"Everything you need to know about gold"
ALL HAIL THE FED!
As investors continue to gobble up stocks and the dollar prices of most assets continue to climb, it would appear that all is well. Concerns about weakening economic activity and recession have been moved to the back burner. Now, the focus is squarely on inflation.
NOTE: Part of the article I posted yesterday (Sunday) did not show up in the referral link sent with the standard email announcement. The text below is everything that followed the CPI bar chart.
continued…
We can see on the chart that the annual CPI rate is under 5% almost eighty percent of the time and that prices actually dropped about ten percent of the time (red years 1920’s, 1930’s). The potential for volatility increases, though, because of the cumulative effects of inflation.
CUMULATIVE EFFECTS OF INFLATION
The first year pictured on the chart is 1914, one year after the inception (1913) of the Federal Reserve. Prices rose by one percent in 1914, followed by a rise of almost two percent in 1915.
Now, imagine that the two percent rise in 1915 was stacked on top of the one percent rise in 1914, followed by each subsequent year being posted similarly. Each succeeding year adds to the height of the first and only column.
The exceptions to the continually increasing height are the years shown in red, which result in reducing the effects of inflation and decreasing the height of the column temporarily.
After a more than one hundred years of inflation, the single column won’t fit on a single page, if we use the same scale as in the horizontal bar chart above.
The cumulative effects of a century of inflation are thus: the U.S. dollar has lost ninety-nine percent of its purchasing power. That means that it takes one hundred times as much for the goods and services we buy as it would without the effects of inflation.
WHERE WE ARE NOW
In a very real sense, the U.S. dollar has already collapsed. Nearly all of the dollar’s loss of purchasing power has occurred since the depths of the Great Depression in the 1930s. As much as the Federal Reserve might prefer otherwise, most of its time is spent reacting to the cumulative, more extreme effects of the inflation they have created for more than one hundred years.
When the Fed chair talks about “reducing inflation”, what he means is that the Fed is trying to control the effects of inflation which the Fed, itself, has been creating since its inception in 1913. Interest rate manipulation might affect the activity of consumers and investors in negative ways that exacerbate current problems and/or cause other problems. The announced intention about “fighting inflation” by raising interest rates will likely have unintended consequences that overwhelm any efforts and intentions to restore stability.
A certain amount of inflation is necessary to keep the economy from collapsing. Originally, a little bit of inflation was seen as a stimulant to economic activity and productivity; now it has become a necessity. Keeping the wheels greased can keep the slowly moving wagon in motion. At some point, though, the wheels will come off.
The situation is very similar to that which is experienced by drug addicts. Each successive fix requires a stronger dose and any positive effects are minimal. The cumulative negative effects continue to percolate until manifesting themselves in a crisis of either withdrawal or death.
The U.S. and world economies are dying. Maybe it is not apparent to some, but it will be soon. The worst part is that a painful withdrawal is no longer an option.
As time marches on, the effects of government inflation will become more extreme and more unpredictable. And the loss of purchasing power in the US dollar will reflect that.
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 – HOW IT ALL STARTED
Early ruling monarchs would ‘clip’ small pieces of the coins they accumulated through taxes and other levies against their subjects. The clipped pieces were melted down and fabricated into new coins. All of the coins were then returned to circulation. The clipped coins circulated side by side with other coins and all were assumed to be equal in value.
As the process evolved, more and more clipped coins showed up in circulation. People became suspicious and were reluctant to accept the clipped coins at full face value. Their concern prompted the ruling powers to reduce the precious metal content of the coins. This lowered the cost to fabricate and issue new coins. Soon, all of the coins in circulation had less precious metal content. Hence, there was no need to clip the coins anymore.
From the above example it is not hard to see how anything used as money could be altered in some way to satisfy the voracious financial appetite of government. However, a process such as this was cumbersome and inconvenient. There had to be a better way. Unfortunately, there was.
ENTER: PAPER MONEY
With the advent of the printing press and continued improvements to the mechanics of replicating words and numbers in an easily recognizable fashion, paper money was a big boost to government’s propensity to inflate the money supply.
However, people viewed the paper money with healthy skepticism. They preferred the old coins with precious metal content which continued to circulate alongside the new paper money. As a result, it was necessary for government to maintain a link between money of known value (coins) vs. money of no value (paper notes) in order to encourage its use.
The link is called convertibility. It allows the circulating mediums of money to be interchangeable, i.e., exchanged on demand for predetermined amounts. In the case of the U.S. dollar, the predetermined ratio was one ounce of gold @ $20.67 oz. You could exchange paper dollars for gold; or, gold for paper dollars – on demand. (see Gold Convertibility – NOT Gold Backing)
Convertibility tempered the anxiety of consumers regarding the use and acceptance of paper money. As long as convertibility was maintained by government, the acceptance of paper money grew. Over time, though, governments continued to inflate their own money supply far beyond their ability to continue exchange/convertibility at the agreed upon fixed rate. This cheapened the value of the paper money and caused people to actively avoid it; preferring instead to use and own precious metal coins.
To protect its own interests, government severed the link of convertibility; partially at first, then completely. It was done by fiat (a decree or order of government).
Not only does our money today have no intrinsic value. The supply of money is inflated (and, therefore, debased) continuously. Fractional-reserve banking (no reserve requirements since 2020!) allows exponential expansion of the money supply via credit. The printing press is still humming 24/7, but the digital age has ushered in new and ingenious ways to fool the people.
WHAT IS INFLATION?
Inflation is the debasement of money by government and central banks via expansion of the supply of money and credit. All governments intentionally inflate and destroy their own currencies.
Inflation cheapens the value of all the money in circulation which leads to a loss of purchasing power in the currency. The loss of purchasing power shows up in higher prices for goods and services. The higher prices are NOT inflation. The higher prices which result from the loss of purchasing power in the currency are the effects of inflation.
There are other effects of inflation including misinterpretation of financial statistics, misallocation of money and resources, unreliable economic statistics and projections, etc.
The effects of inflation are cumulative, volatile, and unpredictable and are the result of inflation that was already created by the government or central bank.
WHO/WHAT CAUSES INFLATION?
There is only one cause of inflation: government. The term government includes central banks. The United States Federal Reserve Bank is the biggest inflation engine in world history. The Fed’s conscious and deliberate action to inflate the money supply since its inception in 1913 has brought about a ninety-nine percent decline in the purchasing power of the U.S. dollar. This means that it costs more than one hundred times as much today for what we buy as would be necessary absent the effects of inflation.
Inflation is not caused by “greedy” businesses, excessive wage demands, accelerated consumer spending, or higher energy prices. Even government’s own propensity to spend, as reckless as it is, does not cause inflation. And that does not contradict my earlier statement that government is the only cause of inflation. The creation of the money comes first. Only after the money or credit is created can the government exercise its wanton disregard for financial restraint by spending its ill-gotten gains. (see Government Spending Is NOT Inflationary)
UNDERSTANDING INFLATION AND ITS EFFECTS
The Arab Oil Embargo in 1973 by OPEC (Organization Of Petroleum Exporting Countries) was prompted by demands for more money for oil. The underlying fact of the matter was that the dollars being received for oil by OPEC nations were worth much less than when existing contractual agreements were originally written. Oil exporters were receiving fixed-dollar amounts in currency that had been losing value for several decades.
To understand this better, imagine that you were a company selling widgets for $1 each and according to your contract you cannot receive any more than that. Fast forward twenty or thirty years. You are still selling lots of widgets and still receiving $1 for each one you sell. Your production costs over the years have continued to climb; and, it costs you more for everything you buy to maintain your standard of living. Everyone is paying more for everything. On an ongoing, year-to-year basis, things seem reasonably normal, except that prices are now rising more frequently and the rate of increase is higher than before. What is going on?
The effects of inflation are showing up. Those effects can be subtle at first, or not noticed at all. At some point in time, though, the cumulative effects of inflation become more obvious and everyone starts acting differently. Businesses try to plan for it and individuals invest with inflation in mind.
As people become more aware of the effects of inflation, they start looking for reasons; and, for guilty parties. Government is quick to act of course. Sometimes they implement wage and price controls. This is like setting the stove burner on ‘high’ and putting a lid on the pot with no release for the pressure. The Federal Reserve’s favorite ‘tool’ is manipulation of interest rates, both up and down (see Two Reasons The Fed Manipulates Interest Rates and The Fed’s 2% Inflation Target Is Pointless). And, they talk a lot.
They have talked enough over the past thirty years to frighten us into thinking that our own spending and saving habits are the problem. Sometimes the blame is directed at foreign countries and their currencies. Our sense of ‘unfairness’ over China’s attempts to weaken the Yuan seem to be misplaced. We criticize them and other countries for doing the same things the US government and Federal Reserve have been doing for over one hundred years.
Even with the hugely, inflationary response of the Federal Reserve in 2008 and afterwards, we did not see the substantial increase in the general level of prices for goods and services that was expected. It took more than a full decade to see economic activity get back to pre-Great Recession levels. Then, the pandemic scare and a forced economic shutdown hit. Government and the Federal Reserve embarked on another grand scheme to save us from the effects of inflation which they had created. This time, the higher prices for goods and services showed up quickly and in large measure.
Below is a chart (source) of inflation’s effects on U.S. dollar purchasing power (CPI). To whatever extent the statistic might be flawed (it is), it still is reasonably representative of the effects of inflation over time…
We can see on the chart that the annual CPI rate is under 5% almost eighty percent of the time and that prices actually dropped about ten percent of the time (red years 1920’s, 1930’s). The potential for volatility increases, though, because of the cumulative effects of inflation.
CUMULATIVE EFFECTS OF INFLATION
The first year pictured on the chart is 1914, one year after the inception (1913) of the Federal Reserve. Prices rose by one percent in 1914, followed by a rise of almost two percent in 1915.
Now, imagine that the two percent rise in 1915 was stacked on top of the one percent rise in 1914, followed by each subsequent year being posted similarly. Each succeeding year adds to the height of the first and only column.
The exceptions to the continually increasing height are the years shown in red, which result in reducing the effects of inflation and decreasing the height of the column temporarily.
After a more than one hundred years of inflation, the single column won’t fit on a single page, if we use the same scale as in the horizontal bar chart above.
The cumulative effects of a century of inflation are thus: the U.S. dollar has lost ninety-nine percent of its purchasing power. That means that it takes one hundred times as much for the goods and services we buy as it would without the effects of inflation.
WHERE WE ARE NOW
In a very real sense, the U.S. dollar has already collapsed. Nearly all of the dollar’s loss of purchasing power has occurred since the depths of the Great Depression in the 1930s. As much as the Federal Reserve might prefer otherwise, most of its time is spent reacting to the cumulative, more extreme effects of the inflation they have created for more than one hundred years.
When the Fed chair talks about “reducing inflation”, what he means is that the Fed is trying to control the effects of inflation which the Fed, itself, has been creating since its inception in 1913. Interest rate manipulation might affect the activity of consumers and investors in negative ways that exacerbate current problems and/or cause other problems. The announced intention about “fighting inflation” by raising interest rates will likely have unintended consequences that overwhelm any efforts and intentions to restore stability.
A certain amount of inflation is necessary to keep the economy from collapsing. Originally, a little bit of inflation was seen as a stimulant to economic activity and productivity; now it has become a necessity. Keeping the wheels greased can keep the slowly moving wagon in motion. At some point, though, the wheels will come off.
The situation is very similar to that which is experienced by drug addicts. Each successive fix requires a stronger dose and any positive effects are minimal. The cumulative negative effects continue to percolate until manifesting themselves in a crisis of either withdrawal or death.
The U.S. and world economies are dying. Maybe it is not apparent to some, but it will be soon. The worst part is that a painful withdrawal is no longer an option.
As time marches on, the effects of government inflation will become more extreme and more unpredictable. And the loss of purchasing power in the US dollar will reflect that.
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!
IS GOVERNMENT SPENDING INFLATIONARY?
When the terms ‘spending’ and ‘inflation’, are used in the same sentence, it is usually in reference to government spending habits. For example, Congress recently approved massive, additional amounts of financial aid for Ukraine and Israel. Thus, we might say that “government spending is inflationary”.
President Biden’s ongoing attempts to cancel student loans have been labeled as reckless and inflationary. The support payments and financial aid programs associated with Covid economic shutdown were termed “highly inflationary”.
Lack of fiscal restraint on the part of government can be harmful, damaging, and demoralizing. In some cases, it is downright deplorable. Lack of fiscal restraint can lead to bankruptcy and loss of confidence.
The spending, however (even deficit spending), is not inflationary; nor, are accelerating wage demands and higher prices for consumer goods and services, higher housing costs, etc. Excessive government spending and the higher cost of living are not inflationary; they are the effects of inflation.
INFLATION, GOVERNMENT, AND CENTRAL BANKS
Inflation is a creation of government. All governments intentionally create inflation to foster and support their own spending habits. Governments create inflation by expanding the supply of money and credit. The ongoing inflation of the money supply leads to a loss of purchasing power in all the money in circulation. The loss of purchasing power shows up in the form of higher prices for goods and services. The higher prices are incorrectly referred to as inflation, but they are NOT inflation. The higher prices for goods and services that result from the loss of purchasing power are the effects of inflation.
Today, the role of government in the creation of inflation has been replaced by central banks. The United States Federal Reserve has been creating inflation since its inception in 1913. It efforts have resulted in a dollar that is worth one penny compared to the dollar of a century ago.
Nearly all of the things we commonly refer to today as inflation are not inflation at all. They are the effects of inflation that has already been created by the Federal Reserve via expansion of the supply of money and credit. Without this inflation the government would not be able to spend the multiple trillions of dollars it does to support its egregious spending habit.
INFLATION IS NOT TRANSITORY
Treasury Secretary Janet Yellen and Fed Chair Jerome Powell have received blowback from their comments a few years ago regarding inflation being transitory. When inflation is defined correctly as “the expansion of the supply of money and credit by governments and central banks”, then it is clear that inflation is not transitory. That is because inflation is an intentional, continuous, and ongoing practice of all governments and central banks. In other words, inflation never stops; so it cannot be transitory.
When Ms. Yellen and Mr. Powell made their comments, the term “inflation” was used to describe the surge of higher prices that happened post-Covid economic shutdown. A significant portion of those higher prices resulted from supply chain disruptions which have nothing to do with inflation. The portion of higher prices for goods and services attributable to supply chain disruptions would have occurred with or without the effects of inflation. Since supply chain disruptions are temporary, their effects (shortages, higher prices, etc.) are also temporary; or, in this case, transitory.
It is my opinion that both Powell and Yellen were thinking about supply chain issues when the comments were made. If that is the case, then their comments were not entirely incorrect. There are two problems with that interpretation, though.
The first problem concerns the ratio of how much of the increase in prices is allocated to the effects of inflation and how much is the result of supply chain problems. I think it is reasonable that the subsequent decline in the rate of increasingly higher prices is due to lesser stress from supply chain bottlenecks and the delayed startup in economic activity.
The second problem has to do with accuracy/timing. How much of an impact on prices for goods and services can be expected from any known increase in the money supply? Even given the temporary nature of supply chain disruptions, how long will resolution take and how long before more positive effects of increasing economic activity materialize?
CONCLUSION
Governments and central banks create inflation intentionally and continuously. The effects of that inflation result in a loss of purchasing power of all the money in circulation. The loss of purchasing power shows up in the form of higher prices for goods and services.
The effects of inflation are unpredictable in timing (usually delayed) and magnitude. The Federal Reserve is engaged in a battle to contain the negative effects of the inflation which they created. Egregious government spending is enabled by the inflation (increase in the supply of money and credit) that is created by the Federal Reserve. The spending, itself, for all of its negativity, is not inflationary. The inflation is not transitory because it never stops.
(also see Investors Re: Rate Cuts – “So You’re Telling Me There’s A Chance”)
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!
SYSTEM LIQUIDITY IS THE BIGGER RISK – “CASH IS PREFERRED AND APPRECIATED”
There is quite a bit of debate right now about whether inflation’s effects will worsen again soon; or, whether the inflation threat has been minimized and “disinflation” will prevail. Don’t look now, but the specter of a liquidity crisis is looming in the background.
The situation is such that a liquidity crisis of epic proportion might overtake all of us in our arguments about the quantity and extent of inflation’s effects. My concern was heightened this past weekend when I drove to a small, local restaurant to pick up a take-out order.
DESTRUCTION OF MONEY
The “biggest collapse in the money supply since the Great Depression” continues unabated at this point. (See Ryan McMaken’s article here.)
The decline in the money supply is nearly three years old and dates back to April 2021.
This decline is a destruction of money and is the opposite of what might be expected if one is looking for evidence that could support some of the more extreme expectations and projections for inflation and its effects.
That is because most, if not all, of the analysis about inflation and its effects focuses on the supply of money and its seemingly unlimited growth.
Discussion about money creation by governments and central banks almost universally excludes mention of the demand for money.
DEMAND FOR MONEY
Money has a demand side, too. We are not talking about the demand for goods and services. We are talking about the demand for money, itself. People need money to pay taxes and transact business; to save and invest.
As long as the supply of money is relatively stable and sufficient to finance existing normal economic activity, then the result is price stability. Without price stability, the economy cannot function reasonably.
Since the inception of the Federal Reserve, excessive growth in the money supply has led to a ninety-nine percent loss of purchasing power in the U.S. dollar.
Currently, though, the money supply is not growing. It is shrinking.
A SHRINKING MONEY SUPPLY
A shrinking money supply is directly opposite to that which has happened which has made the U.S. dollar nearly worthless compared to a century ago.
It is also not supportive to arguments that the U.S. dollar is about to collapse and that hyperinflation is on the way.
Without the continual infusions of “new” money, the previous inflationary “highs” cannot be maintained, let alone increased.
If a shrinking money supply continues, the end result is deflation. (see An End To Inflation – Three Possibilities)
WHAT IS DEFLATION?
Deflation is the exact opposite of inflation. The result is a stronger currency. Instead of losing purchasing power, your dollars would buy more – not less.
Deflation is not bad. However, some of the accompanying economic effects would be very difficult to endure. The U.S. dollar would go further, but there would be fewer dollars to go around.
There would be huge price reductions in real and financial asset prices, depressed economic activity and high unemployment. Conditions would rival and probably exceed those of the Great Depression of the 1930s.
Fortunately, at least for now, we are not there yet.
CONCLUSION
An infusion of new money might temporarily reverse the shrinking money supply and its negative economic effects, but that is not necessarily a good thing.
Think of it this way. Would you recommend a new fix to a drug addict who is undergoing withdrawal symptoms resulting from curtailing their drug use and attempting a return to sobriety?
Intentional inflation by government and central banks in the form of cheap and easy credit has created artificial financial highs, bubbles in asset prices, and a false sense of economic security.
You cannot ignore fundamental financial and economic law forever. Sooner or later (more likely sooner), we will all pay the price. (also see Gold And The Shrinking Money Supply)
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!
GOLD PRICE, INFLATION, DOLLAR COLLAPSE
Expectations for gold to move higher in price are often tied to worsening inflation and a possible collapse in the U.S. dollar.
That sounds logical and there is historical precedent to support such expectations; but, some clarification is necessary first.
DEFINITION OF INFLATION
Inflation is the debasement of money by governments and central banks. The inflation is intentional and all governments inflate and destroy their own currencies.
(also listen to The Prostitution Of Gold)
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!
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…
END OF INFLATION IS INEVITABLE
At first, the statement above may seem counterintuitive; especially in light of the ongoing increase in the cost of goods and services experienced recently that seem to have no limit.
Besides, inflation never stops. All governments, with the help of central banks, intentionally inflate and destroy their own currencies. There are changes in momentum, of course, but an ever-expanding supply of money and credit leads to continual loss in purchasing power of the currency (i.e., U.S. dollar).