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Bill Fleckenstein

Contrarian Chronicles3/23/2009 12:01 AM ET

Got gold? You're right on the money

The bubbles have burst, and the US is (predictably) firing up the printing presses. This desperate move means the value of the dollar is destined to disintegrate.

By Bill Fleckenstein
MSN Money

I'd like to take a few moments to talk about the Federal Reserve's latest act of irresponsibility in a continuing series of irresponsible actions (i.e., buying $300 billion in longer-term Treasurys, an additional $750 billion in mortgage-backed securities and -- just for grins -- $100 billion of government-sponsored-enterprise debt).

As a friend noted, Wednesday was the functional equivalent of Pearl Harbor for the U.S. dollar and fiat currencies in general. He said -- referencing that people might pay less for their mortgages -- that they'll pay much, much more for everything else. I would certainly agree.

The far-reaching arm of recklessness

In thinking about the magnitude of what had transpired, the only comparable data point that came to my mind was when President Richard Nixon closed the "gold window," suspending the direct convertibility of the dollar into gold. Wednesday's action by the Fed seems somewhat more momentous, though only history can adjudicate that for sure.

I discussed this with my good friend Jim Grant, who is one of the foremost authorities on the history of central banking. Jim pointed out to me that when Nixon closed the gold window in 1971, it was a unilateral ending of the world's currency regime, whereas Wednesday marked the announcement of the intent to destroy the world's reserve currency. One reason I think that quantitative easing -- the polite name for debt monetization, or the metastasis of government debt into money -- is a bigger deal than closing the gold window is that in the wake of that move, the mentality of those presiding over central banks was far more sober, and it has taken almost 40 years to get to this state.

Of course, it was the two-decade Greenspan era that brought us to this sorry place, as beginning in the early 1990s each problem led to more money printing, which led to another problem, which led to more money printing, which ultimately led to the stock bubble of the late 1990s. (That money printing, and why it occurred in the wake of then-Fed chief Alan Greenspan's previous errors, was something that I spent a good deal of time discussing in my book, "Greenspan's Bubbles.") Trying to repair the damage done from the stock bubble led to the real-estate/credit bubble of a few years ago, which has led to the place we are now -- which is going to be the vaporization of the dollar.

Fed alchemy can't turn paper into gold

No one should think that money printing will solve our No. 1 problem: job creation. It won't, and it will make the business of running businesses that much harder. That, of course, is going to be even more complicated by other business-unfriendly moves of the Obama administration and Congress, not least of which is the trampling of legal contracts -- mortgage "cram-downs," American International Group (AIG, news, msgs), etc.

The disintegration of the dollar may be somewhat alleviated against other pieces of paper, as the central banks of other countries potentially join the Bank of Japan, the Swiss central bank and the U.S. in quantitative easing. So, the dollar may not go down as hard as it ought to against other pieces of colored paper. But certainly it will against various other assets like precious metals (as well as assets that we can't yet know but which will become clear over time).

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Jim Jubak © MSN Money
Is it time to buy gold?
Gold is looking better than ever for the long term. The devaluation of the Swiss franc means the world has one less haven in an inflationary crisis, MSN Money's Jim Jubak says. (March 19)

As a side note, the Fed has also, given the size of its bid (which will likely be increased), enabled the Chinese to sell their Treasury holdings if they want. Then the question is, what will the Chinese buy with those "liberated" dollars? My guess: the hard assets that China needs.

To sum up: Quantitative easing, unfortunately, is an outcome that I always knew would occur, though it still shocked me when Fed Chairman Ben Bernanke finally pulled the trigger. The masthead of my Web site reads, "In a social democracy with a fiat currency, all roads lead to inflation." Many people have been confused because they thought that it meant every negative outcome would lead to inflation directly, but that isn't the case. It's the response to the problems that leads to the inflation (and currency debasement).

We are attempting to print our way to prosperity (see "The Fed embraces inflation," my June 2, 2008, column). That can't be done, any more than we could speculate our way to prosperity during the stock bubble or borrow our way to prosperity in the real-estate/credit bubble. Got gold?

At the time of publication, Bill Fleckenstein owned gold bullion and gold futures.

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