Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
Technical Analyst: Gold Price Weakness Should Be Short Term - 24th May 19
Silver Price Looking Weaker than Gold - 24th May 19
Nigel Farage's Brexit Party EU Elections Seats Results Forecast - 24th May 19
Powerful Signal from Gold GDX - 24th May 19
Eye Opening Currency Charts – Why Precious Metals Are Falling - 23rd May 19
Netflix Has 175 Days Left to Pull Off a Miracle… or It’s All Over - 23rd May 19
Capitalism Works, Ravenous Capitalism Doesn’t - 23rd May 19
The Euro Is Bidding Its Time: A Reversal at Hand? - 23rd May 19
Gold Demand Rose 7% in Q1 2019. A Launching Pad Higher for Gold? - 23rd May 19
Global Economic Tensions Translate Into Oil Price Volatility - 22nd May 19
The Coming Pension Crisis Is So Big That It’s a Problem for Everyone - 22nd May 19
Crude Oil, Hot Stocks, and Currencies – Markets III - 22nd May 19
The No.1 Energy Stock for 2019 - 22nd May 19
Brexit Party and Lib-Dems Pull Further Away from Labour and Tories in Latest Opinion Polls - 22nd May 19
The Deep State vs Donald Trump - US vs Them Part 2 - 21st May 19
Deep State & Financial Powers Worry about Alternative Currencies - 21st May 19
Gold’s Exciting Boredom - 21st May 19
Trade War Fears Again, Will Stocks Resume the Downtrend? - 21st May 19
Buffett Mistake Costs Him $4.3 Billion This Year—Here’s What Every Investor Can Learn from It - 21st May 19
Dow Stock Market Trend Forecast 2019 May Update - Video - 20th May 19
A Brief History of Financial Entropy - 20th May 19
Gold, MMT, Fiat Money Inflation In France - 20th May 19
WAR - Us versus Them Narrative - 20th May 19
US - Iran War Safe-haven Reasons to Own Gold - 20th May 19
How long does Google have to reference a website? - 20th May 19
Tory Leadership Contest - Will Michael Gove Stab Boris Johnson in the Back Again? - 19th May 19
Stock Market Counter-trend Rally - 19th May 19
Will Stock Market “Sell in May, Go Away” Lead to a Correction… or a Crash? - 19th May 19
US vs. Global Stocks Sector Rotation – What Next? Part 1 - 19th May 19
BrExit Party EarthQuake Could Win it 150 MP's at Next UK General Election! - 18th May 19
Dow Stock Market Trend Forecast 2019 May Update - 18th May 19
US Economy to Die a Traditional Death… Inflation Is Going to Move Higher - 18th May 19
Trump’s Trade War Is Good for These 3 Dividend Stocks - 18th May 19
GDX Gold Mining Stocks Fundamentals Update - 17th May 19
Stock Markets Rally Hard – Is The Volatility Move Over? - 17th May 19
The Use of Technical Analysis for Forex Traders - 17th May 19
Brexit Party Set to Storm EU Parliament Elections - Seats Forecast - 17th May 19
Is the Trade War a Catalyst for Gold? - 17th May 19
This Is a Recession Indicator No One Is Talking About—and It’s Flashing Red - 17th May 19
War! Good or Bad for Stocks? - 17th May 19
How Many Seats Will Brexit Party Win - EU Parliament Elections Forecast 2019 - 16th May 19
It’s Not Technology but the Fed That Is Taking Away Jobs - 16th May 19
Learn to Protect your Forex Trading Capital - 16th May 19
Gold Ratio Charts Offer The Keys to the Bull Market - 16th May 19
Is Someone Secretly Smashing the Stock Market at Night? - 16th May 19

Market Oracle FREE Newsletter

U.S. House Prices Analysis and Trend Forecast 2019 to 2021

Inflation Held in Check by Fear

Economics / Inflation Feb 21, 2012 - 10:20 AM GMT

By: John_Browne

Economics

History has shown us time and again that out of control money supply expansion creates inflation. In light of the trillions of synthetic dollars that have been injected into the economy by the Federal Reserve over the past five years, most observers (this one included) had expected prices to spiral upward. But in making these determinations, many of us forgot to factor in the supply side of the supply/demand equation. Inflation remains low now because of game changing events that have reduced the demand for money.


As far as the Federal Reserve and the President's Council of Economic Advisors are concerned, inflation is currently holding at around 1.4 percent. However, these authorities choose to focus only on the most generous measurement tools, like the core PCE index. Other common indices, such as the CPI burn much hotter. Current CPI is at 2.9 percent, the highest year-over-year increase since 2008 and more than twice the rate of the core PCE. However, it is widely recognized that even these figures have been manipulated downwards to benefit the Government.

Many more skeptical observers suspect that the real rate of inflation is far north of 6 percent, perhaps closer to 10 percent. But even this figure is far below the rate of expansion that our money supply has undergone over recent years. As of November 17, 2011 the Federal Reserve reported that the U.S. dollar monetary base has increased by 28 percent in just 2 years. Logically we should expect to see a direct correlation between the money supply and the rate of inflation. What explains the breakdown of this relationship?

The dramatic collapse in the real estate market, and the resulting recession and deleveraging, have created a very different dynamic among many consumers, businesses and banks. The fragile economy and lagging global uncertainties have inspired dramatic removal of risk, thereby slowing the circulation of money. The dimming of animal spirits should act as a weight on the general price structure. Put simply, a recession should push prices down.

The savings, retirement accounts, and real assets of consumers suffered massively in the recession of 2008/9. Cash flow shortages drove many companies into liquidation. Banks that had speculated in real estate or had made irresponsible so-called covenant-light loans had to be rescued by the taxpayer or by other more conservative banks. Therefore, corporations and banks joined consumers in becoming far more conservative. Indeed, although banks are stuffed full of deposits, bank finance remains extremely tight.

Before the crash, many consumers and corporations had grown accustomed to the continual growth of asset prices. Therefore they grew comfortable with leverage as a means to safely increase wealth. Even banks shared this sanguine view.

Today, consumers have become conservative, spending mostly on what they see as essentials. Corporations have adjusted, cut costs dramatically and have accumulated an aggregate of some $2 trillion in cash. The Fed now pays banks interest on excess reserve deposits and charges near zero percent for loans. In response, banks prefer to lend to the Fed or government, via Treasury bonds, than to lend to ordinary customers, which, under new regulations, requires more capital reserves. Who can blame them?

When the Fed injects money into its distribution system of banks, the money becomes part of the monetary base. It is only when these banks lend the money that it becomes part of the money supply. If the demand for money is muted, inflation will remain muted no matter how much money is made available as monetary base. Indeed, this is the reason that the stimulus packages have enjoyed so little success in terms of increasing consumer demand and jobs.

Therefore, in the absence of demand from consumers and corporations, massive monetary injections of synthetic Fed money have little effect on inflation. The key question remains as to how long the dramatic change in consumer attitude will last and keep inflation subdued?

The price of gold is revealing on this point. A very different dynamic exists in the market for gold than does in the market for electronics, furniture or stocks. Gold buyers by nature are extremely sensitive to monetary policy, and tend to look to gold when central bankers lose credibility. The gold market is also wholly international and is driven more by the growth in the emerging markets rather than the stagnation in the developed world. As a result, the dollar price of gold has been much more correlated over the long term with the increase in U.S. money supply.

So beware of the recovery. Any wakening of animal spirits in the U.S. will likely stir the dormant threat of inflation, which if it were to reveal itself in force, may very well short-circuit the recovery itself. This is a riddle that may be impossible for Mr. Bernanke to decipher.

For an in-depth look at the prospects of international currencies, download Peter Schiff's and Axel Merk's Five Favorite Currencies for the Next Five Years.

Subscribe to Euro Pacific's Weekly Digest: Receive all commentaries by Peter Schiff, Michael Pento, and John Browne delivered to your inbox every Monday.

By John Browne
Euro Pacific Capital
http://www.europac.net/

More importantly make sure to protect your wealth and preserve your purchasing power before it's too late. Discover the best way to buy gold at www.goldyoucanfold.com , download my free research report on the powerful case for investing in foreign equities available at www.researchreportone.com , and subscribe to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp

John Browne is the Senior Market Strategist for Euro Pacific Capital, Inc.  Mr. Brown is a distinguished former member of Britain's Parliament who served on the Treasury Select Committee, as Chairman of the Conservative Small Business Committee, and as a close associate of then-Prime Minister Margaret Thatcher. Among his many notable assignments, John served as a principal advisor to Mrs. Thatcher's government on issues related to the Soviet Union, and was the first to convince Thatcher of the growing stature of then Agriculture Minister Mikhail Gorbachev. As a partial result of Brown's advocacy, Thatcher famously pronounced that Gorbachev was a man the West "could do business with."  A graduate of the Royal Military Academy Sandhurst, Britain's version of West Point and retired British army major, John served as a pilot, parachutist, and communications specialist in the elite Grenadiers of the Royal Guard.

John_Browne Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules