A Slam Dunk Way to Profit From U.S. Government Policies

"Oh, Murphy... I love you. Give me some kisses. You're such a bad girl..."

In 1994, an infamous CIA memo – the "Murphy" memo – made its way around Capitol Hill. The report claimed graphic evidence (a recording) proving that the U.S. ambassador to Guatemala, Marilyn McAfee, was a lesbian. We can only imagine what the tape must have contained...

According to the CIA, McAfee was having an illicit affair with her secretary, Carol Murphy. The information must have come as quite a shock to McAfee's husband.

A reasonable reader of such a memo might have rightfully wondered why the CIA was bugging the bedroom of an ambassador of the United States? And why Ambassador McAfee's personal life was an issue of national security?

According to Tim Weiner's new book, Legacy of Ashes, the reason for bugging the ambassador was to protect a Guatemalan colonel... who'd participated in the murder of two well-connected Americans. Senior Guatemalan military officers can be embarrassing friends. Keeping order in that part of the world (and keeping the locals in line for United Fruit Co.) sometimes meant knocking heads... and sometimes it meant knocking heads off.

According to U.N. estimates, close to 200,000 civilians had been killed in the years following the 1954 CIA-led coup – nearly all of them by the ruling junta. No one much cared what happened in Guatemala as long as Americans stayed out of the fighting. But in 1994, the Guatemalans knocked off two of the good guys, and there was going to be hell to pay.

In an attempt to save himself, the colonel bugged the ambassador. He gave the tape to the CIA's station chief in Guatemala... who sent it around Capitol Hill in an effort to discredit the ambassador and take the heat off the implicated colonel... who was, incidentally, his agent.

The plan might have worked (as it undoubtedly has many times before and since) except for one small fact: The ambassador wasn't, in fact, a lesbian. Nor was she having an affair of any kind. The tape accurately and correctly depicted the ambassador's fondness for her two-year-old, black standard poodle – Murphy.

Weiner's book is a wonderful, eye-opening account of all the things that go wrong when a government agency is given a nearly unlimited amount of money and authority with almost no oversight or review.

Consider the advice of former CIA Director Porter Goss.

The day after President George W. Bush fired him, Goss gave the commencement address at Tiffin University. "If this were a graduating class of CIA case officers," he said, "my advice would be short and to the point. Admit nothing, deny everything, and make counteraccusations."

The only other government agency with as much power and as little oversight is the Federal Reserve Board of Governors. In fact, like the CIA, much of the history of the Federal Reserve is nearly a state secret. While private banking corporations technically own the Federal Reserve banks, the Federal Reserve Board controls the banks' operations. And the president appoints the governors. Thus, at least tangentially, the executive branch controls interest rates and the supply of money in the United States.

An enormous body of evidence proves that the five members of the Federal Reserve Board are prone to serious mistakes. But... like the CIA... the Fed's mantra has long been: Admit nothing, deny everything, and make counteraccusations.

During the tenure of former Federal Reserve Chairman Alan Greenspan, the value of the U.S. dollar fell by approximately 50%, as measured by the so-called GDP deflator. This, to Greenspan, represented "price stability." Deny everything.

Meanwhile, during one of the greatest periods of technological innovation in the history of mankind – when the costs of communications essentially disappeared and the costs of computing fell by 90% – consumer prices in America continued to rise. Asset prices soared. We can't easily measure the real impact of the Fed's actions because we don't know, for certain, what the real increases to productivity were and thus how much a sound currency would have appreciated during the period.

But inflation undeniably taxes the asset-less and creates an inducement to consume and not save. It also creates a subtle (but enormous) tax increase by slowly moving the population into higher tax brackets. In return for the invisible tax of inflation, the American people received the benefits of the "Greenspan put." This is Wall Street-speak for the Fed's tendency to greatly increase the money supply (by depositing money in its member banks) during times of crisis or financial calamity. In effect, the Fed tries to show the public why it's necessary to have a central bank (make counteraccusations) by forestalling the financial losses of speculators and investment banks.

The historical counterbalance to central banks is gold. Unlike Federal Reserve notes, an ounce of gold requires no political backing to maintain its value. Gold is no one else's liability. Gold is universally recognized and easily divisible. It has held its value steadily for as long as we have written records. (An ounce of gold has long bought a high-quality men's suit... and it still does.) On the other hand, every experiment with paper money and central banking has ended in catastrophe.

It doesn't take much thought to conclude that a government that is incapable of running a balanced budget, has accumulated an estimated $50 trillion in total liabilities, and is allowed to print its own money will, sooner or later, create a monetary catastrophe. Ergo... it might some day be wise to own more gold than dollars.

Unfortunately, this realization is somewhat akin to aging. You know, gently and day-by-day, the end is growing nearer. Things don't quite work like they used to. Your "buck" doesn't go quite as far as you remember. But the process is so gradual, you barely notice. Besides, everyone else is suffering from it and the only solution to the problem is extremely unattractive.

So much money and credit has been tied to the property markets in the United States, Great Britain, and Australia that, if these markets break down and the collateral substantially repriced, the monetary destruction would cause a deflation as powerful as the Great Depression. We've already seen this is the case in certain places – such as Florida and Las Vegas, where properties are now routinely selling for 40% less than their offering prices only a year ago.

To prevent the impact of these bad debts from wrecking the banking system and throwing millions of people into bankruptcy, I believe the Fed will continue lowering interest rates so banks (which borrow at short-term rates and lend at long-term rates) can repair their balance sheets and so individuals can find a way to re-finance their homes.

What will happen? Will the banks fail? Or will Bernanke do as he has long promised – drop money from helicopters, if necessary, to prevent a recession?

We can only hazard a guess, of course. God does not whisper in our ear. Nor does Bernanke. But... as central bankers pump hundreds of billions of dollars into the banking system, I'm reminded of what we've told readers for years now: "Make sure you own some gold and silver, folks..."

Good investing,