Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Coronavirus Infection Spread and Deaths Forecast 2020 - Video - 28th Jan 20
Is an Accommodative Fed Bullish for the Stock Market? - 28th Jan 20
Trillion-Dollar Stock Market Cap Club - 28th Jan 20
Corona Virus Wuhan Global Pandemic 2020 Deaths Forecast and Market Consequences - 28th Jan 20
Palladium Surges above $2,400. Is It Sustainable? - 27th Jan 20
THIS ONE THING Will Tell Us When the Bubble Economy Is Bursting… - 27th Jan 20
Stock Market, Gold Black Swan Event Begins - 27th Jan 20
This Will Signal A Massive Gold Stocks Rally - 27th Jan 20
US Presidential Cycle Stock Market Trend Forecast 2020 - 27th Jan 20
Stock Market Correction Review - 26th Jan 20
The Wuhan Wipeout – Could It Happen? - 26th Jan 20
JOHNSON & JOHNSON (JNJ) Big Pharama AI Mega-trend Investing 2020 - 25th Jan 20
Experts See Opportunity in Ratios of Gold to Silver and Platinum - 25th Jan 20
Gold/Silver Ratio, SPX, Yield Curve and a Story to Tell - 25th Jan 20
Germany Starts War on Gold  - 25th Jan 20
Gold Mining Stocks Valuations - 25th Jan 20
Three Upside and One Downside Risk for Gold - 25th Jan 20
A Lesson About Gold – How Bullish Can It Be? - 24th Jan 20
Stock Market January 2018 Repeats in 2020 – Yikes! - 24th Jan 20
Gold Report from the Two Besieged Cities - 24th Jan 20
Stock Market Elliott Waves Trend Forecast 2020 - Video - 24th Jan 20
AMD Multi-cores vs INTEL Turbo Cores - Best Gaming CPUs 2020 - 3900x, 3950x, 9900K, or 9900KS - 24th Jan 20
Choosing the Best Garage Floor Containment Mats - 23rd Jan 20
Understanding the Benefits of Cannabis Tea - 23rd Jan 20
The Next Catalyst for Gold - 23rd Jan 20
5 Cyber-security considerations for 2020 - 23rd Jan 20
Car insurance: what the latest modifications could mean for your premiums - 23rd Jan 20
Junior Gold Mining Stocks Setting Up For Another Rally - 22nd Jan 20
Debt the Only 'Bubble' That Counts, Buy Gold and Silver! - 22nd Jan 20
AMAZON (AMZN) - Primary AI Tech Stock Investing 2020 and Beyond - Video - 21st Jan 20
What Do Fresh U.S. Economic Reports Imply for Gold? - 21st Jan 20
Corporate Earnings Setup Rally To Stock Market Peak - 21st Jan 20
Gold Price Trend Forecast 2020 - Part1 - 21st Jan 20
How to Write a Good Finance College Essay  - 21st Jan 20
Risks to Global Economy is Balanced: Stock Market upside limited short term - 20th Jan 20
How Digital Technology is Changing the Sports Betting Industry - 20th Jan 20
Is CEOs Reputation Management Essential? All You Must Know - 20th Jan 20
APPLE (AAPL) AI Tech Stocks Investing 2020 - 20th Jan 20
FOMO or FOPA or Au? - 20th Jan 20
Stock Market SP500 Kitchin Cycle Review - 20th Jan 20
Why Intel i7-4790k Devils Canyon CPU is STILL GOOD in 2020! - 20th Jan 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Ready for inflation in finance, living costs and bone-headed stupidity...?

Economics / Inflation Oct 30, 2009 - 12:57 PM GMT

By: Adrian_Ash

Economics

Best Financial Markets Analysis ArticleSINCE MONEY MAKES the world go round, more of it would set the earth spinning faster, right? Which would be a good thing, of course...


  • "The case for targeting 4% to 6% inflation is certainly growing," says Australia's Financial Review, quoted by Kris Sayce at Money Morning down under;
  • "I'm advocating 6% inflation for at least a couple of years," says former IMF economist and current Harvard don, Ken Rogoff;
  • "It may be preferable to create limited inflation early on," agrees Spyros Andreopoulos, another economist, this time at Morgan Stanley;
  • "A 2% steady-state inflation rate may be insufficiently high to stop [zero-interest rates] from having significant deleterious effects," says John Williams of the San Fran Fed.

With it so far? Oh do keep up. Inflation for these buffoons, as Kris notes in horror, means a rising cost of living.

Which would come about, no doubt, thanks to a surging supply of money and credit, otherwise known as inflation of the currency. Which can be sparked either by the printing press or, more typically since World War II, sub-zero rates of interest after you account for the rising cost of living.

You see, money that retains its value just won't do. "It's soft money makes the world go round," as a friend at the Economist magazine put it to me over a pint recently. How else do you think Western civilization refined itself to our current state of perfection?

Hard money on the other hand – the "sound money" beloved of pre-War bondholders awaiting repayment in gold – leaves too much freedom, too much discretion, to private individuals. Safe from an inevitable loss of value in cash, both savers and investors – as well as potential debtors – would be left to judge their decisions solely on the situation's own merits. And that just wouldn't do at all.

Got to keep things moving!

"The strong and prolonged deviation of money growth from its reference value since 2001 has caused concern among policymakers about the upside risks to price stability stemming from monetary developments," wrote three Banca d'Italia analysts in a research paper of May 2007.

In short, the Eurozone's money-growth target – the acceptable rate of money inflation (well, acceptable to central bankers at least) – had been informally set at 4.5% per year. Yet through the first decade of the single currency, however, annual money-supply growth doubled that rate and more.

Here in London, chief central-bank pooh-bah Mervyn King also started murmuring about the boom in credit and lending – then hitting a three-decade peak near 20% per year.

Surely consumer-price inflation would follow like ice cream follows pizza...?

"Those risks might be smaller than previously assumed," suggested Ferrero, Nobili and Passiglia. "Current excess liquidity conditions are related, to a considerable extent, to the acceleration of non-bank financial intermediaries' money demand, as well as to the accumulation of marketable instruments. Such increases are likely to be related more to portfolio choices than to transaction motives."

This was barely three months before the banking crisis began, you'll note, and the Trouble with Cheap Money was bound to show up eventually. Consumer-price inflation was about to surge as well, breaking to decade-highs across the West as crude oil leapt, dragging base metals and foodstuffs with it. But "portfolio choices", or so we guess here at BullionVault, were helping soak up the money inflation that would have otherwise shown up in "price stability" (or rather the lack thereof). This substitution brought its own crash-and-burn in the end, of course. But not before it lulled central bankers into thinking there was hardly any mischief afoot at all.

"Beginning in the 1980s, the cult of the markets – which included the development of financial derivatives and the increasing use of leverage – began to dominate," writes Bill Gross, the dominant 'bond king' at Pimco, the world's largest fixed-income manager.

"A long history marred only by negative givebacks during recessions...produced a persistent increase in asset prices vs. nominal GDP that led to an average overall 50-year appreciation advantage of 1.3% annually...[and so] the return from all assets was 100% higher than what it theoretically should have been from 1956.

"Financial leverage drove the prices of stocks, bonds, homes, and shopping malls to extraordinary valuation levels," says Gross. And we all know to our cost what happened next.

To repeat: The 1980s' deregulation and democratization of speculative risk meant money-supply growth didn't show up in consumer prices. Credit and debt meant the "feelgood factor" still applied, but unlike the wage-hikes of the '60s and '70s, the resulting inflation was frozen in bricks, mortar, brokerage accounts and pension funds. Nor did the big win go to the speculators either, not now the casino was so crowded, only the croupiers were sure to come out ahead. Which is just what they did.

Now the world's great brains want to see real interest rates sink further, back to sub-zero levels last seen during the late 1970s. Creating inflation in money is one thing, however; containing it in speculative card-shuffling quite another. The last three decades of financial rent-seeking are attempting to make a comeback this fall. But we wouldn't bet against inflation showing up in the cost of living as well if not instead.

By Adrian Ash
BullionVault.com

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2009

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Adrian Ash 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