On January 1 this year, the Fed Funds Rate stood at 6.50%. On October 2, it stood at 2.50%. In nine cuts over nine months, the Fed has cut 4.00% off its governing rate, pushing it 61.5% of the way to ZERO.
As Privateer Subscribers know we reported on it in our latest issue, the Fed Funds TARGET rate of 2.50% has become all but meaningless, since the Fed has been shoving funds into the U.S. banking system at rates well below 1.00% since September 11. But, for the sake of comparison, let's take the target rate of 2.50% at face value.
The last time that the Fed Funds rate fell below 3.00% was in 1962 - the year before the assassination of President Kennedy. Anyone who was an adult in 1962 would now be in his or her early 60s. 1962 was before Vietnam, it was even before anyone had heard of The Beatles. Your esteemed author was just entering high school in 1962. It was a LONG time ago.
In 1962, the funded debt of the U.S. Federal Government was about $US 300 Billion, $US 40 Billion higher than it had been at the end of World War II - 17 years before. Today, U.S. Federal Government funded debt is about $US 5,800 Billion - that's an increase of 1833%. Yet U.S. interest rates are the SAME now as they were in 1962.
In 1962, the budget of the U.S. Federal government was about $US 107 Billion. In the year ending on September 30, 2001, it was just under $US 2,000 Billion. Who knows what it will be this year. Right now, President Bush and the Congress are competing to tell us how much BIGGER it will be. Yet U.S. interest rates are the SAME now as they were in 1962.
In 1962, America was the world's greatest creditor nation. In 1962, Americans saved. In 1962, Americans were still carrying around small change which was 90% silver. In 1962, few people had ever seen a "credit card". In 1962, currencies were "fixed" against the U.S. Dollar which was "fixed" against Gold at $US 35.00 per ounce. In 1962, most of today's investment vehicles and ALL of the more exotic ones did not exist. Yet U.S. interest rates are the SAME now as they were in 1962.
In short, there is only one whay in which the financial world of late 2001 resembles in any way the financial world of 1962. Fed mandated interest rates are at the SAME level now as they were then. It was absurd enough that rates hit 3.0% in 1991-92 to rescue the U.S. from the last recession. It is many times more absurd that they have now dropped below that level, considering the fact that the financial profligacy of the past decade leaves anything that went on before it consigned to a footnote in the history books.
But in the world of global finance, absurdities abound. It is one of the many tragedies emanating from the atrocity of September 11 that they should have multiplied like locusts since that fateful day.
In 1962, interest rates were "low" because anyone who looked to the recent past and the foreseeable future saw risks to be low. Today, interest rates are "low" because the U.S. government has decreed that they be low. In 1962, people were happy to accept a "low" rate of return on their savings because their experience told them that their savings would retain their purchasing power. Today, people MUST have a "low" rate of interest because they have no savings and their debts will not remain supportable unless rates remain low.
The problem is simple. Forty years ago, "low" interest rates were a sign of a healthy economy and confidence in the future. Today, those same "low" interest rates have done NOTHING to create or maintain confidence in the future, because they are necessary to keep the economy functioning at all.
An ounce of Gold is an ounce of Gold. That does not change. What has changed since 1962 is that Americans are now permitted to own Gold - they weren't in 1962 - and that it takes a lot more Dollars to buy an ounce of Gold than it did in 1962.
In 1962, the fact that the Dollar was tied to Gold still exercised an influence on Government by acting as a brake on the amount of new Dollars they saw it as being "safe" to create. Anyone who has watched the antics of the U.S. Government since September 11 should know that there are NO perceived impediments to Dollar creation today.
Whatever currency you own, or however many different currencies you own, you should know this clearly. Every government plan to "spend" money and every Central Bank intervention in the marketplace dilutes the purchasing power of every unit of currency you hold. Every basis point that it arbitrarily shaved off governing interest rates penalises all those who create real wealth and those who produce more than they consume. Every effort to escape an economic downturn by throwing more "money" at an economy guarantees that the downturn will be both more severe and longer lasting.
Consider the financial history of Japan over the past decade. Consider what the Japanese authorities have done to try to re-start their economy. Consider the fact that the Japanese economy is in MUCH worse shape now than it was a decade ago. Consider all these things and you will know the future of the U.S. economy - and every other economy whose "authorities" follow the U.S. lead.
The recession was always going to be bad. The actions of the U.S. government and the Fed since September 11 have GUARANTEED that it will now be much worse.
Finally, consider this. Right now Gold at $US 291.40 is - in terms of equivalent purchasing power - not much more expensive than it was in 1962. In terms of actual "inflation" (government debt up 1833%), it is actually cheaper. And unlike 1962, Americans along with everyone else can buy it.
By Gold, we mean PHYSICAL Gold, we don't mean paper claims to Gold. If the global financial system is EVER going to get back to the comparative sanity of 1962, it will only do so when and if Gold regains its place as a MONEY metal. But whatever happens, if you want to preserve your purchasing power in what is coming, you need to own Gold.
Whether the U.S. and its coalition goes to war or not (and it surely will), the "crunch" will come when enough people realise that U.S. interest rates no longer matter. That realisation will come, as it already has with the Japanese and their interest rates, when it becomes clear that no one can afford to borrow any more. The world's biggest borrower is the U.S. (both "public" and private sectors), the U.S. still provides the "underpinning" for the world's financial system. That's a "double whammy" from which there is no escape - except Gold.