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…
Inflation
Consumer Price Inflation
CONSUMER PRICE INFLATION
We hear the term used often, and I’m reasonably certain that most of those who use it think they understand it; but, is the term itself a correct expression for what is meant?
If Inflation Is So Bad, How Come It’s Not Worse?
IF INFLATION IS SO BAD…
Recent headlines have many people despairing over inflation.
A couple of recent examples such as “Inflation Is The Worst It’s Been In Forty Years” and “Consumer Prices Are Rising Rapidly” were followed by “High Inflation Is Here To Stay”.
Just how bad is it? Let’s take a look.
Simple Facts About Inflation
SIMPLE FACTS ABOUT INFLATION
When most people talk about inflation, they are usually referring to the higher prices they pay for goods and services. That is not inflation.
Most of what passes for explanations of inflation and its causes are convoluted and confusing. It is like looking into a pond of muddy water and trying to ascertain what lurks blow the surface.
Below are some facts about inflation that should help clarify things:
Effect of Deflation On The Gold Price
The higher price for gold over time reflects the loss in purchasing power of the US dollar. The loss in the dollar’s purchasing power is an effect of inflation.
Over the past century, the US dollar has lost approximately ninety-nine percent of its purchasing power. The loss in purchasing power is reflected in a gold price that has increased one-hundred fold ($20.67 oz. x 100 = $2067 oz).
The effect of deflation on the gold price is different. To be more accurate, the effect of deflation on gold’s price is opposite to the effect resulting from inflation.
Even Gold Is Subject To Inflation
Yes, even gold is subject to inflation.
Most gold bugs think that a gold standard will solve our inflation problems. While it is true that gold acts as a restraint on governments and central banks desire to create and control money, it does not mean that inflation cannot happen just because gold is the money used.
Inflation Or Deflation – End Result Is Still Depression
INFLATION OR DEFLATION
The debate continues but not much has been said that clarifies the issue for ordinary investors. What follows in this article should help.
Inflation is the debasement of money by government and central banks. The Federal Reserve and all central banks practice inflation by expanding the supply of money and credit continuously and intentionally.
This debasement of the money results in effects that are harmful and unpredictable. One of these effects of inflation is an unquantifiable loss of purchasing power in the money itself.
It’s Not Biden’s Inflation
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!
Everything Peaked in 1980 – The Waning Effects Of Inflation
EVERYTHING PEAKED IN 1980
Both gold and crude oil peaked at all-time highs in 1980. Those highs are still intact when the effects of inflation are accounted for. Below are the charts for both gold and crude oil…
Higher Gold Price Vs. Inflation Expectations
HIGHER GOLD PRICE VS. INFLATION
The actions by the Federal Reserve over the past year have led many to assume that much higher inflation is a foregone conclusion. This leads to a further expectation that a much higher gold price is imminent.
That sounds logical, but it is not that simple.
There is a relationship between higher gold prices and inflation, but the two are not directly related. The confusion results from a misunderstanding about inflation and its effects.