"Everything you need to know about gold"
The emphasis on “NOT” in the title of this article is critical to a better understanding of what inflation is – and isn’t. We hear all the time: “Inflation rose sharply last month as consumer prices increased by .6%”, or something similar.
We also hear that higher prices themselves are a cause of inflation. Example…
DID THE FED CAUSE THE 2008 RECESSION?
A review of the history regarding Fed interest rate policy yields information that says “yes”.
On June 30, 2004, the FOMC began to tighten policy by increasing the Fed Funds target rate to 1¼%. By June 2006, two years later, the target rate was at 6 1/4%. It remained at that level for the next year – well into 2007.
FED’S GAME PLAN IS ALWAYS CHANGING
“Inflation is likely to take longer to return to our price stability goal than previously expected” Fed Chair Jerome H. Powell March 16, 2022
GOLD, INFLATION, AND THE FEDERAL RESERVE
Below are my comments and answers to various questions about gold, inflation, and the Federal Reserve. They are “for the record” so to speak, and are meant to be taken literally and specifically…
CHAIRMAN POWELL
In 1970, an R&B vocal group called Chairmen of The Board debuted their first single – Give Me Just A Little More Time…
When I see Chairman Powell responding to questions about the Fed’s efforts to raise interest rates, including how effective their efforts are and when the expected/hoped for results will begin to show up, I hear the song playing in my mind.
What are the ‘hoped-for results’? In the Chairman’s words, “to return inflation to a range more in line with the Federal Reserve’s 2% target” or similar words to that effect. (see The Fed’s 2% Inflation Target Is Pointless) The implied purpose is to suppress inflation (more correctly, the effects of inflation) before it turns into something much worse, like runaway inflation or hyperinflation.
BULL (THE FED)
Today, more than ever before, focus is on the Federal Reserve. The general public has joined economists, financial analysts, and market participants in monitoring and parsing every statement regarding Fed action and policy.
Each morsel of data receives the the strictest attention. The actions are mostly for naught, of course. That is because most of those asking the questions are unaware of certain facts that would change the nature and tone of Fed focus overnight.
GOLD PRICE RATIOS
There are two charts below for your observation. We will review each of them in sequence and then provide some commentary and conclusions.
FED DILEMMA IS NEVER-ENDING
The Federal Reserve doesn’t know what to do. Even worse, though, is that it probably doesn’t make much difference what they do – or don’t do.
ONCE MORE WITH FEELING
“…try it one more time with feeling
Chairman take it from the top
This one is the big one Jay so give
it everything you got
(You can) make believe your makin’ me
believe each word you say
Let’s try it once more with feeling
and we’ll call it a day”
(original lyrics by Kris Kristofferson)
NOTHING CHANGES AT THE FED
The statement may sound obvious given that Jerome Powell has been nominated to continue his reign as head of the world’s most visible central bank. Some might think this is a good thing; and will allow the Fed to steer a course that will bring our economy back from the living dead.
NOT BIDEN’S INFLATION
You wouldn’t know that by listening to current commentary about inflation. Casual observers, economists, investors and analysts seem to agree that “higher inflation is being generated by abnormally huge amounts of government spending”.
The supposition, however, is incorrect. In fact, no amount of government spending causes inflation.
It is also true that abnormally higher spending by consumers does not cause inflation.
Most people think that the term ‘inflation’ is synonymous with ‘higher prices’.
The rising prices, however, are not inflation. The inflation has already been created.
DEFINITION OF INFLATION
“Inflation is the debasement of money by governments and central banks.“
The inflation is accomplished by expansion of the supply of money and credit. All governments and central banks inflate and destroy their own currencies intentionally.
The inflation leads to a loss in purchasing power of the currency which in turn shows up in the form of increases in prices for most goods and services.
Inflation is not created, or caused, by companies raising prices. It is not triggered by escalating wage demand, hoarding or supply shortages.
Changes in economic demand, hoarding, and bottlenecks in the supply chain for goods and services have nothing to do with inflation.
When someone says “inflation is back”, they are referring to rising prices. They are wrong on two counts.
First, the portion of rising prices resulting from the loss in purchasing power are the effects of inflation.
The current share of rising prices resulting from changes in economic demand, such as supply chain bottlenecks, pent-up demand, etc. have nothing to do with inflation or its effects and are a totally separate factor in price changes for various goods and services.
Second, the inflation isn’t back; because it never went away.
Inflation is an ongoing cancer for all currencies of the world and its effects are unpredictable. Governments and central banks never stop expanding the supply of money and credit.
This means, of course, that all currencies continue to lose purchasing power. The US dollar today is worth one penny compared to its purchasing power of a century ago.
ROLE OF THE FEDERAL RESERVE
The Federal Reserve is a banker’s bank. Its purpose is to create and maintain a financial system that allow banks to lend money in perpetuity.
We are bombarded daily with commentary and analysis regarding the Fed and their actions. We are treated to continual rehashing of the same topics – tapering, interest rates, inflation – over and over.
Fed actions, especially including the inflation that they create, are damaging and destructive. Their purpose is not aligned with ours and never will be.
Today the Fed is restricted by necessity to a policy of containment and reaction regarding the negative, implosive effects of their own making. (see The Federal Reserve – Purpose And Motivation)
THE FED IS THE PROBLEM
One of the self-proclaimed objectives of the Federal Reserve is to manage the stages of the economic cycle so as to 1) avoid recessions and depressions and 2) extend the prosperity phase of the cycle.
How well have they done? Not very well.
In their initial attempt to avoid and defer the natural corrections associated with economic recession, the Fed ushered in the most severe depression in our country’s history beginning with the stock market crash in 1929. Even former Fed chairman, Ben S. Bernanke agrees:
“Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”…Remarks by Governor Ben S. Bernanke (At the Conference to Honor Milton Friedman, University of Chicago -Chicago, Illinois November 8, 2002)
But they did do it again.
Six years after his speech, Governor Bernanke presided over another catastrophe in the financial markets. Cheap credit and ‘monopoly’ money had blown bubbles in the debt markets that popped.
Alan Greenspan was Chairman of the Federal Reserve at the time Bernanke made the above statement. When testifying before Congress after the credit implosion of 2007-08 and after he had been replaced by Mr. Bernanke, Greenspan had this to say:
“I discovered a flaw in the model that I perceived is the critical functioning structure that defines how the world works. I had been going for 40 years with considerable evidence that it was working exceptionally well.”
And lets not forget the Fed induced bubble surrounding stocks in the late nineties which was pricked in early 2000. Greenspan was at the helm then, too.
But is this really any wonder? What can you expect after reading what Danielle DiMartino Booth says…
“The economists were satisfied parsing backward-looking data to predict future events using their mathematical models. Financial data in real time were useless to them until it had been “seasonally adjusted,” codified, and extruded into charts. Fed employees had no interest in financial news.”
IT WILL BE MUCH WORSE NEXT TIME
Similar events today would bring about a price collapse in all markets as well as usher in deflation and a full-scale depression. All of this would be resisted on every front by government and the Federal Reserve.
They would launch an all-out financial war (and maybe another real war, too) by opening the money and credit spigots full force in a futile attempt to reverse the credit implosion and negative price action of all assets.
The depression would also last much longer than needed. And the price declines which are necessary to correct the excesses of the past and cleanse the system would be countered every step of the way by regulations and programs of dubious value.
The efforts of government would actually worsen things and prolong the suffering; and the results would be much worse than anything we could imagine.
It will be quite a ride. (also see Federal Reserve And Market Risk; see here for ThinkMarkets review)
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!