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Posted Wednesday, November 10, 2010, at 5:55 AM

Did something happen to Her Majesty's Ship the Queen Elizabeth II? No, this is not about the luxury British cruise liner. Rather, this is about our government's current monetary policy; quantitative easing, second round "QE2."

Quantitative easing, sounds rather abstract doesn't it? It is a fancy new term for the government's plan to intentionally cause inflation. Have you been wondering why since August silver has gone up in value by 50 percent and gold has gone up by nearly 20 percent? The plan to intentionally cause inflation is why.

What is inflation and why would the government do it?

The value of a dollar is determined the same way as the value of a stock or any other commodity. You make an educated guess as to the sum total value of the entire United States (or General Motors, or the 2010 corn crop, etc.) and divide by the number of dollars in circulation (or shares of stock issued, or bushels of grain taken to market, etc.).

What happens when General Motors issues new shares of stock or if farmers bring lots of extra grain to market? The price per share or per bushel falls. The same is true when the government prints new money. The value of each dollar falls.

In effect, inflation is one of the most cruel forms of taxation. People who have spent their lives saving, and people who have modest incomes, lose some of the value of that savings or income as it costs more dollars to buy stuff. People who have lots of real estate, stocks, gold and silver, and "stuff" see the value of their stuff go up as it takes more dollars to buy it when they sell. Inflation is the one thing that truly makes the rich richer and the poor poorer. (Not market driven economics.)

Why would a government intentionally create inflation? A simplified answer is that it helps to keep powerful people in power.

First: If the Federal Reserve creates 20 percent inflation, as they plan, the value of the national debt does down by 20 percent because it destroys 20 percent of the value of every bond and treasury note bought by investors.

Second: The Federal Reserve regulates banking. The number one problem faced by banks is that they have mortgage loans in default secured by real estate that is not worth as much as the mortgage. As the value of real estate goes up, from inflation, the level of security on the mortgages loans go up.

Third: When the federal government is buying its own bonds (that is how the new money gets into circulation - making bond dealers, like Goldman Sachs, rich) bond interest rages go down because the government will buy the bonds at auction before the interest rate gets too high. As most interest rates are set on bond rates, that keeps interest rates artificially low.

Have you noticed that the government keeps urging us and businesses to keep borrowing money? Why would they do that? The reason is that borrowed money is spent which they hope will help stimulate production, which should in turn stimulate hiring. That they hope will create a cycle that will pull us out of our present slump.

Shouldn't we all be glad that there is inflation on the way? No. While inflation may help bankers and may help stimulate factory production it robs the average person and stimulates artificial bubbles in real estate, commodities, and stocks.

Do you remember the 1970s? The last time we did this? Do you remember "stagflation" and the "misery index?" Then look at the early 80s when there was a crash in precious metals, a crash in real estate value, and finally a crash in the stock market. All bursting bubbles created by the inflation of the 1970s.

History repeats itself when people do not take the lesson. It looks to me like we may be heading back to school.

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