By Howard Katz

The Fed created over $1 trillion last autumn. Right now my estimate is that $1 trillion has flowed into the money supply since May ’08, that the Fed is lying about the money supply and that the money supply over the past year (May ’08 to May ’09) has increased from $1.3 trillion to $2.3 trillion. The point is that there are $1 trillion deficits planned as far as the eye can see. How is the Government going to finance those deficits?

People who are ignorant of economics believe that a government finances its deficits by borrowing from the people. Indeed, in the Reagan Administration there was a Secretary of the Treasury (William Simon) who believed this and hence warned that a large deficit would cause interest rates to rise. Simon was a nice man, but if he is going to be Secretary of the Treasury he ought to

know that, since the birth of democracy (1689), no government has dealt with a deficit by borrowing from the people. That causes interest rates to rise to very high levels, and the low interest faction gets mad and puts a lot of political pressure on the government.

So financing by borrowing is not in the realm of political reality. All governments have financed their deficits (except for very tiny ones) by printing money. This computes to the printing of $1 trillion in 2009 (already done) taking the money supply from $1.3 trillion to $2.3 trillion, another $1 trillion in 2010 taking the money supply from $2.3 trillion to $3.3 trillion, another $1 trillion in 2011 taking the money supply from $3.3 trillion to $4.3 trillion and yet another $trillion in 2012 taking the money supply from $4.3 trillion to $5.3 trillion. This is a 300% increase in the nation’s money supply over the next 4 years. That is, prices will be rising by something like 50% per year.

The worst price increase in American history occurred in 1979 (13.3%), and the American people reacted by kicking out the party in power. From Dec. 1978 to Jan. 1980, the price of gold rose from $200 to $800, at times going up $50 per day. Gold conferences were held around the country, and wealthy Americans flocked to them to learn what to do with their money.

If this is what happened when prices rose by 13.3% for one year, then what do you think will happen when prices rise by 50%, year after year, for 4 years? All H___ is going to break loose. My $14,000 projection was constructed by taking my previous projection of $3500 for gold (at the highest point in the commodity pendulum) and multiplying it by 4.

But regardless of whether $14,000 is right or wrong, the price of gold is going so far up that you have to be in it. For example, I know that many of you were scared last week as gold came down 7½%. Well, when gold hits $5,000, you will look back on this past month and feel sheepish that you were worried about a 7½% decline.

Besides, you have no choice. As I argue above, the Fed might be closer to tightening than I have previously thought. Let the yield gap drop below -3.5%, and the stock market will be hit with a body blow. Long term you have to either be in gold or other commodities. And gold is the most user-friendly commodity there is. It doesn’t jump around. It doesn’t require specialized knowledge. And it obeys standard technical chart patterns. The best thing I can do for you is to make you realize the enormity of what is now going on in America.