June 08, 2011 - In the Middle Ages alchemists strove to turn base metals into gold bullion, but they were realistic. Their other major quest was to find a potion for eternal youth – they knew the task would take more time than they had.

Alchemy fell by the wayside, but the magical thinking apparently has not. Governments still think it possible to create wealth out of debt by simply declaring fiat currency to be money, explaining Bernanke’s prediction that economic growth will rebound over the remainder of the year.

Just what does Bernanke think will get the economy moving in Q3 and Q4? More of the same, of course. According to a News Alert from the Wall Street Journal, he believes the Fed’s singularly unsuccessful policy needs to remain in place, keeping interest rates artificially low for an “extended period.” Despite that prediction, which he apparently pulled out of a hat, Bernanke concedes that the recovery is “uneven” and that “that conditions, particularly in the labor market, remain troubled.”

Americans have had their fill of such empty rhetoric and failed expectations. We have been in this quagmire too long not to see through the charade. A new Rasmussen survey reveals that a full 50% of Americans “say that there will be a 1930s-like depression in the next few years, including 26% who say it is Very Likely.”

What we are seeing is the predictable end time of the Austrian business cycle theory. Free Market Economics describes the cycle like this:

First interest rates are held below that of the free market, which encourages business to borrow heavily for long-term projects, creating a false boom in specific sectors and attracting a disproportionate inflow of people and investment into that sector. The central bank then gradually begins to raise interest rates to market value, which in turn pressures prices upward, often fueling a bubble. It becomes apparent that the sector cannot perform to investor expectations leading to a bust as money is diverted into other sectors that better reflect market fundamentals. Prices fall back to realistic levels, and unemployment rises as the sector adjusts.

The cycle repeats to where we are now, the point where “the debt burden is just too large to overcome … There is no solution to the crisis, merely a choice of which of two roads to choose, a deflationary debt collapse, or a hyperinflationary dollar collapse.”

Either way, only real money – gold bullion – is likely to survive the Fed’s modern day alchemy.

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Jonathan Monroe

Senior Staff Writer - Gold-Bullion.org