Skip to comments.The Printing Press Is Running Hot, But Where Is Inflation And How Will It Affect Gold?
Posted on 09/06/2012 11:13:39 AM PDT by blam
The Printing Press Is Running Hot, But Where Is Inflation And How Will It Affect Gold?
Commodities / Gold and Silver 2012
Sep 06, 2012 - 02:48 AM
The key to understanding inflation lies in the implications of an increasing money supply. Here at Global Gold, we rely on the True Money Supply which is provided by the Mises Institute. The True Money Supply was originated by Murray Rothbard and represents the amount of money in the US economy that is available for immediate use in exchange. On the chart below you see that the True Money Supply has accelerated at a faster rate in the past couple of years; it is currently in an exponential growth phase. Even if one takes the official data published by the US Fed, the evolution looks similar: since 2000, the Fed balance sheet has increased fivefold.
What are the implications of the hugely increased money supply for inflation? The Austrian School of Economics defines inflation as the expansion of the money supply, whereas rising prices denotes the increase in the general price level. If the supply of a given good increases (in our case its money), one unit of the same good loses some of its value. That devaluation of money results in rising prices. Note that in spoken language inflation tends to be associated with consumer prices, which can lead to confusion.
Inflation is the root cause of the devaluation of money, whereas price increases are just the result of inflation. In the years leading up to the financial crisis, we had official inflation rates between 2 and 4%. At the same time however, the US was importing an increasing number of goods from low cost producer China. This should have lead to a decrease in the price level. But due to the increase in money supply, prices kept rising. This implies that the USD has lost much more than 2 to 4% of its value in real terms per year.
So why dont we see rising prices, although inflation is already here?
First, we should note that we believe inflation (as calculated by governmental entities) is manipulated in order to hide the currency devaluation. Shadowstats.com calculates inflation based on the traditional calculation methods. Based on those metrics, the inflation level in the US should be at least 5%. Even an inflation rate of 5% seems to be low for the amount of money that is being created.
Which reasons explain this phenomenon? We believe there are several reasons, the most important one being that the newly created money is not getting into circulation. Most of the fresh fiat-money has been used to bail-out the existing banking system. Even with these bailouts, the banking system is massively under-capitalized, so the huge amount of liquidity is not being lent out (to other banks, individuals or corporations). The liquidity is being horded and invested in safe assets. This is creating asset bubbles all over the world.
The biggest one of those asset bubbles are government bonds. Banks all over the world are investing in (read: inflating) treasury bills and government bonds. The perversion of the current bond prices becomes clear when you see people willing to lend out money to governments with a negative yield as a return. Thats unsustainable. I will not go into detail regarding the bubble in the stock market, but it should be noted that there has been a strong correlation between the quantitative easing measures of the US Fed and the strong equity price returns.
The channeling of liquidity into certain assets is keeping the velocity of money low. Velocity, which stands for the frequency with which a unit of money is spent in the economy, has collapsed since 2007. Back in 2001 every USD was turned over more than twice a year, today the number is down to only 1.5 times. Thats a decrease of almost 30%! Newly created money is not being circulated. You can be sure however that in the near future the velocity will go up again and that will finally lead to enormous price rises.
Are there any triggers already visible that could spur the velocity of money?
Well, history tells us that you cant control inflation over a long time. Somehow liquidity will inevitably come into the system, leading to sharp price increases. It will lead to a change in peoples perception as well. The shift on a large scale will come when people will finally lose their trust in paper money, which will only happen when they see its value declining and when they understand they beaome victim of it.
In my personal view, the next few years will be dominated especially in the western world by a declining real economy, higher unemployment rates, financial repression such as higher taxation, government restrictions when it comes to investment possibilities. Interest rates, which are kept artificially low, in combination with a moderate inflation rate, are leading to low or even negative real return on investments. Thats really destroying the existing wealth through the back-door, reducing the purchasing power of paper money / currencies.
It doesnt matter that the velocity has been decreasing for more than a decade now, as clearly visible on the above chart. The central point is that history shows that velocity increases when people expect prices to go up in the near future. When that happens, its impossible to stop the move.
At that point in time, people everywhere are going to understand that paper money is worthless. They will rush into assets which have real value. That will be an incredible driver for real assets! History has shown that in hyperinflation scenarios people rush into precious metals. The coming collapse of our fiat currency system will be no different in my view, sooner or later gold and other precious metal prices are going to skyrocket. Again, history shows us that especially gold has outperformed any other asset classes in those kind of environments
because gold is money for more than 5000 years now.
I got inflation right here....
Where is inflation.
Try the grocery store..
Dry beans that I bought a year ago at 1 buck a pound is 1.50
I used to stock up on Sirloin roasts at .99/lb and haven’t seen it under 4. Can’t buy hamburger for under 3 a pound.
Gasoline is twice what it was 4 yrs ago.
The real inflation is in the stuff they don’t include in the measurements.
OK, where’s the guy that swears up and down that food and energy are NOT EXCLUDED from the reported rate of inflation?
Beer Nuts are 99 cents and Deer Nuts are just under a buck!
And the bastids are going ahead with a “stealth QE3”.
It’s the collapse in velocity that is “keeping the presses running”. Knowing Bernanke’s background tells you he will do whatever is necessary to avoid the monetary mistake of the Great Depression when tightening occurred triggering a double dip sever recession. The author indicates the key issue: when velocity improves, how quickly can the Fed drain the liquidity out of the market to avoid runaway inflation. Timing will be everything.
There is package deflation to hide the costs.
The price of dog food hasn’t changed much. A 20 pound bag of Beniful kibbles was 15 bucks..Then the 17 pound bag was 15 bucks.. Now the 14 pound bag is 15 bucks.
I used to buy Kroger frozen vegetables for a buck a pound.. Still a buck on sale but it’s now 12 ounces.
I don’t have a reference point for them.
Food, energy, education, the usual. Clinton told us last night that housing prices are finally rising, as if it were a good thing. Aren’t there stories about subprime car loans running wild? Such phenomena we never seem to tie to an increase in the money stock.
We’re fundamentally handicapped as regards monetary policy. All these indicators, all these induces. But we can’t ever tell until it’s right on top of us. The booming housing market was a badge of honor for decades before it blew up. Assuming we could tell, and knew what was happening, and furthermore impossibly knew whether it was good or bad, we couldn’t make the right move. Because by the ti.e complementary or counter actions take effect conditions have changed.
I have yet to mention our biggest handicap, in that we never know how things would look without our meddling. Inflation may not be punching us in the face, but what if prices are higher than nature would have them? Who knows?
Ten trillion in wealth destroyed. About one trillion in “printing” added back in. We’ve got quite ways to go to create structural inflation.
The inflation in food is mainly due to drought, the use of corn for fuel instead of food and animal feed, and the high price of oil/gas. In other words, not structural inflation but temporary due to weather, and temporary as to oil and stupid policy. (although high oil price will hang around if Obama wins, since that’s his policy goal.)
Here’s what’s deflated:
The value of your labor. Real estate (80% of our wealth). The value of most retirement accounts. The cost of many retail items like TVs and computers.
So, we have massive asset deflation (net worth and wages of Americans both down) and weather and policy related inflation of certain items, most noticable being food. Small inflation in truck-delivered goods due to gas prices.
The food inflation can be partially solved through policy, and the rest of it will fade when the drought fades, as droughts always do.
of course gold will increase in price, as it’s measured in US dollars
and as you dilute the value of the dollar... which they are doing to keep the markets ‘up’... those commodities that do not dilute, such as gold... will spike in price
The “amount printed” above should be 2 trillion, not 1, sorry.
Indeed. One trip to the grocery store.
“when tightening occurred triggering a double dip sever recession.”
That didn’t happen. But ideas have consequences and since everyone in power think depressions are caused by deflation we will get endless helicopter dumplings. Or maybe ideas don’t matter and government control of monetary systems will only ever produce one answer, Keynes and Friedman or no.
It is true that people are sitting on money, and that it is not changing hands at rates satisfactory to our overlords. But once in a blue moon businessmen forecast correctly, and maybe skittishness is justified. For one thing, why expand if you don’t Knowles whether the federal government will up and confiscate your profit tomorrow?
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