By Porter Stansberry, November 17, 2009

Lots of people realize the government is propping up the banks with their
repeated bailouts. But most folks don't understand the real way the
government is saving the banks. It's not the shares the feds bought (and
paid too much for). It's the whole system of paper money.

The government is deliberately keeping short-term interest rates super low,
so the banks' funding costs almost disappear. Then, by running a huge budget
deficit and spending record amounts of money on domestic programs, the
government insures inflation (and longer-term rates) will remain high. The
banks make money on the spread between short-term rates and long-term rates.

And just to make sure nothing goes wrong, the Fed has promised to buy $1.75
trillion (yes, that's trillion) worth of mortgages, many of which come
directly from troubled banks like Citigroup. In short, there's no way these
banks can lose.

And here's the best part... According to the Congressional Budget Office,
this secret plan to save the banks is free. No line item anywhere in the
budget accounts for interest-rate manipulation or the Fed's mortgage buying.
It's all "free."

But of course, there is a real cost. The value of our currency goes down
with every new dollar the Fed prints and with every dollar of new deficit
spending. But the politicians can all pretend inflation doesn't exist. When
it shows up in our economy, they can lay the blame with "speculators" and
oil companies...

The government can manipulate the dollar like this because it's not backed
by gold. President Nixon "temporarily" cut the tie between the dollar and
gold in August 1971. You can see the video
here.

In it, Nixon promises the dollar won't be devalued - "your dollar will be
worth just as much tomorrow as today"...

At the time, $35 would buy an ounce of gold. Today, it takes more than
$1,100. That's a 97% decline in purchasing power. It's fascinating how many
people believe this won't happen again... despite the fact that we've got
runaway deficits, we're trying to fight two overseas wars, we're about to
pass the largest new entitlement program in history... and we're propping up
every major bank in the United States. I'm not surprised gold is trading at
$1,100. I'm surprised it's not trading for more than $5,000.