The Gold Bullet

Could 2012 be the year in which Federal Reserve Chairman Ben Bernanke will use the ultimate tool a government has, under a paper-money system, to combat deflation and weak economic growth by printing money to reduce the value of the dollar? It is certainly possible as all the other tools which he mentioned in his November 21, 2002 speech to the National Economic Club of Washington D.C. have been utilized. If one combs through that speech one sees that the tool of driving rates to zero has already been used up, the tool of buying government and MBSs securities, in order to cap longer term yields, has been used as well and so the only tool left could be to "print money and distribute it willy-nilly" as Mr Bernanke points out in his famous speech.

Devaluing the dollar might be difficult to do against other paper currencies so Mr. Bernanke and the U.S. Treasury could be forced to use the F.D.R. remedy of 1934. Back then President Roosevelt devalued the dollar against gold overnight from $20.67 to $35 through the Gold Reserve Act . One reason the U.S. might have to resort to the F.D.R. strategy is that if the U.S. tries to devalue against all other paper currencies it will very probably lead to a paper currency war as other countries try to keep up with the United States and the debasement of the paper dollar.

Being that the U.S. dollar is the global reserve currency, the U.S. government is only left with the alternative of devaluing against the currency that cannot be debased like paper currencies and that is gold.

Mario Innecco