It’s Not Biden’s Inflation

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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!

 

The Rise And Fall Of Gold Stocks

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The rise and fall of gold stocks is a story of hurt and disappointment. That is because most of the time gold stocks are in decline.

Below are four charts which depict the sad story. Following each chart I will make some brief comments…

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Everything Peaked in 1980 – The Waning Effects Of Inflation

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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…

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Price Of Silver – 100 Years In The Making

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Sometimes fantasy becomes reality. At other times, a dose of reality will temper fantasies of outsized and unjustified proportion.

Some silver investors and analysts could use a dose of reality. Below is a chart of silver prices dating back to 1915…

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Waiting On Silver

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Expectations still abound for the long-awaited, vertical leap in silver prices.  We are told it is inevitable; and that it is supported by solid fundamentals. Those fundamentals include supply deficits, a return to the 16 to 1 gold-silver ratio, increasing monetary demand for silver, etc.

However, an examination of those fundamentals reveals a different picture.That picture is inconsistent with the call for higher silver prices.

SILVER SUPPLY & DEMAND, RATIOS

The supply deficits (gaps in consumption over production) have been talked about for decades.  In the 1960s and 1970s they were the principal fundamental justification in the case for higher silver prices.

Throughout the twentieth century, industrial use of silver increased to the point where the consumption of silver eventually exceeded new production. This is the start of the consumption/production gap to which people refer. The government  then became a willing seller in order to keep the price down.  The specific purpose was to keep the price from rising above $1.29 per ounce. This is the level at which the amount of silver in a silver dollar (not Silver Eagles) is worth exactly $1.00.

The huge price gains for silver that occurred in the 1970s were largely attributable to years of price suppression prior to that. Those years of price suppression, though, were preceded by decades of price support.

Neither price suppression, nor support, are significant issues at this time. The primary imbalance in supply and demand was corrected in the 1970s. If it hadn’t been, the silver price might be much higher than it is.

Expectations for a return to a 16-1 gold/silver ratio will go unfulfilled. The gold-to-silver ratio that existed one hundred fifty years ago was mostly the result of political influence and appeasement. There is no fundamental reason which justifies any particular ratio between gold and silver. (see Gold-Silver Ratio: Debunking The Myth)

Gold to Silver Ratio – 100 Year Historical Chart

As can be seen in the chart above, the gold-to-silver ratio continues to widen in favor of gold.

SILVER FUNDAMENTALS

Silver is an industrial commodity. Its primary demand is driven by – and its price is determined by – industrial consumption. Any role for silver as a monetary hedge is secondary.  This is true even in light of the significant increase in the amount of silver used in minting bullion bars and coins; particularly Silver Eagles.

The fundamentals simply do not support the bullish expectations for silver. Also, there are fundamentals that make silver vulnerable to a big price drop.

Deflation is a more likely near-term possibility than hyperinflation.  True deflation results in a decrease in the general price level of goods and services.

As an industrial commodity, the silver price would reflect the full brunt of deflation’s effects. The depression-era low for silver occurred in late 1932 at $.28 oz.  This low coincided with the stock market’s low.

Something similar happened in March-April 2020, when both silver and stocks declined by thirty-five percent.

Another possibility is that we might continue for several more years with relative prosperity and disinflation. This would not stop further price declines for silver.

SOME HISTORICAL PERSPECTIVE

After it peaked at $48.00 per ounce in 1980, silver’s price declined ninety-two percent over the next thirteen years. It reached a low of $3.57 oz. (February 1993) during the boom years  of the 1990s.

It has been ten years since silver last peaked at close to $50.00 oz. At the current price of approximately $25.00 oz., silver is cheaper by one-half. This is shown on the chart (source) below…

Silver Prices – 10 Year Historical Chart

 

Given that, does it matter much that silver has doubled in the past year. All of that increase is just a matter of recovering some lost ground.

Historically speaking, most of the reasons people give in support of dramatically higher silver prices, lose credibility when one looks at the facts.

CONCLUSION

Silver is ineffective as a monetary hedge because it is not a store of value. Silver would need to be over $100.00 per ounce right now to roughly approximate what gold’s current price of $1800 oz. reflects regarding the loss in purchasing power of the US dollar over the past century.

It is not remotely close to that number and there is no historical precedent to expect the gap between gold and silver to narrow in silver’s favor. As long as the US dollar continues to lose purchasing power, the gap between gold and silver prices will continue to widen in  favor of gold.

In addition, on the few occasions when silver has increased in price dramatically, it has given up most or all of the gains in short order.

In other words, there is likely more downside ahead for silver’s price. And it could be quite significant.

(also see $100 Silver Has Come And Gone)

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!

 

What’s Next For Gold Is Always About The US Dollar

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Since the origin of the Federal Reserve in 1913 the US dollar has lost ninety-nine percent of its purchasing power.

Not coincidentally, but in direct reflection of the dollar’s loss in purchasing power, the price of gold has multiplied one hundred fold from $20.67 oz to $2060 oz as of August 2020.

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A Visit To Jekyll Island – The Fed Is A Banker’s Bank

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A VISIT TO JEKYLL ISLAND

Earlier this year, I had the opportunity to visit Jekyll Island and see some of the landmark buildings where secret meetings took place which led to the origin of the Federal Reserve  in 1913…

With all the attention that the Federal Reserve gets today, it might be a good idea to learn a bit more about that origin which is steeped in controversy regarding claims of conspiracy.

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Higher Gold Price Vs. Inflation Expectations

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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.

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Comparing Bitcoin To Gold

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Comparing Bitcoin To Gold – Store(s) Of Value?

Mark Cuban claims that Bitcoin is a better store of value than gold. Is he correct?

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Two Reasons Hyperinflation Is Unlikely

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The correct definition of inflation is “the debasement of money by government and central banks“.  

The effects of inflation show up in the form of higher prices for all goods and services.

Hyperinflation is defined as “out-of-control general price increases in an economy, …typically measuring more than 50% per month.”  (source)

There are two specific reasons why hyperinflation re: out of control general price increases for all goods and services, possible US dollar collapse, etc., is unlikely.

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