oz. They could then practically back the price using Fort Knox Treasury’s gold in which US bank dealers of gold would conduct open market operations. At the price of $5,000/oz, dealers will buy if the price goes below $5,000/oz and sell if the price goes above $5,000/oz. They would then print money on a buy or reduce money on a sell-through the banks. The Fed, in turn, would target gold prices rather than interest rates.

Such a scenario had taken place before—in fact, twice over the last 80 years, in 1933 under the order of Franklin Roosevelt to increase the gold price from $20.67/oz to $35/oz (for a 75% rise in price), second in 1970 under Richard Nixon when he stopped the dollar-to-gold conversion by US traders. Gold went from $35 per ounce to $800 per ounce. The country experienced inflation, after all.

We can see from history that raising the price of gold quickly leads to inflation. The markets may not cause inflation, but the government can force it. For example, when the US Treasury took control of the nation’s gold under the Gold Reserve Act of 1934 (during the depression), it also included the Federal Reserve’s gold. While the Fifth Amendment states the government may not seize private property without compensation, there are loopholes. The Federal Reserve is not a government institution, so the Treasury gave them a gold certificate to compensate and to follow the Fifth Amendment (it was left on the books).

In 1953, Eisenhower faced a debt ceiling, as Congress did not raise it in time. When the administration could not pay the bills, they turned to the gold certificate left on the books in 1934. It turns out this certificate did not include all of the gold the Treasury possessed. So, the Treasury figured the difference and sent it to the Fed, asking for the money. The government essentially got the funds needed from the Treasury’s gold—until Congress increased the debt ceiling.

Today’s Scenario

Today is no different. The Federal Reserve’s gold certificate values gold at $42.22/oz—while today’s market price of gold is about $1,900/oz. The Treasury could issue the Federal Reserve a gold certificate in the amount of 8,000 tons at $1,900/oz, subtract the original $42.22/oz, multiply the difference by 8,000 tons and literally come up with nearly $500 billion.

Simply put, the Treasury could issue the Fed a gold certificate in the amount of 8,000 tons (in Fort Knox) at $1,900/oz and ask the Fed to give the difference over $42/oz. The Treasury would gain nearly $500 billion, debt-free. This would not increase the national debt since the Treasury already possesses the gold.

Conclusion: Inflation is Inevitable

In reality, there is not enough gold to support finance and commerce. Also, the gold supply does not grow fast enough to support world growth. Therefore, whether this scenario will play out as we deal with economic trials remains to be seen at a national level. Our solutions to the current national debt are certainly inflationary measures, which means we must revalue the dollar through higher gold prices or mark the gold as marketable to give the government money.

Both scenarios are leading in one direction: Higher inflation seems inevitable to save the nation from debt. As the government begins to recover from the results of a complicated and unusual state of distress, Reagan Gold Group may be able to address your financial questions and guide you for a stable investment in Physical Gold & Silver. Now maybe the most critical time to watch the market and invest in a more positive future. Call today and learn more about how to stabilize your retirement portfolio and prepare for the possibility of most-certain inflation.