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Easy Dollars vs. Hard Silver, Profiting from Obama’s Inflation

Commodities / Gold and Silver 2010 Dec 15, 2009 - 05:08 PM GMT

By: Dr_Jeff_Lewis

Commodities

Best Financial Markets Analysis ArticleBarack Obama has charged banks with the task of lending more money to consumers and businesses in an effort to stimulate the economy.  Luckily for gold investors, easy credit and greater loan activity have always meant higher precious metal prices.


Money Multiplier

When you analyze the relationship between the Federal Reserve and fractional reserve banking, there is always a discrepancy between the amount of paper cash in circulation and the amount of money supposedly deposited in bank accounts. 

The M0, the smallest measure of money, calculates only the amount of money that has been printed as cash and bank reserves.  Currently, the M0 money supply of US dollars resides at roughly $1.7 trillion.  The M2 money supply, which includes hard cash and the value of savings, money market, checking and other demand accounts, is just over $8.2 trillion. 

How can this be?  The answer is the multiplier effect.  Thanks to the way fractional reserve banking works, as well as how the Federal Reserve operates, commercial banks have the ability to expand the money supply up to 10 times greater than the amount of hard cash in circulation!  Obama and the US government know this fact, and they are pushing commercial banks to make loans to increase the money supply.

Why Create More Money?

In the long term, more money created by process of inflation always proves to destabilize the economy.  Eventually, prices catch up with the newly created money, and all that has occurred is a transfer of wealth to the person or business that used the new money first from the person who used it last. 

Since the market can take up to 18 months to adjust for inflation in the money supply, those who first have access to new money get a quick benefit because their dollars have yet to lose their spending power. 

Politically Popular Policy

In addition, the process of inflation proves to be politically popular.  By inflating the currency, the administration in power can show an economic benefit as more money changes hands and inflation remains near zero.  However, as consumer prices catch up with the value of the currency, the next recession begins, and government proposes more inflationary procedures to “stimulate the economy. 

One well known economist, Paul Krugman, advocated a new real estate bubble, which could be propped up by inflation, large government spending and easy credit.  Although the new real estate bubble would increase prices, history shows time and time again that bubbles are only temporary.

Why Own Precious Metals?

Not a single government economist or Fed chair since Paul Volcker has been willing to create a deflationary environment by decreasing the money supply and allowing empty credit to drain from the system.  Instead, year after year, recession after recession, government takes the easy way out, inflating the currency and enjoying the few in between years of “economic growth.”  Luckily, precious metals investors can be a benefactor of bad policy by profiting on inflation with the ownership of gold and silver coins.

By Dr. Jeff Lewis

Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of Silver-Coin-Investor.com and Hard-Money-Newsletter-Review.com

Copyright © 2009 Dr. Jeff Lewis- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


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