GEORGE W. MEIGGS

G. W. MEIGGS CAPITAL

by George W. Meiggs

Well, it's September. The air is cooler and so is Wall Street. Stocks have had a good run on news the economy is not going to crash but, from my point of view, there isn't any good news that will help this market go higher. There might be more good news from the banks when they report their earnings next quarter but I don't see much else to cheer about and the banks I like already have had a good run.

So I have turned my attention to the dollar. It is hitting all time lows. Usually when the dollar is getting beat up, it's time to buy silver and gold. I think this is where we are now. If you have noticed, gold and silver prices have been moving up lately. I think this is just the beginning. There is much more room for gold and silver to go up. If you adjust gold for inflation it could go as high as $2,000 an ounce.

So what should I buy? I am going on my past experience and lean toward the gold and silver mining companies. Their stock prices should increase as the dollars value decreases. In the past, gold and silver have done very well during an economic crisis.

I like Silver Wheaton at: $12.22 (SLW) and its stock price is rising. I like Gold Corp. at: $40.83 (GG) too. Gold Corp. has already had a correction and it is poised to break out to new highs. These are two of my favorite metal stocks to hold during an economic crisis.

The big picture here is the shift that is taking place in Wall Street. I believe it is topped out and any disappointment could lead to a big sell-off. It's better to be safe than sorry so, I'm moving a substantial amount of my capital into the precious metal stocks.

One important point I want to make is, during the Great Depression not all stocks went down. The gold mining stocks went up. When people feared the Dollars demise they turned to gold and silver.

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The U. S. Economy

"The modern mind dislikes gold because it blurts out unpleasant truths." - Joseph M. Schumpeter

"To restore the dollar will be a very painful process, but the alternatives are political repression, socialism and worldwide inflation." - Jacques Rueff

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The New Deal... When President Franklin D. Roosevelt took office on March 5, 1933, the nation was in the midst of the worst peacetime crisis in its history. On the day after his inauguration, President Roosevelt begin his administration with dramatic changes in our fiscal, monetary, economic and social policies.

One of the most profound changes made was the departure of the Gold Standard from our monetary policy. President Roosevelt, in effect, removed gold as a backing for our money on January 30, 1934 when the Gold Reserve Act became law.

In 1934 President Roosevelt faced the lowest depths of the Great Depression and was eager to accept new ideas from the "New Economics" thinkers of the day such as John Maynard Keynes. Keynes believed the world had fallen into a state of permanent stagnation and depression and newly created money and government spending was the only way to solve it. Keynes, a liberal Cambridge theoretician and Roosevelt the New Deal bureaucrat, were the chief architects of the new international monetary system.

Without the backing of gold to worry about, President Roosevelt, while embracing Keynes' ideas, went to the printing of paper money and was very generous in distributing this money to the American people through low interest rates and easy credit, with the goal to create a high rate of consumer spending. Roosevelt embraced the idea of diverting a substantial portion of the nations wealth to public use. (Government spending).

President Franklin D. Roosevelt and John Maynard Keynes together created our current monetary policy embracing the idea that you spend your way to riches.

Without the restraints of gold, holding back the creation of paper money, the government can print whatever amount they want, to use in any way they want. If you are thinking that this could be a recipe for disaster, you are right.

When money is created this way, it makes it more available to more people, mainly through low interest loans. The Federal Reserve controls interest rates through the banking system. Whenever the government wants to spur the economy upwards they print more money, flood the system of banks with this newly created money and loan it out to the American people at low interest rates, this causes a flurry of new activity in consumer spending and in turn our economy grows.

Our government has learned that they can fine tune this process. When our economy slows down they lower interest rates or increase the money supply or both. This process spurs economic growth. This artificial growth puts pressure on prices and price increases eventually leads to inflation.

When inflation becomes a concern and prices rise the Fed raises interest rates and or removes money from the system to control inflation. It sounds like the panacea the world needed but there is a ugly side.

When you first go to the printing press and create fiat money and this money trickles down to the consumer, it works like magic. It spurs the economy and creates all kind of economic activity. People buy houses, cars, boats, planes and many more things. Businesses expand their operations to take care of all the increased business. They build new warehouses to store all the new stuff that consumers are demanding. They see business is good and build new stores to capitalize on the increased demand. It is good times for everyone until prices start to rise.

This artificial demand created by fiat money causes the raw materials that consumer products are made from to rise. The increased demand soon shows up in increased prices of commodities such as: oil, gas, steel and gold. In the beginning these price increases are small and are absorbed into our everyday economic life. As time goes on these prices continue to rise as the economy grows and expands. After awhile, these price increases are more frequent and consumers begin to complain that their money won't buy what it used to. If interest rates are left low and money is plentiful, inflation could become double-digit or even runaway inflation.

Once inflation is noticed in our economy and this inflation grows to a point where it is a determent to our economy, the Fed has to step in to slow the economic activity previously created through low interest loans made possible by printing press or fiat money.

When the Fed raises interest rates they do so because they know that inflation is on its way. They know because they created it. By raising interest rates the Fed thinks they can fine tune and control the growth of the economy before inflation becomes a problem. The history of their success is dismal at best. In the sixties and seventies the American people would not stand for more taxes to pay for the Vietnam War. The Vietnam War was not approved by Congress or the American people but our government wanted to continue with this war anyway. Their solution was to print the money they needed. The double-digit inflation and high interest rates of the seventies and early eighties were the result of these policies.

Our government controls the creation of our money and interest rates. It's like they are on a rocking horse and they can't get off. First they rock forward, ( print more money at low interest rates ), then they rock backwards, ( reduce the amount of money in the system and raise interest rates ). Printing more money spurs our economy, reducing the amount of money slows our economy. Low interest rates creates more demand for money and high interest rates creates a lower demand for money. This is the monetary system we are living with today. The monetary system is the major trend that controls much of what you do and what the rest of the world does. It is very important to understand exactly where our government is in this process of monetary management. It has the power to make or break you. If your business decisions are made contrary to what the Fed is doing, you are putting your capital at extreme risk. On the other hand if you manage your money knowing what the Fed's policy is, you will have a much better chance of success.

I have seen many people save their money, with dreams of owning their own businesses, and after starting their business, wondering why their business is not successful. Many times it's because the Fed is working against them by slowing down the economy. If only they knew the forces were working against them they could have chosen a better economic environment to launch their business.

Get to know about the Fed and what they are doing. Determine what stage they are in, in the management of the monetary system. Follow this major economic trend to protect your capital and optimize your returns. If you are investing or building your business during a time when the Fed is slowing the economy by raising interest rates, it could be a struggle to be successful. If you are on the right side of this monetary trend it could help you be successful with your business and your investments.

This is the # 1 Trend that will affect your business success and your investment success. Spend some time learning what the Fed is doing and what stage of the monetary management process they are in. more

GEORGE W. MEIGGS

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