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The Asian markets have weighed in with their response to the infamous downgrade – Shanghai slid 3.7% while gold and silver came on like gangbusters.

August 08, 2011 – The Asian markets have weighed in with their response to the infamous downgrade – Shanghai slid 3.7% while gold and silver came on like gangbusters. Now it’s our turn, but I suspect that whatever happens here will be no where near as rational.

Asia holds way too much US debt to not take any official recognition of our financial instability seriously. We, however, are the proverbial headless chicken, running blindly about in search of a scapegoat. Over the past two decades Americans have refined panic into an art form and in the process we have committed our economy to an irreversible deflationary spiral.

When an economy is left to find its own way inflation and deflation are just phases of an ordinary cycle between manageable extremes. Government interference, however, invariably succeeds only in exaggerating the extremes.

Several decades ago our government realized that it had set itself on a course necessitating continuously growing revenues virtually forever, in turn requiring a perpetually expanding economy. The government, with its ability to control the money supply, believed it had the power to control natural economic forces through infinite credit expansion. Drunk on fiat money, they saw no problems in such an idiotic notion.

One big presumption was that the public would forever jump at the opportunity of government induced cheap credit. Eventually, however, people reach a point where they realize that their indebtedness actually erodes their purchasing power. They lose faith in the monetary system and begin to deleverage. As they divest of assets, prices begin to fall and the economy slows.

Enter the Fed. They hoped to hoodwink the people by dumping money into the equity markets. The illusion of a strong market, they surmised, would give people the confidence to go deeper into debt. Instead, growing lack of trust in the government and a rapidly declining economy drove them to deleverage even more, further driving down asset values.

At first falling prices create growth in the apparent buying power of currency, and people rush to accumulate all the cash they can get. Meanwhile the government is going broke so it steps up its efforts to sway the public. The spiral tightens.

Most people keep hoarding cash, but when all else fails to curb deflation the government will surely fire up the presses. And chances are that will be all the spark needed to ignite runaway inflation – and possibly hyperinflation.

Only those who had the foresight to buy gold and silver will be spared.

Shannon King

Senior Staff Writer – GoldSilver.org

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