The sad history of paper money is that it is printed until it is worthless. This is to say that whenever paper currencies are de-linked from gold or silver (made no longer redeemable in gold or silver), politicians print those currencies until they are worthless.

In no case did any politician come forth and say, “Our currency is now no longer redeemable in gold or silver, so let’s print it until it is worthless.” In all instances, the politicians thought they had good reasons to print.

The most infamous destruction of a paper currency occurred in post World War I Germany. The Germans had lost the war, and the French demanded reparations. Coupled with the costs of reconstruction, Germany turned to the printing presses.

The French, ironically, had their own sad encounter with paper money during the French Revolution (1789 – 1799), which was eloquently documented by Andrew Dickson White, cofounder of Cornel University, is his Fiat Money Inflation in France.

The French currency of the time was the assignat. White’s account tells how members of the French Assembly rose and called for the printing of more assignats with every slow down in the economy. In the end, just as would be the case in Germany 1923-1924, hyperinflation destroyed the currency.

Politicians always have what they consider good reasons for the printing of more paper money, regardless of the inevitable consequences. Of course, I’m sure, they rationalize that “Just this one time, it is necessary.” Later comes another time.

Going from memory, I can think of a few of those times. There was the Russian crisis in late 1980s, followed by the Mexican crisis in the early 1990s, followed by the Asian crisis. Then there was the slow down in the economy, which prompted Alan Greenspan to lower the Fed’s discount rate to 1%.

Greenspan’s hammering of interest rates helped bring on the housing boom, which turned into the housing bust, which gave us the Fannie Mae/Freddy Mac debacle. Now, Congress has instructed the Fed and the Treasury to work together for the creation of still more fiat paper money.

Ron Paul, who needs no introduction to gold/silver investors, gives an excellent analysis of the Fanny Mae/Freddy Mac bailout legislation that will allow the Fed and the Treasury to commence printing. Paul prepared his comments in video form. The video, which can be found on goldseek.com, is only 7-1/2 minutes. Note below the video the printed summary of the bill.

For some investors, and apparently for the media and for Congress, judging their coverage and comments, the looming failures of Fanny Mae and Freddy Mac were surprises. To other investors, however, the lid was simply pulled off a barrel of rotten apples.

For years, the head of Fanny Mae has bragged about lending money to low-income homeowners. Sounds great, right? Struggling Americans want to own homes just like everyone else, and along comes a White Knight with plenty of money to lend. And, you don’t have be all that qualified. Able to sign your name, fog a mirror? Viola! You have a home mortgage.

And, you couldn’t lose. The housing market was hot, up 17% to 20% annually in some areas, at higher rates in a few regions of the country. Why not buy? “If you can afford to rent, you can afford to buy,” said the posters in banks, which decided to get in on a good thing and also entered the mortgage business in a big way.

Fanny Mae and Freddy Mac, however, had the upper hand over banks. Fanny Mae and Freddy Mac are government sponsored enterprises (GSEs) and enjoy the implied backing the federal government. The implied government backing enabled them to borrow in the money markets at lower rates than other lending entities. That position resulted in Fanny Mae and Freddy Mac garnering 50% of the mortgage market in the US.

Under the laws that set up Fanny Mae and Freddy Mac, the federal government did not agree to back debt issued by the two lenders. Past Secretaries of the Treasury have said so. But, in the world of political expediency, Congress and the Fed stepped up to the plate.

So far, the U.S. government has not agreed to guarantee Fanny Mae and Freddy Mac debt. At this time, the Fed has announced that it will only buy Fanny Mae and Freddy Mac debt on the open market. That is a long way from guaranteeing the debt, but had the Fed not agreed to do make the purchases, Fanny Mae and Freddy Mac debt holders would have suffered huge losses.

As investors became aware that Fanny Mae and Freddy Mac did not have the capital to cover all the bad loans that they had written, Fanny Mae and Freddy Mac stock prices collapsed, losing about 85% in twelve months. Meanwhile, a large California mortgage lender, IndyMac Bank, was taken over by the FDIC, further spreading concerns about the banking industry.

Under such circumstances, gold and silver become of interest to an even larger number of people, and for good reason. Gold and silver are the ultimate monies. They cannot default; they need no government guarantee to maintain their values. Investing in gold and silver at this time makes sense.

A final note: Why was it that some investors knew to avoid Fanny Mae and Freddy Mac debt while huge financial institutions, such as insurance companies and mutual funds, got stuck? Primarily because those investors were attune to what was going on. Fact is, you cannot be attuned to what is “going on” by watching Establishment financial programs and by reading Establishment publications. You can learn what has happened by following Establishment sources, but it’s rare that you learn via Establishment media what is happening while it is happening.

One non-Establishment source is Weiss Research, founded by Martin Weiss, PhD, in 1971. Weiss’ understanding of banking and its inherent flaws, i.e., fractional reserve banking, gives him great insight into today’s financial markets. Visit his website at http://www.moneyandmarkets.com/. And, get more information about investing in gold and keeping up with silver prices on our website.

On news that the Fed and other central banks are going to intervene in the sagging US mortgage market, stocks got off to a roaring start today. The Dow Industrials, the most watched stock index in the world, opened 200 points higher, for nearly a 2%. The NASDAQ, which opened 50 points higher, did see a 2% increase. To stock investors, the Fed was the cavalry riding to the rescue. But, is the optimism justified? Will the rescue be successful?

The Fed announced that it plans to lend up to $200 billion in exchange for mortgage-backed securities now held by the banking industry. The move falls short of calls for the Fed to make outright mortgage purchases of mortgage debt, but the move is certainly a huge step in that direction. If losses on the sinking mortgage debt continue to eat at the balance sheets of the major banks, how will the Fed not take the final step and buy the mortgage paper?

Although the Fed lowered its discount rate 1.25% in January as direct result of deteriorating debt markets, the problem has not gone away. Around the world, banks have suffered mortgage debt losses in the billions. Even after the Fed made the extraordinary January cuts, in England the government had to “nationalize” (take over) Northern Rock Bank in February after depositors lined up to withdraw their money. If there is anything that scares governments, it is people lined up outside banks.

This conflagration, which was ignited during Alan Greenspan’s tenure as Fed Head, threatens to burn down our financial house of cards, a banking system built on paper money. Greenspan ignited the fire by lowering its discount rate to 1%, then attempted to put it out by boosting interest rates as price inflation raised its ugly head. Now, Greenspan’s successor, Ben Bernanke, is devising schemes to keep the blaze under control.

Such is the problem that last month the Fed announced a “new tool” to alleviate pressures in the credit markets. That new tool was dubbed the Term Securities Lending Facility and is to make available $200 billion for the purpose of “lending Treasuries to primary dealers.” ($200 billion here, $200 billion there, pretty soon we’re talking some real money, to steal a phrase from the late Everett Dirksen.)

The “primary dealers” just happen to be the big banks, and this rescue program also involves other central banks. The problem truly is worldwide, and the Fed will not stop throwing paper dollars at the problem as long as dollars are accepted. When the dollar is finally repudiated, the game is up.

Meanwhile, a small segment of investors has begun rejecting paper dollars. That would be those investors who have turned to investing in gold. Many are making investments in silver as well. When people become concerned about the excessive printing of paper money, they always turn to gold and silver, and logically so, for gold and silver have proven to be the best forms of money ever used by mankind.

As for the Fed’s intervention affecting gold and silver, it has. Precious metals prices remain strong.

One of the tenants of Austrian Economic Theory is non-intervention in the marketplace. However, this concept is lost on economists who think that they know better than the marketplace when it comes to what the marketplace wants. The mortgage market is one such market where the interventionists delight in manipulation.

Now, the President himself has declared that there will be further intervention in the marketplace via the Federal Housing Administration. The president’s goal is to alleviate the pains caused by past intervention with still more intervention.

When Alan Greenspan took fed funds rates to 1%, the housing market took off as mortgage companies lent to anyone who could fog a mirror. The result was a housing mania, which has turned into a nightmare. Fedgov to the rescue.

In a clearly political move, last Friday President Bush announced a package intended to help homeowners refinance unserviceable mortgages through the Federal Housing Administration. The program, however, misses the target by a wide margin.

When Bush announced the program, it stipulated that borrowers eligible for relief could not be behind on their payments. Such a stipulation, of course, means that borrowers not needing help are eligible, but those behind on their payments will not be helped. How does this help the mortgage market, unless Bush’s advisors see it getting worse and those not now behind on payments maybe getting behind as things worsen? As the program is implemented, rules probably will be changed to bail out borrowers who have missed payments.

Meanwhile, Ben Bernanke, Fed Head, has declared his willingness “to grant further relief to U.S. financial markets.” I think that choice of words illustrates the awe that people hold for the Federal Reserve System. It will “grant further relief.” What it means is that the Fed is aware of the problem Greenspan created and is willing to print more money for temporary relief. (It is foregone conclusion that the Fed will lower its fed funds rate at its September meeting.)

More Fed intervention (the creation of more dollars and the lowering of interest rates) can only result in more price inflation. Monetary inflation is the cause; price inflation is the result.

The writer of the article linked above typically sees fedgov’s plans as beneficial. Few writers understand Austrian Economic Theory. Still others, who may have superficial knowledge of it, ignore it, probably because of having spent many hours in college being indoctrinated in the various economic theories that advocate government intervention. (I have a friend who actually believes that commerce could not exist without government rules!)

As this is written, the dollar is trading below 80 on FOREX markets. A drop through 79 could send the dollar spiraling, shot down by the too much government intervention in the US financial markets. Maybe a time to buy gold coins?

So far, it looks like the world’s central banks have been successful in averting a meltdown of financial markets. However, there may be more work (money to be printed) by the central banks as more problems surface. The latest to report problems in the market include China’s second largest bank, the Bank of China, which reported a $9.7 billion exposure to sub-prime loans. A consensus seems to be developing that the Fed will lower the fed funds rate at its September meeting.

Gary North has written for lewrockwell.com an insightful look into the Fed’s role in the subprime mess. North also discusses the ramifications of the Fed continuing to print money to bail out the holders of the subprime debt. If not immediately, then certainly later, the price of gold will be affected by the creation of more fiat money.

Now, before a bunch of readers jump all over me for having recommended a Gary North editorial, let me say that despite him having been one of the major voices behind making drastic preparations for the Y2K debacle that did not materialize, it does not tarnish North’s understanding of the financial markets. When it comes to money, North is one of the most erudite writers of the times.

One of the interesting things in North’s piece is a table showing the entities that own the subprime debt. Note how many governmental entities own it. Note also how many are supposedly sophisticated financial organizations, which are run by persons with MBAs, even PhDs. If these guys are so smart, why could they not have seen that lending money to persons without the financial ability to repay it was not a good idea?

Other supposedly sophisticated persons, perhaps the same, warn against investing in gold. Are these people you really want to listen to? Frankly, when it comes to money and gold, Gary North is a much better voice.