Replies to post #11484 on GOLDBUGS AMEX Goldbugs Index (GOLD)

[4Godnwv]

What’s happening on the inflation front?
Steve Saville
Apr 7, 2009

Current Situation

The Fed scaled back its money-pumping efforts over the first three months of this year, which is not surprising given that it would have been almost impossible to sustain the frenetic pace achieved during the final four months of last year. But even though the Fed's actions have become less frenzied of late, the Fed-Treasury tag team has made sure that the rate at which new money is borrowed into existence continues to exceed, by a substantial margin, the rate at which money is extinguished via debt repayment. This has mostly been accomplished via the US Government increasing its debt load at a much faster pace than the private sector de-leverages. As mentioned in previous TSI commentaries, the private-sector debt bubble is in the process of being replaced by a public-sector debt bubble.

The following chart shows the year-over-year percentage change in True Money Supply (TMS). Note that TMS does not include bank reserves. When the banks eventually start lending their excess reserves the result will be a further increase in TMS, but there is no telling when that will happen. It could, for example, happen within the next few months, but on the other hand the commercial banks could decide to sit on their excess reserves for several years. Either way there is likely to be a lot more monetary inflation over the coming 12 months for the same reason there has been a lot of monetary inflation over the past 12 months: increased government borrowing and Fed monetisation of both government and private debt.



On the above TMS chart we have identified three separate periods. Period A (mid-2001 through to mid-2004) had fast money-supply growth, Period B (early-2005 through to early-2008) had slow money-supply growth, and Period C, which began during the final quarter of 2008, has thus far been characterised by fast money-supply growth. The fast money-supply growth of Period A fueled rapid price rises in houses, housing-related debt securities and commodities, and the slow money-supply growth of Period B led to large price declines in houses, housing-related debt securities and (eventually) commodities. The fast money-supply growth of Period C WILL fuel rapid price rises SOMEWHERE in the economy.

There is nothing novel or complicated about the theory that fast money-supply growth over a prolonged period leads to substantial price rises and that a subsequent sharp slowing in the pace of money-supply growth causes prices to retrace; it is just basic supply and demand. However, the effects of monetary inflation are non-uniform and the time delays are both lengthy and variable. The challenge, therefore, lies in determining which prices will be affected the most by the money-supply changes and how much time will elapse before the effects of the money-supply changes become evident in prices. This is not only a challenge for investors; it's also a challenge for policymakers. One of the main problems faced by policymakers (central banks and governments) in their efforts to manipulate the economy to their own best advantage is that they will always be able to inflate the money supply but they will never be able to control the effects of the inflation. Sometimes they will get lucky and the right things (stocks and real estate, for instance) will be the primary beneficiaries of the inflation, but at other times they will be unlucky and the wrong things (gold and oil, for instance) will gain the most ground in response to the inflation. We suspect that over the next few years they will be as unlucky as they can be in that gold will be by far the biggest winner.

Will the Fed eventually 'soak up' the excess money?

Bernanke and his Fed cohorts will naturally say that they plan to remove much of the recently injected money once the economy recovers. In all likelihood they will also go as far as making preparations to drain away the "excess liquidity"; for example, getting approval for the Fed to issue its own bonds. This is all part of managing inflation expectations. However, there is almost no chance that the Fed will actually engineer a significant slowing in the rate of money-supply growth until it is way too late (until a major inflation problem is 'baked into the cake'). The reason is that the inflationary policies implemented to date will not only fail to turn the economy around, they will very likely make things worse. To put it another way: the harder they try to stimulate the economy by creating money out of nothing the more economic damage they will do (counterfeiting money transfers wealth from productive enterprises to the counterfeiter and thus reduces the economy's growth potential) and the longer it will take for a sustainable economic turnaround to begin.

Rather than draining away the so-called "excess liquidity" that was injected in an effort to boost the economy, it is more likely that the obvious failure of Fed-sponsored inflation and increased government spending will lead to even more of the same. After all, every good doctor knows that if a patient becomes sicker after taking a certain medicine then the correct response is to double the dosage. And if that doesn't work, double it again.

The cost of "flexible" money

One of the most popular arguments against having gold as money is that a gold-based monetary system would be inflexible, the implication being that today's dynamic economy requires a more flexible, or elastic, form of money. Well, if by "inflexible" it is meant that under a gold-based monetary system the supply of money could not be arbitrarily expanded by governments and banks, then yes, a gold-based monetary system would be inflexible, but such inflexibility is a consummation devoutly to be wished. In our opinion the ideal money would be as constant as the sun, enabling each of us to calculate exactly how much money we needed to save to cover our future living expenses.

Today's official money is very flexible, and it's not hard to see the cost of this flexibility. The following chart from http://mwhodges.home.att.net/nat-debt/debt-nat.htm reveals one method of quantifying this cost. The chart shows that the total quantity of debt in the US economy was around 185% of net national income in 1957 and was still around this level at the beginning of the 1970s. However, by 2008 the total debt had grown to about 500% of net national income. Bear in mind that the current "flexible" monetary system came into being in the early-1970s. In other words, the introduction of "flexible" money led to a veritable explosion in the quantity of debt.



Steve Saville
email: [e-mail]
Hong Kong

[4Godnwv]

No Gold -- No Silver -- Just Inflation and Hotcakes
by The Mogambo Guru
April 07, 2009

Bloomberg.com had a report by Kim-Mai Cutler saying, "Currencies of countries that are using quantitative easing, or printing money to buy government or corporate bonds, are plunging against those of nations sticking to conventional monetary policy" which surprised me because I did not know of any big economies that were "sticking to [the] conventional monetary policy" of not creating excess money and credit, which makes their currencies strong, but I know of plenty of them that are "sticking to [the] conventional monetary policy" of constantly creating too much money and credit because that is the bizarre bastardization of the economic system that has evolved! Hahaha!

In fact, all countries seem to be in a rush to participate in a disgusting orgy of government deficit-spending, which would be a sign of global mental-illness unless they were using this money to buy gold and declare a gold standard for their currencies, which is what I would do to insure a currency so strong that I got cheap imports of goods, services and raw materials, thus keeping inflation low and delivering a higher standard of living for all the citizens, for which they would regularly gather and have "Thank You, Mogambo (TYM)" parties, sort of like midnight at Mardi Gras in New Orleans, except not as reserved in relative behavior as that Louisiana bunch of prudes.

Jim McCormick of Citigroup is not impressed with how the phrase "Show us your boobs!" is mysteriously common to both Mardi Gras and Hail Mogambo! Parties Of Thanks (HM!POT), and says only that "The foreign-exchange market has clearly gotten its arms around the notion that quantitative easing is a negative for currencies."

Well, this makes you want to ask "Where in the hell has the foreign-exchange market been all this time that they are just now finding out that a country stupid enough to abuse a fiat currency to create excess money and credit, leading to inflationary bubbles of speculative frenzy and resultant excesses in the prices of assets such as stocks, bonds, houses and size of government, and then try to spend its way out of bankruptcy by creating huge NEW multiples of NEW money and credit so that the buying power of the dollar falls to (in the original Latin) 'squatus stinkum', is, after all this time, now 'a negative' for its currency? Hahaha!"

Not too surprisingly, then, the dollar index sank a staggering and heart-stopping 4.1% last week, taking the index back to 83.8. This is, also surprisingly, still a lot higher, and for no good reason that I can think of except that all the other currencies are even more worthless, than its low of the low 70s in 2008.

I'll bet that if the foreign exchange markets don't know that the currency of a nation of fiscal and monetary idiots was "a negative for currencies", then I guess that they also don't know that gold and silver, when priced in the currencies of fiscal and monetary idiots, will soar as the currency falls in buying power, which is so elementary that I am shocked that they are that stupid!

Before you start thinking that everyone is stupid, I met a guy named Art Arbutine, of BellaireCoins.com, and I casually asked him "How much gold are you selling these days?" and he surprisingly says "None."

Well, I used the word "surprisingly" precisely because this was kind of surprising to me, as I had been hearing that gold is selling like hotcakes, which is an expression that you don't hear much these days, probably not too surprisingly because I never heard of hotcakes being big sellers and thus giving rise to the expression.

Waffles, maybe, but not hotcakes. Crepes, maybe, but not hotcakes, although, now that I think about it, it's been a long time since I had hotcakes, and maybe I'm being hasty in my rush to judgment!

So there I am, trying not to think about hotcakes and how hungry I am, or how some hotcakes would really hit the spot right now, maybe with a side of bacon, various syrups and toppings with a cup of coffee, when I suddenly remember that he said that he is selling no gold! Huh?

So I suspiciously ask him, "Why not?" and he says that when people come into his shop and want to buy gold, he tells them that he doesn't have any gold to sell them because there is no gold for him to buy to turn around and sell to them, and that is why he told me that he sells no gold.

I could tell by the slight smirk on his face that he thinks it is "Art 1, Mogambo 0", but I am going protest the score because more and more you hear those kinds of "no supply" things, what with stories of South African gold mines shutting down, and the U.S. Mint suspending production, and shipment schedules, and silver comes mainly as a by-product of base metal mining which is effectively stopped nowadays and blah blah blah, a blizzard of facts and crucial interconnections, none of which I have straight.

However, it does bring up the question, "Hash browns with hotcakes, yes or no?" which is not even mentioning the puzzling paradox of "With rising demand but zero supply, why is gold not shooting To The Freaking Moon (TTFM) in price, on its way to infinity dollars per ounce, which would be a mathematical imperative of a supply/demand dynamic where the price of gold cannot be determined by the market-clearing point where demand equals supply because supply is always is zero, regardless of the price"! Wow!

This is, indeed, Twilight Zone weird, trapped in some kind of spooky nether-world beyond space and time, between light and shadow, between the depths of despair and the heights of imagination where the Laws of Economics do not apply any longer, but the Laws of Physics still work 24/7, and you still have to work at your same stupid job, and you are married to the same stupid person and you have the same stupid kids as the ones you had in the "other world" where the Laws of Economics still worked, which shows how unfair life is.

My wife and her stupid friends in "this" parallel reality say that I am acting childishly, whining about how life is "unfair" and how I imagine that I am in some parallel universe where immutable "laws" of nature simply disappear, like how a price of something does not rise even though demand is increasing and supply is zero! Amazing!

Of course, this could be easily explained by the Mogambo Gold Conspiracy Theory (MGCT), which, as I recall, I stole directly, line by line, from GATA.org because I am too unimaginative and too stupid to think of it on my own, and too desperate to save my career to be stopped by mere plagiarism when I am, like a diseased, cornered rat in a do-or-die situation, capable of so, so much more.

The Executive Summary is how the Fed and the other central banks around the world have been conspiring among themselves to suppress the price of gold so that the price would not rise, which would alarm a lot of people since a rising gold price means rising consumer prices, who would then start asking a lot of questions, and then everyone would find out "Hey! Inflation in prices is soaring, just like that Idiot Mogambo Lowlife (IML) said it would after such suicidal increases in government deficit-spending and the Federal Reserve increasing the money supply to pay for it, and now we are screwed and need to buy Mogambo Mindless-Mob Brand Riot Gear (MMMBRG) while supplies last in our displays of open rebellion! I hope operators are standing by!"

Well, you can relax on that score, as an operator is standing by in case someone is so stupid as to send me money for some purported Mogambo Brand product that may or may not actually exist; but as for the price of gold rising in the face of inflation, it is no secret that the Fed and the other central bankers have been releasing gold into the market to keep the price down, and they have literally admitted it, as GATA.org has laboriously documented, especially after being counseled to do so by Paul Volcker, famous former chairman of the Federal Reserve, in his book, who said that not controlling the price of gold was the biggest mistake he made in his famous fight against inflation.

The surprising thing is not that he is selling twice as much silver bullion and numismatic coins than he ever sold, but that people are buying silver without even asking him how much it costs! They just want it!

Of course, what can one say in response to this except, "Whee! This investing stuff is easy!"