TO reach the historical bottom around 3, we will see gold or the Dow at 3,000.
Posted on 03/19/2008 6:44:32 PM PDT by kiriath_jearim
The word "INFLATION" covers two very different concepts, and it's important to keep them separate, writes David Galland for Casey Research.
The first concept is monetary inflation, which is when the supply of money increases faster than the supply of goods and services. The other concept is price inflation, which refers to an increase in the overall level of prices for goods and services.
The relationship between the two is the relationship of cause and effect.
Monetary inflation causes price inflation, because an excess of money reduces the value of each monetary unit. But while almost everyone sees price inflation when it happens, few people notice the monetary inflation that causes it.
And so they tend to blame the producers of goods and services for higher prices – rather than the money-creating government that is the true culprit.
Make no mistake; as government spending continues on a steep ascent, piling up debt, there is no question that the government has to continue creating money like there's no tomorrow. This situation is not unique to the United States. Quite the opposite, in fact. The adoption of fiat monetary systems is now universal.
The results of over three decades of unhindered monetary creation are increasingly being felt in a rising tide of price inflation, whether it be the 7.4% increase in producer prices reported by the US in the most recent quarter, or the news just out of China that consumer price inflation now tops 8% and is worsening...or, in the most extreme example, Zimbabwe, where the utter lack of restraint by an insane dictator now burdens that economy with an inflation rate of over 100,000% annually.
Inflation: Global Overview
To get a better sense of things, Casey Research recently conducted a survey of the world's top 30 economies, broken down on a region-by-region basis.
Most pundits focus on commodities as a central culprit in today's higher price inflation. Why are commodity prices rising? There are many reasons, most importantly: supply and demand fundamentals, speculation and a weakening US Dollar, the "universal currency" in which oil, Gold and many other commodities are priced.
Of those factors, supply and demand and speculation are fairly fluid. Which is to say they can vary over time based on politics (a threat to cut off oil sales by Venezuela, a war in the Middle East, legislation favoring bio-fuel production) or for more technical reasons (power shortages impacting mining in South Africa, or the shutdown of the Gulf of Mexico during a hurricane).
This relatively short-term variability largely neutralizes the value of these factors as predictors of future inflation. Simply put: who can know the unknowable?
Instead, we look to longer-term trends. In that regard, two are apparent. The first has to do with the concept of "peak" commodities. While it has been Marion King Hubbert's theory of Peak Oil that has received the most attention, credible arguments can also be made for peak metal (the dearth of major new discoveries), and even peak food. While these arguments have merit, they were beyond the scope of our survey, other than noting them as potentially rising in significance over time.
The second long-term trend is, in our view, of immediate consequence and worth a more detailed discussion: per above, the limitations and risks inherent in the fiat monetary systems now in universal favor around the world. It is this fiat monetary regime – the attempt to manage monetary policy based on flexible guidelines, and without the anchor previously provided by a gold standard – that we believe is the single most important driver of the rising price inflation now apparent around the world.
Losing Control of Inflation
Simply, while the central banks of a handful of countries are (just) managing to contain inflation through restrained monetary and fiscal policy, the vast majority are finding the task politically inexpedient and are losing control. While we may point with some well-deserved derision at Mr. Mugabe's comedic attempts to paper over his inflation with yet more paper, all nations are currently making the same errors, albeit at differing levels of failure.
To understand this point, we share a simple but accurate way of thinking about inflation as the result of too much money chasing too few goods.
Now we're beginning to get under the hood of the problem, but one further view is necessary to understand what happened in the early 1970s that unleashed the tidal wave of money.
While canceling the gold standard was a US policy decision, its impact was felt around the world. That is because of the historic Bretton Woods agreement struck between representatives of over 40 countries in 1944, as World War II came to an end.
Leveraging its position as "last man standing" following the devastating war, the United States pushed forward a wide-ranging set of agreements – the net result being that, from that point forward, the US Dollar would be the de facto global reserve currency, with all the nations of the world pegging their currencies to the dollar.
New institutions, including the International Monetary Fund and the International Bank for Reconstruction and Development, were fathered at Bretton Woods, but they were nothing more than enforcers for the new regime, ensuring that the other countries stayed in line, buying and selling dollars as needed to maintain a stable peg.
For its part, the US guaranteed Dollar convertibility at a Gold Price of $35 "forever".
But as is inevitable when dealing with governments, "forever" really means "for as long as it is politically expedient." When it became inconvenient, in the late 1960s when the French under Charles de Gaulle decided that they'd prefer to have the Gold, Nixon canceled convertibility.
Once President Nixon canceled that convertibility, which took effect in August 1971, the world's central bankers – left with no other immediately obvious or more viable alternative – continued using the US Dollar as a key component of their reserves. The greenback also continued to be used in international trade, to price globally traded commodities, such as oil.
Yet the end of gold convertibility represented a fundamental change; from that point forward the creation of US Dollars and, by extension, all of the world's currencies, was restrained by nothing more than political expediency.
It is our contention that the size of the politically motivated governmental spending, spending which has no "hard" limiting factor or defined discipline, will continue apace and, in fact, significantly worsen due to compounding interest on government borrowing and the coming wave of irrevocable social commitments – on Social Security and Medicare in the US, for example.
Against the backdrop of a global fiat monetary regime, the only limitation to government spending is that which the politicians believe will be politically unacceptable to a population. This is, generally speaking, no real limitation at all, given that the public is now apathetic about, and numb to, the real world implications of large numbers.
Inflation Baked in the Cake
In light of the cause and effect between monetary inflation and price inflation, and given the clear findings in our Global Inflation Survey, we can only conclude that inflation in both its commonly understood forms is now baked into the proverbial cake.
As investors, that keeps us focused on gold, the world's longest-serving form of money and an investment we have been profitably beating the drum about since 1999. Importantly, a quick scan now finds that gold is rising against a large number of currencies. This is a very useful view of the current inflation trend in that it demonstrates that the trend has expanded considerably beyond just a weakening US Dollar, and is now affecting fiat currencies around the world, almost without exception.
Are we seeing the end of the experiment in fiat monetary systems? It's too early to say one way or another, but it's not too late to shift at least some percentage of your portfolio into physical Gold Investments and, for leverage, gold shares.
The above was excerpted from the Casey Research Global Inflation Survey. The full 38-page survey, which includes commentary by Casey Research chairman Doug Casey – and an interview on the inflation/deflation debate with Casey Research's chief economist Bud Conrad – is available on request here...
[Doug Casey is a world-renowned investor and author, whose book Crisis Investing was #1 on the New York Times bestseller list for 29 consecutive weeks, a record at the time. He has been a featured guest on hundreds of radio and TV shows, including David Letterman, Merv Griffin, Charlie Rose, Phil Donahue, Regis Philbin, NBC News, and CNN; and has been the topic of numerous features in periodicals such as Time, Forbes, People and the Washington Post. His firm, Casey Research, LLC., publishes a variety of newsletters and web sites with a combined weekly audience in excess of 200,000, largely high net worth investors with an interest in resource development and international real estate.]
TO reach the historical bottom around 3, we will see gold or the Dow at 3,000.
Travis, I am starting a club of Freerepublicans who have been called Marxists for pointing out some home truths around here. kiriath got called a Marxist about 1/2 hour ago. Have you been called a Marxist yet?
In fact, governments intervene to slow the amount of money creation private finance manages on its own, in all the so called "hard" currencies. In a few hyperinflation cases it does the opposite, to be sure, but that is the exception and not the rule.
And also except for the implication there is anything new in governments being able to spend as much as their peoples are willing to let them spend. That isn't a function of the financial system and it has always been true; it is necessarily true in the nature of things, even. The only operative question is how much those populaces actually want them to spend.
In other words, the government middlemen are convenient whipping boys for actions the writer does not approve of, on the part of other parties he isn't interested in indicting or confronting. If democratic governments spend too much because it is politically expedient to spend "too much", a lot of somebodies want that spending. And if financiers create a lot of new money substitutes, it isn't because the government forced them to at gunpoint, it was because it refrained from stopping them from doing so, again at gunpoint.
a) Bernanke is an idiot, not understanding the relationship between money supply, supply of goods and demand for goods.
b) Bush is such a great poker player that he chose Bernanke so he would have someone at the FED willing to inflate the government out of its’ massive debt obligations (Social Security for the Baby Boomers especially).
I had though a was true, but I'm really beginning to wonder, with all the obvious signs of inflation around us (despite the CPI being low) if b is really the correct answer.
The permatouts can't bear to face reality.
Debt? What debt?
Printing money? What Money?
Just for the fudge of it, let’s imagine a 40% DJIA drop to 7,200.
That puts our 3-1 ratio based AU price at 2,400
This is pretty much in line with what the inflation adjusted high point would be.
But let’s split the difference on the Dow drop and call it only a 20 percenter. That means 9,600 for equities and 3,200 for gold.
No matter how you slice or dice it, there’s a huge upside potential.
I also read somewhere that since we de-monetized gold, based on what reserves we have (or they say we have, it may have all been leased or they are simply flat out lying), that the M3 numbers tell us how many “dollars” have been created per ounce.
somewhere in the neighborhood of 32,000
I say we are in a speculation bubble, don't get caught with too many commodities.
The second long-term trend is, in our view, of immediate consequence and worth a more detailed discussion: per above, the limitations and risks inherent in the fiat monetary systems now in universal favor around the world. It is this fiat monetary regime – the attempt to manage monetary policy based on flexible guidelines, and without the anchor previously provided by a gold standard – that we believe is the single most important driver of the rising price inflation now apparent around the world.
Oh by the way - gold IS a commodity. If the present money system is a fiat system why can't it be fiat-ed. Money is the value placed on human labor. Commodity prices are the speculative value of labor in a market.
Marxism is pointing out that the spigot is open.
Gold has not kept up with inflation.
But you can’t call it speculation if all you want to do is break even.
I am certain there are a large number of Bear Stearns who wish right now that they had gone out and just bought a couple tankers of unleaded, rising price of gas nonwithstanding.
And IF (note I said if) the dollar keeps falling as projected, doesn’t it make sense to stock up on commodities you need for production NOW rather than wait till you need it when your dollars will buy less?
The real estate bubble was partly (mostly) a speculative frenzy. But I don’t see a rise in commodity prices as speculation, especially when it’s an across the board rise, not focused on any particular sector.
Charts without labels identifying their numbers are.....
I don’t think anybody should call people marxists, unless they actually advocate the government taking money from the rich and giving it to the poor, like by forgiving part of the cost of a house someone bought simply because those people can’t find someone to pay as much for their house as they paid for it.
If you don’t do that, you should be fine.
Let’s imagine a thousand-point DJIA drop in 2 days.
Oh wait, that’s what gold does regularly.
If you love paper, that’s your business.
I got some paper here, I’ll sell it to you cheap. After I use it.
Around here if you point out that the banking system is making up for its losses by stealing from everybody, through the generous office of the federal reserve printing press you are called a Marxist.
Now a gallon of gas is .35% as much per gallon as an ounce of gold - a veritable bargain!
All I am saying is be prudent, these bubbles happen over time, the herd instinct in us all make us want to jump in, even when the bubble is about to burst. (think about it - if the US economy were to go bust, what would be the value of gold) The value of money is the human labor behind it. I would put US labor against any workforce in the world - we are that good.
There is nothing secret about what the Fed Reserve does,(their deliberation are private - would you want them to be otherwise?), everyone is informed. Do you have material evidence to the contrary?
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