It's official …

It’s official. Fed Chairman Ben Bernanke is going to do what I’ve been warning you about for some time now: Print money out of thin air.

That’s the decision he announced at last Wednesday’s Federal Open Market Committee (FOMC) meeting, and he’s going to start by essentially pressing a button on his digital money machine to issue as much as $1.2 trillion of electronic credits to the Federal Reserve’s accounts.

Then, Bernanke will use that electronic money to purchase mortgage-backed securities and U.S. Treasury bonds. Perhaps even other assets.

The three chief reasons for printing the money:

#1: To get 30-year mortgage rates down to record lows below 5 percent …

#2: To support the housing market …

#3: To help the U.S. Treasury finance its record deficit and upcoming trillions of dollars that it needs to borrow … and to help get overall credit flowing in the economy.

Will it work? I’ll answer that in a minute. First, I urge you to reread one of Bernanke’s most famous statements, made in a 2002 speech. On the subject of deflation, Bernanke stated the following:

“Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.

“By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services.

“We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”

Now, take a look at this chart of the U.S. Dollar Index, which measures the performance of the U.S. dollar against a basket of six of the world’s major currencies. Is it any wonder the value of the U.S. dollar collapsed immediately after Bernanke’s announcement, experiencing its worst single-day slide since 1971?!

And now, take a look at this chart of gold: Is it any wonder that gold soared almost $59 immediately after the announcement? I don’t think so. Nor should it be any surprise to you.

And finally, consider this: Is it any wonder that China — our largest creditor — has recently been voicing considerable concern over the value of its dollar-based investments?

I don’t think so.

Back to the question: Will printing money help the U.S. economy?

My answer: Yes and no.

Yes, in the sense that it will help temporarily stabilize the economy and markets.

No, in the sense that it’s all nothing but a mirage. And one that you must be acutely aware of to protect your money and profit in the months and years ahead.

First, understand the following …

A. Printing money will devalue the dollar. That should be clear both by Bernanke’s commitment to printing money as well as the U.S. Dollar Index’s reaction, which I just showed you via the chart above.

Never mind the pundits who claim the dollar is going to reign supreme as other economies crumble in the face of the global financial crisis and they, too, start printing money.

The United States is ground zero for the financial crisis. So the world is going to be relying largely on the United States to solve the problems, and every central banker and savvy politician in the world realizes that the only way out of this financial crisis is for the dollar to decline in value.

A cheaper dollar boosts U.S. exports … inflates away the mountains of dollar-denominated debts in the world … and effectively puts U.S. assets on sale, helping to attract foreign investment.

B. Printing money will spark inflation. Partly as a result of the falling dollar, but also because of the supply of money surging through the system.

Bernanke’s plan to crank up his printing machine to spit out as much as $1.2 trillion of electronic credits is NOTHING BUT A MIRAGE, made of mirrors, phantom money, and shell games.

At first, inflation will creep higher. But in the not too distant future — as markets stabilize and credit crisis fears start to subside — banks will start actively lending again and the cheap money will work its way through the economy.

As the velocity of money picks up and more normal leverage comes back to the system, inflation will go on a tear. Hard to believe right now, but I have no doubt, whatsoever, that within 12 to 18 months, we will likely see some of this country’s highest inflation rates, ever, in the double digits. It will be a new ballgame.

C. Printing money will temporarily help the Treasury borrow. Huh? Doesn’t make much sense, right? Well, helping the Treasury to borrow the money it needs to finance all the promises it’s made and the bailouts it’s undertaken is one of Bernanke’s principal goals.

Think about it: The Treasury has promised to backstop nearly $10 trillion of losses and debts in the financial system, plus, it’s directly lending more than $4 trillion in bailouts.

As I’ve said many times before, where is all that money going to come from?

It can come from taxpayers willing to stick their necks on the line and buy the Treasury’s IOUs, or bonds.

And some can come from foreign investors, willing to stick their necks out and buy U.S. Treasury bonds.

But the odds of either one or both of the above lending the U.S. the money it needs are rapidly diminishing.

Domestic investors are already fed up with low interest rates, so why would they lend more money to the government for virtually no rate of return?

They’re also getting increasingly fed up with the government’s bailouts of companies that should be allowed to go bankrupt … and the lax oversight resulting in huge bonuses being paid to executives of failing companies who are receiving taxpayer money.

So, domestic investors are becoming reluctant to finance our own Treasury. I can’t blame them.

And foreign investors, who we depend upon for 50 percent of our borrowing needs — are starting to leave, in droves.

According to the latest Treasury International Capital Report, foreign investors withdrew funds from U.S. assets in record amounts in January, selling a net $60.9 billion in long-dated U.S. securities, after buying $24.3 billion in December.

Including changes in banks’ dollar holdings, short-term securities and nonmarket transactions, net foreign capital outflows totaled a record $148.9 billion in January, compared to $86.2 billion of inflows in the previous month.

So, I repeat, where’s the money the Treasury wants to borrow going to come from?

Answer: From the Fed. By creating money out of thin air and then using it to buy mortgages and bonds, the Fed is essentially financing the Treasury. It aims to be the backstop for the Treasury’s borrowing needs, and at least temporarily, support bond prices so interest rates don’t start exploding higher.

Short term, it will work. It will help the Treasury get its money. It will help keep mortgage rates low, even press them lower, and support the bond market.

But long term, it is NOTHING BUT A MIRAGE, made of mirrors, phantom money, and shell games. And all of it merely kicks the can down the road for another day of reckoning, effectively confiscating wealth from its citizens through inflation.

Consider the words of the great economic thinker, John Maynard Keynes, who in 1920 said …

“By a continuous process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method, they not only confiscate, but they confiscate arbitrarily; and while the process impoverishes many, it actually enriches some. The process engages all of the hidden forces of economic law on the side of destruction, and does it in a manner that not one man in a million can diagnose.“

So here’s my question to you: Which one are you going to be …

A. One of the 999,999 people who do not understand what the government is doing to their money? Or …

B. The one-in-a-million who does, allowing you to protect your wealth and even profit from the government’s actions?

So What Can You Do
To Protect Your Wealth?

Gold has always preserved and protected one’s assets, whether in inflationary times OR in deflationary panics.

Now, more than ever before, you must focus on the two-pronged approach to protecting — and increasing — your net worth:

First, no matter what, keep the majority of your money LIQUID!

Don’t get stuck in illiquid investments right now, especially real estate.

Also, continue to steer clear of long-term government, municipal, and corporate bonds. While interest rates may seem like they might decline in the short-term, with the Fed pumping out money like crazy and the U.S. dollar plummeting in value, it’s only a matter of time before long-term rates start climbing and hitting the bond market hard.

In my opinion, money market accounts, especially treasury-only money markets, are the best place to hold your liquid keep-safe funds. The yields are not great, but at least your money is safe.

Second, absolutely without question hedge the value of your money and simultaneously position yourself for profits.

How? With gold. The ultimate currency.

It’s an asset whose purchasing power has outlasted governments, civilizations, financial crises and panics for more than 5,000 years.

It will be one of the best investment decisions you’ll make this year. I guarantee it.

Gold has always preserved and protected one’s assets, whether in inflationary times OR in deflationary panics.

For my latest core gold and natural resource recommendations, check out my latest Real Wealth Report, published Friday. A subscription is a mere $99 a year, the best money you’ll ever spend on a publication, I guarantee it.

Best wishes,

Larry

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