Kelsey Williams

The Federal Reserve And Long-Term Debt – Warning!

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FEDERAL RESERVE AND LONG-TERM DEBT

Won’t somebody please say something different about the Federal Reserve? Or nothing at all?

It seems amazing to me that we are so studiously focused on comments, statements, or actions emanating from the Fed. It is as if we expect to find a morsel of truth that will give us special insight or a clue as to their next move.

I suppose that is reasonable to a certain extent – especially today. We are social-app (il)literate and very impatient. Seems to be a sort of day-trader mentality.  Problem is that every morning we see the same headlines. All week long we hear about the most recent Fed meeting, or the release of minutes from the last meeting, or what to expect at the next meeting, etc., etc. And the cycle repeats itself every month. (I’m not Bill Murray and this is not Ground Hog Day.) 

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Gold vs. Stocks: Ratios Do Not Prove Correlation

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GOLD VS. STOCKS 

There is considerable extensive research and lots of articles written about gold vs. stocks. Sometimes, that is done in order to support or justify the argument that stocks are a better, long-term investment than gold. And the results seem to indicate that.

Except that gold is not an investment.

Gold is real money and a ‘store of value’. Its fundamentals have nothing to do with the fundamentals for stocks or any other investments. When gold is analyzed as an investment, it gets compared to other investments. And then the analysts start looking for correlations.

Some say that an ‘investment’ in gold is correlated inversely to stocks. But there have been periods of time when both stocks and gold went up or down simultaneously.

And, classifying gold as an alternative investment, or a safehaven asset, confuses people and creates unrealistic expectations. At least when comparing apples to oranges, we know that both of them are fruits. 

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How Much Is Your House Worth Today? Another Crisis Brewing?

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We seem to have come full circle in the past ten years or so. The pipe dream of being a millionaire by virtue of owning a home – any home – is stoking unrealistic fantasies once again.

But, before we get carried away, here is a story about home ownership that might cause you to question the potential reality of that dream. 

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Gold And Interest Rates – No Correlation

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GOLD AND INTEREST RATES 2001-11

Over and over again, the following statement or something similar continues to find its way into commentary about gold:

“…prospects of higher US interest rates have the ability to limit upside gains. It must be kept in mind that Gold is a zero-yielding asset that tends to lose its allure in a high-interest rate environment”  

A variation of that statement:

“Because gold doesn’t bear interest, it struggles to compete when interest rates rise.” 

The statements imply a correlation between gold and interest rates. And the implied correlation suggests that higher interest rates result in lower gold prices.

If that is the case, then there should be some historical precedent to corroborate the correlation. There is. And we only need to go back a few years or more to find it. But it does not corroborate the correlation; it refutes it.

During the ten-year period 2001-2011, gold’s price increased from $275.00 per ounce to a high of nearly $1900.00 per ounce. And interest rates continued their long-term decline throughout that entire period.

In this example the original correlation is inferred to be supported by the opposite scenario  – lower interest rates and higher gold prices. So far, so good.

GOLD AND INTEREST RATES 1970-80

However, let’s go back a bit further along the time line. Between 1970 and 1980, the price of gold increased from $35.00 per ounce to $850.00 per ounce. But rather than declining, interest rates were on a tear.

Rather than “struggling to compete” gold was galloping ahead in the face of ever higher interest rates and increasing lack of demand for higher-yielding investments.

The higher rates were a reflection of lower prices for bonds and particularly U.S. Treasury securities. The 10-year U.S. Treasury bond yield exceeded 15%. Which makes you sort of wonder when you read something like this:

“Higher rates boost the value of the dollar by making U.S. assets more attractive to investors seeking yield.” 

Two ten-year periods of outsized gains in the price of gold. And interest rates were doing something exactly opposite during each period. There simply is no correlation between gold and interest rates.

Additionally, there is no correlation between gold and 1) social unrest, or 2) global terrorism; or 3) world wars. Gold is not a safe haven hedge and it is not an investment. It is real money.

WHY DOES GOLD PRICE CHANGE?

But is there something that correlates with gold? Anything at all? Why does its price change? And so dramatically, it seems?

With respect to gold and its price changes, there is only one thing that correlates. The U.S. dollar.

The U.S dollar is a substitute for gold. Gold is original money. The price of gold is an inverse reflection of the changing value of the U.S. dollar. The ongoing, never-ending deterioration of the dollar’s value means ever rising gold prices over time.

Gold is the standard; not the U.S. dollar. Gold has earned its designation as real money over five thousand years of history. It is original money. And it is real money because it is a store of value.

And there is historical evidence to support the correlation of gold’s price to the value of the U.S. dollar. Every change of significance in time and price for gold correlates with an inverse change in the value of the U.S. dollar. Higher prices for gold correlate with a lower value for the U.S. dollar. Lower gold prices correlate with stability and strength for the U.S. dollar.

The correlation between gold and the U.S. dollar is implicit. One does not ’cause’ the other. Either one is the inverse of the other.

Some have said that the argument about correlation of interest rates and gold depends on making a distinction between real interest rates and nominal interest rates. No correlation there, either.

That is because any patterns that appear to confirm correlation between real or nominal interest rates and gold need to include the U.S. dollar. The U.S. dollar is the determining correlative factor re: gold.

Without taking into account the relative strength or weakness of the U.S. dollar relative to gold’s price, any other correlations are either meaningless, misleading, or contradictory.

There are six major turning points (1920, 1934, 1971, 1980, 2001, 2011) on the chart (source) below. All of them coincided with – and reflect – inversely correlated turning points in the value of the U.S. dollar…

Gold Prices: 100-Year History
                                                                                               

The U.S. dollar is the world’s reserve currency and gold trades are settled in U.S. dollars. Since gold is priced in U.S. dollars and since the U.S. dollar is in a state of perpetual decline, the U.S. dollar price of gold will continue to rise over time.

There are ongoing subjective, changing valuations of the U.S. dollar from time-to-time and these changing valuations show up in the constantly fluctuating value of gold in U.S. dollars.  (read more here)

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!

Inflation Is Not Our Biggest Threat

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You wouldn’t know that by listening to current commentary on the economy.

There is a bigger threat, though. But first, there is some clarification about inflation that is necessary.

Most people infer rising prices when they hear the term inflation. That is not correct. The rising prices are the ‘effects’ of inflation. The inflation, itself, has already been created.

It is not created, or caused, by companies raising prices. And it is not created by ‘escalating wage demand’.

When someone says “inflation is back”, they are referring to rising prices. Yet they are wrong on two counts.

First, as we have previously said, the rising prices, generally, are the effects of inflation.

Second, the inflation isn’t back; because it never went away.

From my book INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT:

“Inflation is the debasement of money by the government. 

There is only one cause of inflation: government. The term government also includes central banks; especially the U.S. Federal Reserve Bank.” 

The Federal Reserve caused the Depression of the 1930s and worsened its effects. Their actions also led directly to the catastrophic events we experienced in 2007-08 and have made us more vulnerable than ever before to calamitous events which will set us back decades in our economic and financial progress.

The new Chairman of the Federal Reserve, Jerome Powell, is personable, likable, candid, and direct. But he cannot and will not preside over any changes that will have lasting positive impact.

The Federal Reserve does not act preemptively. They are restricted by necessity to a policy of containment and reaction regarding the negative, implosive effects of their own making.

And their actions, especially including the inflation that they create, are damaging and destructive. Their purpose is not aligned with ours and never will be.

Yet they are not independent. In fact, they have a very cozy relationship with the United States Treasury. That relationship is the reason they are allowed to continue to fail in their attempt to manage the economic cycle.

There are two specific terms which describe our own actions and relationship with the Federal Reserve – obsession and dependency.

We are bombarded daily with commentary and analysis regarding the Fed and their actions. Almost daily we are treated to rehashing of the same topics – interest rates, inflation – over and over. And we seemingly can’t read or hear enough, i.e. obsession.

But are we reading or hearing anything which will help us gain a better understanding about the Federal Reserve? And what, if anything, can we realistically expect them to do?

We are also hooked on the liberally provided drug of cheap credit. Our entire economy functions on credit. We are dependent on it. And without huge amounts of cheap credit, our financial and economic activity would come to a screeching halt.

A credit implosion and a corresponding collapse of stock, bond and real estate markets would lead directly to deflation. The incredible slowdown in economic activity leads to severe effects which we refer to as a depression.

Deflation is the exact opposite of inflation. It is the Fed’s biggest fear. And it is a bigger threat at this time than progressively more severe effects of inflation.

The U.S. Treasury is dependent on the Federal Reserve to issue an ongoing supply of Treasury Bonds in order to fund its (the U.S. government’s) operations. During a deflation, the U.S. dollar undergoes an increase in its purchasing power, but there are fewer dollars in circulation.

The environment during deflation and depression makes it difficult for continued issuance of U.S. Treasury debt, especially in such large amounts as currently. Hence, the resulting lack of available funds for the government can lead to a loss of control.

The U.S. government is just as dependent on debt as our society at large.

The following excerpt is from my new book ALL HAIL THE FED!:

“When something finally does happen, the effects will be horribly worse. And avoidance of short-term pain will not be an option. The overwhelming cataclysm will leave us no choice.

As severe as the effects will be because of previous avoidance and suppression, they will also last longer because of  government action. The cry for leaders to “do something” will be loud and strong. And those in authority will oblige. 

But don’t look to the Federal Reserve for a resolution. They are the cause of the problem.”

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!

All Hail The Fed!

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ALL HAIL THE FED!

The United States Federal Reserve Bank has left a century-long trail of damage in its wake. A misguided attempt to manage the stages (growth, prosperity, recession, depression) of the economic cycle has led to nearly complete destruction in the value of our money.

The Federal Reserve caused the Depression of the 1930s and worsened its effects. Their actions also led directly to the catastrophic events we experienced in 2007-08 and have made us more vulnerable than ever before to calamitous events which will set us back decades in our economic and financial progress.

The new Chairman of the Federal Reserve, Jerome Powell, is personable, likable, candid, and direct. But he cannot and will not preside over any changes that will have lasting positive impact.

The Federal Reserve does not act preemptively. They are restricted by necessity to a policy of containment and reaction regarding the negative, implosive effects of their own making.

And their actions, especially including the inflation that they create, are damaging and destructive. Their purpose is not aligned with ours and never will be.

Yet they are not totally independent. In fact, they have a very cozy relationship with the United States Treasury. That relationship is the reason they are allowed to continue to fail in their attempt to manage the economic cycle. You can learn about that relationship in my new book ALL HAIL THE FED!

Whatever your understanding is about the Federal Reserve, it will change after reading this book…

The Federal Reserve – Purpose And Motivation

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With each succeeding day, obsession with the Federal Reserve continues. And the obsession is a good indicator of just how misinformed most of us are.

This is true with respect to various policies, statements, and actions; and includes comments made by board members, either in speeches or interviews. But it is also true regarding purpose and motivation.

To a large extent, it is a matter of perception. Some, maybe most, people see the Fed as the lead driver. There is an assumed aura of authority and control. On all matters economic, we look to them for direction. But where are they taking us? 

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Kelsey Williams Interview With David Scranton

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Kelsey Williams was interviewed by David Scranton on The Income Generation show March 1, 2018 about his book: Inflation – What It Is, What It Isn’t, And Who’s Responsible For It.

Here are the links to the interview:

FULL SHOW [1] https://vimeo.com/advisorsacademy/review/258621529/28ad77b32f

KELSEY WILLIAMS[2] https://vimeo.com/advisorsacademy/review/258625019/3179c3db98

https://vimeo.com/advisorsacademy/review/258621529/28ad77b32f

https://vimeo.com/advisorsacademy/review/258621529/28ad77b32f

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!

No Silver Lining Here

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NO SILVER LINING

As bad as the prognosticators can be with their predictions for the price of gold, the situation for silver is even worse.

Some very recent headlines trumpeted the following proclamations:

“Silver prices to surge…”

“Silver…Why Prices Will Soar”

“Why You Must Own Silver…”

But my favorite headline expresses all of the emotion and confusion regarding silver quite aptly: “What Is Wrong With Silver?”

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Gold, U.S. Dollar, And Inflation

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GOLD, US DOLLAR, AND INFLATION

Gold bulls have a short memory. Last year at this time, gold was similarly priced and they were quite bullish then, too. But their expectations didn’t ‘pan out’ as expected.  In fact, gold prices turned and went in the opposite direction, hitting lows in late summer well below $1200.00 per ounce.

The downturn was unexpected. But it was unexpected because most analysts and investors were looking in the wrong place for the wrong clues.

Gold’s price changes over time in response to changes in the value of the U.S. dollar. But some additional explanation is necessary.

Some say that a weaker U.S. dollar ’causes’ a higher gold price. That is like saying that lower interest rates cause higher bond prices.  That’s not the way it works.

Gold and the US dollar move inversely.  So do bonds and interest rates.

If you own bonds, then you know that if interest rates are rising, the value of your bonds is declining.  And, conversely, if interest rates are declining, the value of your bonds is rising.  One does not ’cause’ the other.  Either result is the actual inverse of the other.

When you were a kid you probably rode on a see-saw or teeter-totter at some time.  When you are on the ground, someone on the other end of the see-saw is up in the air.  And, vice-versa, when you are up in the air, the other person is on the ground.  Again, one does not ’cause’ the other. Either position is the inverse of the other.

Most of those who comment on gold consider the dollar to be one of several factors contributing to a higher gold price. But, in truth, gold’s price reflects only one specific thing: changes in value of the U.S. dollar.

There are six major turning points (1920, 1934, 1971, 1980, 2001, 2011) on the chart below. All of them coincided with – and reflect – inversely correlated turning points in the value of the U.S. dollar.

Gold Prices: 100-Year History   (inflation-adjusted)                                                                                               source

Since gold is priced in US dollars and since the US dollar is in a state of perpetual decline, the US dollar price of gold will continue to rise over time. There are ongoing subjective, changing valuations of the US dollar from time-to-time and these changing valuations show up in the constantly fluctuating value of gold in US dollars.

There is also more talk about inflation recently.  So here is an axiom to remember: inflation is the debasement of money by the government.

When you  hear someone referring to things such as ‘cost-push’ or ‘demand-pull’ inflation, accelerated wage growth pressure, or an ‘over-heated economy’, listen politely. But know that there is only one cause of inflation – government. And government in this case includes central banks, especially the United States Federal Reserve Bank.

Government creates inflation by expanding the supply of money and credit. They do this intentionally and continually under the pretense of managing the economic cycles.

Since inflation, as practiced by government, is ongoing, the risks are cumulative. As that cumulative risk builds, events triggered by the effects of inflation become more volatile; and they are unpredictable.

When the Federal Reserve responded to the financial crisis of 2007-08 by increasing hugely their monetary expansion efforts, many thought that it would lead to runaway inflation and collapse of the U.S. dollar. It didn’t. But it did drive the prices of assets like stocks, bonds, and real estate, much higher.

Originally, of course, the price of gold surged in response to the Fed’s efforts. Since gold’s price is an inverse reflection of the U.S. dollar, it should come as no surprise that the dollar continued its long decline in value; and significantly so.

But the drop in the value of the dollar and gold’s higher prices from that point forward were mostly in anticipation of damaging effects from the Fed’s inflation in the form of significantly higher prices for all goods and services. In essence, a repeat of the seventies, only much worse, was expected. And the looming threat of U.S. dollar repudiation fanned the flames.

But there was no significant increase in the “general level of prices for goods and services”. And U.S. dollar weakness (possibly overdone) eventually reversed and the price of gold began to decline (2011 – see chart above).

Between 2011 and 2016, the U.S. dollar continued to strengthen and gold’s price continued to decline. At that point the two reversed direction again and that brings us to where we are currently.

Some are convinced that recent dollar weakness will continue unabated and that the price of gold will soar soon. Some are still banking on severely damaging effects from the Fed’s past money creation efforts. And still others are short-term traders who are looking at their charts and want to be “on the right side of the trade”.

Most of them will likely be disappointed – again. There are two reasons:

1)The fundamentals and logic involved are inconsistent and flawed.

2)The effects of inflation are volatile and unpredictable.

Applying investment logic to gold leads to erroneous conclusions. Gold does not react or correlate with anything else – not interest rates, not jewelry demand, not world events.

Changes in gold’s price are the direct result of changes in the value of the US dollar. Nothing else matters.

Since paper currencies and credit can be manipulated by government, expectations and reactions become more volatile and increasingly unpredictable.

That should be relatively clear; especially after what we have experienced in the past ten years. But some are still predicting  a gold ‘moonshot’. And they want it now.

Something like that may occur. In fact, it is quite possible. But when? It will only happen if it is accompanied by a complete collapse and repudiation of the U.S. dollar.

The chart above is current. Does it look like we are in the midst of something similar to 1970-80 or 2001-11? Or something worse?

Yes, forewarned is forearmed. But most of those who are the most vociferous in their calls for huge increases in the price of gold are those who were doing so all during gold’s price decline from August 2011 through January 2016.  What’s changed?

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!