Monetary mayhem: the world's central bankers are creating currency and "out of thin air" at an astounding rate. The consequences will be devastating.

[ILLUSTRATION OMITTED]

Gold fever is back, with futures surging to an all-time high above $880 an ounce on January 8, after enjoying a run-up in 2007 of nearly 32 percent against the dollar. Gold for February delivery hit $880.30 an ounce on the New York Mercantile Exchange, breaking its previous record of $875, set in 1980 and then crossed over the $900 barrier, hitting $916 an ounce on January 15.

The price of gold is skyrocketing because investors worldwide are fleeing hyper-inflated housing markets and dumping the dollar along with other depreciating currencies. Despite claims by establishment economic gurus who insist that the U.S. economy is still robust, millions of investors now believe what THE NEW AMERICAN has been saying for the past several years: the fantastic escalation of real-estate prices of the past decade was a classic bubble caused by easy credit and inflated dollars, both of which are the result of policies by the Federal Reserve and its sister central banks overseas.

"In the 21st century, the U.S. economy has been driven by consumers going deeper in debt," noted former Reagan Treasury official Paul Craig Roberts in early December. "Consumption fueled by increases in indebtedness received its greatest boost from Fed Chairman Alan Greenspan's low interest rate policy. Greenspan covered up the adverse effects of offshoring on the U.S. economy by engineering a housing boom. The boom created employment in construction and financial firms, and pushed up home prices, thus creating equity for consumers to spend to keep consumer demand growing."

How big a bubble did this create? According to Dean Baker of the Center for Economic and Policy Research, "The housing bubble created more than $7 trillion in housing wealth." And homeowners "have used this bubble wealth to support a surge in consumption over the last five years, pushing the saving rate to near zero.

They borrowed against their home equity to pay for vacations, new cars, or just to meet necessary expenses." Now the chickens are coming home to roost, with a glut of unsold homes on the market, housing prices in steep decline, and foreclosure rates going through the roof in most markets. But Federal Reserve Chairman Ben Bernanke and his central banker confreres continue to deceive their publics about the extent of the problem.

"While the Fed chairman and other leading economists assured the public that the problems would be restricted to the subprime segment of the housing market, this assertion was always ridiculous on its face," notes Dean Baker. "Subprime mortgages accounted for one-fourth of all mortgages issued in 2006," continues Baker. "The equally troubled Alt-A mortgage category accounted for another 15 percent. With segments that account for 40 percent of the mortgage market going into convulsion, there was no way that the housing market as a whole would not be affected. Of course, record supplies of unsold new homes and vacant homes also ensured that there would be substantial downward pressure on house prices."

On December 18, the European Central Bank (ECB) made the astonishing announcement that it was pumping 348 billion euros ($502 billion) into the financial system to ease the global credit squeeze caused by the U.S. mortgage meltdown. That's more than half a trillion dollars. But that's not all; the Bank of England, the Federal Reserve, and central banks of Canada and Switzerland also joined the ECB in injecting new money into a bailout plan. Through a newly created Term Auction Facility, the central banks would be able to facilitate foreign-exchange swaps and repackaging of troubled loans portfolios of the major insider commercial banks and brokerage houses.

[ILLUSTRATION OMITTED]

"What this really means," noted Joel Skousen in his December World Affairs Brief, "is that the Fed will begin to accept packages of subprime mortgages as collateral that otherwise have no value on the open market. This move will allow devalued debt to act as security for new loans that do have value, based upon the overall reputation of the borrowing bank. In short, the Fed has joined forces with other central banks to LAUNDER the subprime mortgage debt packages into other forms of debt. It also pumps billions of liquidity into bank coffers so they don't have to liquidate these bad debts to cover investor withdrawal or legal demands to make good on the original value of these subprime package deals. Slick."

Incredibly, while pushing forward these schemes that are devaluing their currencies and causing inflation, the central bankers straight-facedly tell the public that they are fighting inflation. "The ECB's credibility in fighting inflation would help to insure that what should be a temporary rise in inflation, caused by higher commodity prices, is not reflected in higher wage demands and consumer goods price rises," declared ECB chief Jean-Claude Trichet on December 19--the day after he had announced the $500 billion dollar infusion!

Monsieur Trichet soothed all worries with proper European Fedspeak, stating: "We are alert and everybody must know that we will do whatever is needed to deliver price stability and be credible in that delivery. The single needle in our compass is price stability"

Market analyst Gary Dorsch, in a December 20 online article for SirChartsAlot.com, noted that "less than 48 hours after pumping a whopping 350 billion Euros into the banking system, Trichet appealed to European workers to resist the temptation to demand higher wages, so they can stay ahead of the higher cost of living. Otherwise, the ECB would punish workers demanding higher wages, with higher interest rates."

Dorsch rightly notes that higher wages don't cause inflation; the expansion of the money supply causes inflation. Dorsch cites a passage from The Monetary History of the United States, 1867-1960, by the late Nobel Prize-winning economist Milton Friedman and his coauthor Anna Schwartz: "Inflation is always and everywhere a monetary phenomenon. As the government increases the rate at which it prints money, the result is too much money chasing too few goods and services."

True, the additional dollars devalue the dollars already in circulation, so the dollar does not buy as much as it once did. On the surface it appears that goods and services purchased in dollars have become more expensive, but in reality the value of the dollar has gone down.

A January 4 article in the online Wall Street Journal makes this same point concerning the recent spike in oil and gold prices. It notes:

   Since 2001 the dollar price of oil and
   gold have run in almost perfect tandem.
   The gold price has risen 239%
   since 2001, while the oil price has
   risen 267%. This means that if the
   dollar had remained "as good as
   gold" since 2001, oil today would
   be selling at about $30 a barrel, not
   $99. Gold has traditionally been a
   rough proxy for the price level, so
   the decline of the dollar against gold
   and oil suggests a U.S. monetary
   [policy] that is supplying too many
   dollars.

"We would add," the Journal continues, "that the dollar price of nearly all commodities--from wheat to corn to copper to silver--are also surging, a further sign of a weakening currency. On Wednesday alone the price of wheat and soybeans increased 3.4% and 2.8%, respectively. That follows a 75% increase in their price in 2007--which ran ahead of the oil price, which gained a mere 57% for the year. Neither OPEC nor China caused food commodity prices to rise like this. The main culprit here is a global loss of confidence in Federal Reserve policy and the dollar."

Which is why lots of average joes are joining countries such as Qatar, Kuwait, South Korea, China, Russia, and Vietnam, along with financial guru Jim Rogers, billionaires Bill Gates and Warren Buffet, and supermodel Gisele in fleeing the dollar for the euro and other currencies.

All of which calls to mind another quote from Milton Friedman. "Money is too important to be left to central bankers," Friedman told Deroy Murdock in a spring 2001 interview for National Review. "You essentially have a group of unelected people who have enormous power to affect the economy."

Affect it they surely have for nearly a century, and most of the time to the harm of almost everyone. We cannot expect to have a sound and prosperous economy unless and until the Federal Reserve is abolished and the dollar is once again backed by gold.