Tuesday, November 24, 2009
Inflation and Precious Metals
The year 2000 usered in our first deflationary crises in decades; the first really serious one since 1930. Today's crises is technically a continuation of the same crises, as most stocks and indexes continue in down channels established in Y2K. GM, for example, hit its high of $96 in Y2K, and only recently went bankrupt and is liquidating now, close to $0.
Strangely, the fad of today is PMs. All the cab drivers are buzzing about them. I've posted a lot about why this is the worst time to own PMs, especially if one is foolishly chasing capital gains, as over-liquidity is drying up at a record pace.
Interestingly, PMs, as a group, are doing very poorly. One has to look back to the last inflation crises, when the cash supply was ballooning out of control and the interest rate to coax people into holding dollars was on a rocket. That was under Jimmy Carter.
Those who remember the first legal right turn on red (implemented to save fuel), the crises in Iran, a decaying US military that couldn't rescue a hostage without turning back after taking heavy losses, probably also remember 22% interest rates and the effect it had on people. What a contrast to today...
That was inflation.
I remember my parents planning to buy all their non-perishables, en mass and as quickly as possible to avoid next month's price hikes. Anything we were sure to use was bought forward--appliances, canned food, toilet paper. "Creative financing" was the real estate buzz phrase, as heavy demand drove up prices despite 20% mortgage rates. Everyone owned a gold fund, sophisticated investors owned a handful of miners, as a recommended fraction of mainstream investment portfolios for the previous 20 years. If you could find a station with gas, the line was shorter than a half mile and your last license plate digit matched the even/odd day, you hopped in it.
An ounce of gold bought the Dow.
Silver was $50 an ounce. It bought 25 movie theater tickets to see Star Wars.
That was inflation.
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There is a segment on CNBC about Thanksgiving food prices being lower than ever.
ReplyDeleteIt is deflation now, but the goverment is fighting deflation by printing money, if they succeed, the hyperinflation is waiting for us. I think that the reason why gold price keep going up, people want to buy some insurance.
ReplyDeletePlease do the "read me first" section of the blog.
ReplyDeleteOur government has no ability to print money.
People are buying gold because they have no faith in current monetary and fiscal policy, and believe the current system will end with some sort of gold backing.
ReplyDeleteI remember those days. My Dad said there was no way in heck he was paying off his 6.25% mortgage early - the bank was losing money on that.
ReplyDeleteHe also had us kids looking through rolls of quarters (or was it half dollars I can't remember) to find coins that had higher silver content. It was pretty easy to tell by looking at the edge of the coin - coins with higher silver content had more thickness in the silver-colored portion in the edge of the coin. You could pick them out of a stack of coins pretty easily.
No the government can't print money, but they sure can take it away;-)
ReplyDeleteFDR- The market seems to believe that the fed will have trouble reigning in all the money they have printed and given to banks which are holding these funds to paper over losses they refuse to take, and don't have to since we can just do away with certain accounting rules, aka don't count the losses. The market is chasing returns to keep up with inflation expectations, thus the market will probably go much higher until the fed proves successful in withdrawing and destroying all of the newly printed money before it enters the economy through lending. We know that the population can't take on any new debt, therefore this money is not being lent and there is deflation. So what I don't understand is what will cause the market to realize that inflation won't happen and be wondering why they are all holding pieces of paper, originally priced for inflation that is not occuring. The market is clearly not worried about deflation even in the face of deflation around us. For now, this deflation is merely written off as a " sale". Things go on sale all the time, when does the market worry that the "sale" is not temporary? The market looks to run hard into the Christmas season and most retailers will probably do well due to the fact that 85% of people are still employed and earn good money. I know that the majority of people I know in the mid thirties earn on average of 100k a year and are still employed as they are college educated have thus far not felt the effects of the recession we are in. They are not in the construction business which was the hardest hit. These people were not the ones consuming the retail items in bulk to begin with.
ReplyDeleteIt is strange that people keep saying the end is near. On one half you have deflationists who see the dollar rising in value due to scarcity and on the other hand you have inflationists that worry the dollar is heading to zero. You can't have both and it appears right now you have neither, or at least a very sweet spot where you have inflation of paper assets and deflation of goods sold. This results in a massive wealth effect as peoples equity accounts sky rocket on a daily basis and the money they take in buys them more stuff. Win Win for the equity market longs. I assume this cannot last forever, either stuff needs to cost more, inflation, or paper assets need to collapse. Correct? What will be the trigger for this realignment?
FDR - you continually say government can not print money but I disagree.
ReplyDeleteWhen the Federal Reserve creates money which the Treasury then issues Treasury notes, bills and bonds AND the Fed buys back these same Treasuries they are essentially creating monies from thin air - "quantitative easing" - is the euphemism isn't it?
Certainly the 12.9 billion given to GS through AIG credit default swaps by the Treasury was real enough (just as another example)
FDR, can you think of any economic or geo-political scenario where gold can rise or hold steady in a deflationary environment?
ReplyDeleteIs it possible that the Fed, with all the toxic assets on their balance sheet, may not survive the coming deflation?
Thanks,
FDR wrote: "Our government has no ability to print money."
ReplyDeleteNot without the cooperation of the Fed, they don't.
But the combination of the Fed and the government *does* have the ability to print money, because the government can borrow money from the Fed (which prints it) and then distribute the money in question in payment to employees, contractors, foreign governments, etc. -- anyone who is on the receiving end of a federal payment.
When the Fed becomes the only entity willing to lend the government any money, then we'll see a significant inflationary force. The degree to which it will counter the other deflationary forces in place remains to be seen, but I have no reason to believe that this is all as simple as you imply.
"FDR, can you think of any economic or geo-political scenario where gold can rise or hold steady in a deflationary environment?"
ReplyDeleteNot really. I guess a scenario in which gold becomes invaluable for some industrial purpose, but right now gold does nothing but (well, 10-20% mostly disappears into jewelry) reflect the number of dollars in circulation. Since deflation is defined as fewer dollars circulating, gold always falls in price, minus bubbles custom designed to rip people off in the end game.
People mistake me for a gold bear, but I rode the gold bull as my primary trading strategy from 2002 to 2007, when gold more than tripled in price due to INflation with steadily rising interest rates to prove it.
Today's 10% later to the party bump-up, over the past two years is not significant, nor will it last.
"FDR, can you think of any economic or geo-political scenario where gold can rise or hold steady in a deflationary environment?"
ReplyDeleteNot really. I guess a scenario in which gold becomes invaluable for some industrial purpose, but right now gold does nothing but (well, 10-20% mostly disappears into jewelry) reflect the number of dollars in circulation. Since deflation is defined as fewer dollars circulating, gold always falls in price, minus bubbles custom designed to rip people off in the end game.
People mistake me for a gold bear, but I rode the gold bull as my primary trading strategy from 2002 to 2007, when gold more than tripled in price due to INflation with a 700% increase in interest rates to prove it.
Today's rates are 0% and falling. The way-late-to-the-party crowd, riding a precarious 10% bump-up over the past two years are not part of a significant move, nor will it last.
To the contrary, it is a mania carefully being created during a period of substantial dollar strengthening, for the explicit purpose of maximum theft.