ALPINE, UT | 17 March 2008 | There are certain economic concepts that most people are just oblivious to. Even worse, we have been trained, taught, and educated to let things we don’t understand about economics just float by our conscious minds with little critical thought at all. For example, I think most people have heard on the radio, watched on the television, or read in the paper reports that the “dollar” is not doing well (an intentional understatement). But I don’t think most people understand what this means for them directly. Specifically, if “dollars follow value” what I don’t think most people are aware of is that the value of the dollar is something that effects every day of their life - and government decisions related thereto should be scrutinized by an alert and educated public. Take for example the Fed’s recent 25 basis point cut at the end of last week. Do you know how this is affecting your life today? Well it is and if you were to become aware of just how this is happening you just might be able to adjust some of your financial decisions to benefit from this knowledge.Let’s take a look at the article mentioned above.

Key Points:

• Gold struck a record high over the weekend at over $1,015.10 per ounce.
• The US Dollar struck a record low against multiple currencies losing an estimated 2% in value in just one week.
• Fed action like the recent action to “save’ Bear Stearns causes dollar values to drop and commodity values to rise.
• Fed action like lowering the discount rate by 25 basis points causes the value of the dollar to drop.
• The market, not the government sets “real prices” and expresses “real values.”

Summary:

Some people think of the economy as a machine and that the government is its steward. This is a dangerous and naive analogy. The econmy is more like the weather with no stewards over it. Everyone is affected by the economy just like we are all affected by the weather. The economy just like the weather is governed by certain laws or principles. The government cannot change the economy any more than it can change the weather. Oh, there can be slight modifications here and there, and the weather is definitely affected by the actions of humans. However, the weather system is so much larger and influenced by so many factors that it is impossible for one agenda of one person, group or government to control all of these factors so as to predict and control the environment. Besides, even it it were possible (technologically we can conceive of a day when it could be possible to control most variables) it doesn’t make sense. The weather works based upon certain principles so it is always more cost effective and prudent in our preparations to LEARN the principles, LEARN how to predict patterns and results, and ADJUST our behavior (and our plans) accordingly. So, it is with the eoncomy. The economy is “how” people are behaving at any given point in time, and people behave according to what they believe. Importantly, people believe what they do because of perspective. What people see (their perspective) is their experience in life. Their experience in life is governed by principle. So what does this have to do with the Fed, Gold and your savings? Well let me share with you a great quote from Alan Greenspan in 1966.

“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holdings illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the “hidden” confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.”

Action Steps:

1. Read Alan Greenspan’s Gold and Economic Freedom (The Objectivist, July 1966)
2. Research Project: Commit to researching why expanding the money supply or easing credit (lowering cost of money) causes inflation. Write your discoveries in a blog or letter to the editor.
3. Research Project: Commit to researching why the Fed offering credit or financial guarantees to a corporation such as Bear Stearns generally causes stock prices to fall and what affect falling stock prices has on the value of the dollar. Write your discoveries in a blog or letter to the editor.
4. Research Project: Commit to researching what the relationship is between the “price” or “value” of the dollar and the “price” or “value” of gold. Write your discoveries in a blog or letter to the editor.

Reference(s):

Date: Monday March 17, 2008
Source: Reuters - Stocks tumble, gold at record after Fed cut
Source: Bloomberg.com - Dollar Doomsayers Draw Signs from Bernanke Rate Cuts
Author: Miranda Maxwell & Bo Nielsen
MRFC Principles: (3, 7, 13)