Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
USDT Ponzi Scheme FINAL WARNING To EXIT Before Tether Collapses Crypto Exchange Markets - 22nd Jun 21
Stock Market Correction Starting - 22nd Jun 21
This Green SuperFuel Could Change Everything For the $14 Trillion Shipping Industry - 22nd Jun 21
Virgin Media Fibre Broadband Installation - What to Expect, Quality of Wiring, Service etc. - 21st Jun 21
Feel the Inflationary Heartbeat - 21st Jun 21
The Green Superfuel That Could Disrupt Global Energy Markers - 21st Jun 21
How Binance SCAMs Crypto Traders with UP DOWN Coins, Futures, Options and Leverage - Don't Get Bogdanoffed! - 20th Jun 21
Smart Money Accumulating Physical Silver Ahead Of New Basel III Regulations And Price Explosion To $44 - 20th Jun 21
Rambling Fed Triggers Gold/Silver Correction: Are Investors Being Duped? - 20th Jun 21
Gold: The Fed Wreaked Havoc on the Precious Metals - 20th Jun 21
Investing in the Tulip Crypto Mania 2021 - 19th Jun 21
Here’s Why Historic US Housing Market Boom Can Continue - 19th Jun 21
Cryptos: What the "Bizarre" World of Non-Fungible Tokens May Be Signaling - 19th Jun 21
Hyperinflationary Expectations: Reflections on Cryptocurrency and the Markets - 19th Jun 21
Gold Prices Investors beat Central Banks and Jewelry, as having the most Impact - 18th Jun 21
Has the Dust Settled After Fed Day? Not Just Yet - 18th Jun 21
Gold Asks: Will the Economic Boom Continue? - 18th Jun 21
STABLE COINS PONZI Crypto SCAM WARNING! Iron Titan CRASH to ZERO! Exit USDT While You Can! - 18th Jun 21
FOMC Surprise Takeaways - 18th Jun 21
Youtube Upload Stuck at 0% QUICK FIXES Solutions Tutorial - 18th Jun 21
AI Stock Buying Levels, Ratings, Valuations Video - 18th Jun 21
AI Stock Buying Levels, Ratings, Valuations and Trend Analysis into Market Correction - 17th Jun 21
Stocks, Gold, Silver Markets Inflation Tipping Point - 17th Jun 21
Letting Yourself Relax with Activities That You Might Not Have Considered - 17th Jun 21
RAMPANT MONEY PRINTING INFLATION BIG PICTURE! - 16th Jun 21
The Federal Reserve and Inflation - 16th Jun 21
Inflation Soars 5%! Will Gold Skyrocket? - 16th Jun 21
Stock Market Sentiment Speaks: Inflation Is For Fools - 16th Jun 21
Four News Events That Could Drive Gold Bullion Demand - 16th Jun 21
5 ways that crypto is changing the face of online casinos - 16th Jun 21
Transitory Inflation Debate - 15th Jun 21
USDX: The Cleanest Shirt Among the Dirty Laundry - 15th Jun 21
Inflation and Stock Market SPX Record Highs. PPI, FOMC Meeting in Focus - 15th Jun 21
Stock Market SPX 4310 Right Around the Corner! - 15th Jun 21
AI Stocks Strength vs Weakness - Why Selling Google or Facebook is a Big Mistake! - 14th Jun 21
The Bitcoin Crime Wave Hits - 14th Jun 21
Gold Time for Consolidation and Lower Volatility - 14th Jun 21
More Banks & Investors Are NOT Believing Fed Propaganda - 14th Jun 21
Market Inflation Bets – Squaring or Not - 14th Jun 21
Is Gold Really an Inflation Hedge? - 14th Jun 21
The FED Holds the Market. How Long Will It Last? - 14th Jun 21
Coinbase vs Binance for Bitcoin, Ethereum Crypto Trading & Investing During Bear Market 2021 - 11th Jun 21
Gold Price $4000 – Insurance, A Hedge, An Investment - 11th Jun 21
What Drives Gold Prices? (Don't Say "the Fed!") - 11th Jun 21
Why You Need to Buy and Hold Gold Now - 11th Jun 21
Big Pharma Is Back! Biotech Skyrockets On Biogen’s New Alzheimer Drug Approval - 11th Jun 21
Top 5 AI Tech Stocks Trend Analysis, Buying Levels, Ratings and Valuations - 10th Jun 21
Gold’s Inflation Utility - 10th Jun 21
The Fuel Of The Future That’s 9 Times More Efficient Than Lithium - 10th Jun 21
Challenges facing the law industry in 2021 - 10th Jun 21
SELL USDT Tether Before Ponzi Scheme Implodes Triggering 90% Bitcoin CRASH in Cryptos Lehman Bros - 9th Jun 21
Stock Market Sentiment Speaks: Prepare For Volatility - 9th Jun 21
Gold Mining Stocks: Which Door Will Investors Choose? - 9th Jun 21
Fed ‘Taper’ Talk Is Back: Will a Tantrum Follow? - 9th Jun 21
Scientists Discover New Renewable Fuel 3 Times More Powerful Than Gasoline - 9th Jun 21
How do I Choose an Online Trading Broker? - 9th Jun 21
Fed’s Tools are Broken - 8th Jun 21
Stock Market Approaching an Intermediate peak! - 8th Jun 21
Could This Household Chemical Become The Superfuel Of The Future? - 8th Jun 21
The Return of Inflation. Can Gold Withstand the Dark Side? - 7th Jun 21
Why "Trouble is Brewing" for the U.S. Housing Market - 7th Jun 21
Stock Market Volatility Crash Course (VIX vs VVIX) – Learn How to Profit From Volatility - 7th Jun 21
Computer Vision Is Like Investing in the Internet in the ‘90s - 7th Jun 21
MAPLINS - Sheffield Down Memory Lane, Before the Shop Closed its Doors for the Last Time - 7th Jun 21
Wire Brush vs Block Paving Driveway Weeds - How Much Work, Nest Way to Kill Weeds? - 7th Jun 21
When Markets Get Scared and Reverse - 7th Jun 21
Is A New Superfuel About To Take Over Energy Markets? - 7th Jun 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Deflation by Dictatorship

Economics / Deflation Jun 27, 2011 - 04:11 AM GMT

By: Clif_Droke

Economics

Best Financial Markets Analysis ArticleThere are two major considerations for the nation's economic and financial health as we enter the second half of 2011. Each can be addressed in the form of a question: 1.) Will the Federal Reserve embark on a third attempt at stimulating economic recovery through money printing; and 2.) Has the cyclical bull market that began in March 2009 peaked, and further, what will happen to the financial market once the 6-year cycle peaks in October? We'll attempt to answer both of these questions in the following commentary.


The Fed's second quantitative easing (loose money) program is about to expire and for many the last day can't come soon enough. Though it's debatable that QE1 was necessary and had a salutary effect on financial markets and the economy, QE2 was both unnecessary and its longer-term future effects could still be disastrous. If nothing else, QE2 has served as a reminder that the Fed always goes too far in carrying out any of its policies, whether it be tight money or loose money. QE2 was no exception.

For instance, it was the Fed's deliberate inversion of the Treasury yield curve in 2006-07 that led to the financial crisis of 2008-09. Although there were many factors which contributed to the worst financial disaster since the Great Depression, without the Fed's tight money policy it almost certainly would have been less severe and shorter in duration. Fed Chairman Bernanke's decision to invert the yield curve was based on a flawed Keynesian view of the economy, which assumes that inflation is a product of full employment.

After the credit crash of 2008 showed Bernanke the error of his ways, the Fed reacted by taking the opposite course and aggressively loosened money by dropping short-term interest rates to nearly zero. Then came the Treasury purchasing programs designed to further increase monetary liquidity. The only problem with this is that the Fed never knows when enough is enough, and this time was no different. Not content with the first quantitative easing initiative (QE1), Bernanke felt it was necessary to have yet another one and so along came QE2 late last year.

One of many unwelcome consequences of QE2 was a big increase in oil and food prices as well as a broad array of commodities. This has had a spillover effect in raising prices paid by consumers on a number of goods, and as the lag between commodity futures price increases and consumer prices is at least six months on average, it will mean that consumers will be paying for Bernanke's monetary mistakes until next year. The Fed's timing couldn't have been worse, for once the 6-year cycle peaks in October - and assuming the Fed doesn't start up with QE3 by then - the economy will likely have some rough headwinds into 2012.

To give an example of just how big a problem increased consumer prices will be later this year, last week's issue of Businessweek noted that because of higher labor and material costs, China's toy industry is already preparing for a series of price increases. "There is a big chance for shoppers in the U.S. to face higher prices for Christmas gifts this year," said a Beijing analyst quoted by BW. The article went on to say that the pressure is coming from higher commodity costs, due mainly to the run-up in prices for cotton and crude oil.

Inflation pressures in commodities and real estate in the world's second largest economy have led China's central bank to embark on a campaign of monetary tightening. It has raised interest rates four times since October, most recently on April 6, and has just this week increased the amount of capital banks must keep on reserve by half a percentage point. China's consumer-price index rose 5.5% in May from a year earlier and is growing at its fastest pace in three years.

Getting back to Bernanke and QE2, sometimes it helps to know the philosophy behind a policy. For this I'm grateful to an article by Richard Salsman appearing in a recent issue of Forbes. Mr. Salsman quoted a 2002 speech by Bernanke in which the Fed Chairman said that the Fed "retains considerable power to expand aggregate demand and economic activity even when its accustomed policy rate is at zero," for it "has a technology called a printing press (or, today, its electronic equivalent) that allows it to produce as many U.S. dollars as it wishes at essential no cost," and by this method it can "reduce the value of a dollar" and thus "raise the prices in dollars of those goods and services."

Investors could certainly be forgiven for assuming that the temporary spike in commodity price inflation this year was a presage for an even bigger hyper inflationary trend. This isn't going to be the case, however, as the long-term super cycle is in its hyper deflationary phase until late 2014. The Fed's effort to fight this deflationary force by inflating money and credit can only lead to more deflation down the road. The reason for this is that in a deflationary super cycle like the one we're now in, aggregate demand is on the wane (contrary to Mr. Bernanke's belief). Neither the Fed nor the government seem to realize this since their proposed solutions to the economic recession has been to try and stimulate demand by creating more money.

Money creation, however, doesn't create demand, although product creation can actually stimulate demand. Within the 30-year and 60-year cycles, demand can be stimulated to a degree by monetary manipulation but only when the cycle is still in its ascending phase. In a declining cycle monetary creation can only result in a temporary imbalance of supply and demand, which may have the intended effect of boosting prices (for a time) but ultimately demand fails to keep up with the degree of artificial money creation and prices collapse.

David Knox Barker, in his latest Long Wave Dynamics Letter (www.LongWaveDynamics.com) eloquently describes the Fed's dilemma: "The current strategy of socializing losses by trying to restore the big bank's balance sheets with the spread between zero rates and their government bond holdings is simply punishing savers, reducing economic growth and delaying the recovery process. Aggressive monetary policy is keeping excess global production capacity online when it should be shut down to reduce the building deflationary pressures. Counter intuitively, loose money leads to deflation after transitory inflationary pressures."

Mr. Barker suggests that the end of QE2 may produce a deflationary global shock. He further suggests that Bernanke may capitulate to the "drum beat for QE3 already coming from some on Wall Street that are counting on their year-end bonuses from the spread between zero rates paid to savers, and what they expect to earn on their Treasuries, wheat and oil." Barker, who is a highly regarded expert on the Kondratieff long wave, believes that a few trillion more in quantitative easing (QE) and more government intervention could carry the present long wave "winter" into 2016, "buy by then the resolutions will have come to the developed world, maxing out the degrees of freedom."

Monetary manipulation isn't the only way Washington is trying to stimulate demand, however. In the latest surprise development, the International Energy Agency announced the release of 30 million barrels of oil from the nation's strategic petroleum reserve. The move was ostensibly made to relieve pressure on the global economy from rising pump prices. While this move might have been laudable had the retail gasoline price risen above $4/gallon, it's a debatable policy to unleash strategic oil reserves when oil and gas prices have in decline for the last two months.

If ever there was a time to release oil reserves in the name of stimulating the economy, it was back in 2008 when the oil prices were heading toward and all-time high of $145/barrel. The President at that time resisted calls to release strategic oil reserves, which undoubtedly would have brought some relief to beleaguered consumers as well as putting a check on speculators. As it turned out, the credit crash eventually rendered this point obsolete, but not before the rising oil price did considerable damage to the global economy. The main issue here is that the time to release oil reserves is when petroleum prices are high and going higher, not when prices are in a downward trend. Another question that must be asked is whether the decision to release oil reserves was done to assist the oil "shorts."

Ultimately, the decision to release oil reserves at this time is yet another example of how official policy can only feed the underlying deflationary trend. The first instance of a destructive deflationary policy was seen earlier this spring with the CME's decision to raise margin requirements on silver contracts. The result of this decision not only saw a collapse in silver prices but also a spillover decline in other asset prices, including oil.

In light of the above examples, one gets the sense that regulators including the Fed, exchange officials and Washington policymakers, all believe they can dictate their will to the market and successfully fend off deflationary pressures. The temptation to also use policy to manipulate markets for the benefit of their friends on Wall Street is also a problem.

One thing is certain, though. The final descent of the Kress super cycle in 2012-2014 will divorce policy makers of the notion that they can dictate to markets their will. As we travel along the hard road to 2014, it will be discovered to the chagrin of the dictators that the only thing they have successfully dictated through their policies is deflation.

Omens and prodigies

In the ancient world, omens and prodigies were regarded with superstitious reverence.

It was believed that God (or the pagan gods in the case of the Greeks and Romans) always gave a sign before bringing about a major social catastrophe or natural disaster. For those in modern times who give credence to omens, the mysterious death of over 7,000 blackbirds and 100,000 fish in Louisiana at the start of this year could be regarded as a portent of catastrophes to come. (Indeed, one could be forgiven for pointing to this year's abundance of political revolutions and natural disasters both in the U.S. and around the world as being at least a partial fulfillment of these omens).

From a secular standpoint, omens and portents are not infrequently seen in the financial markets. Signal events in major equity or commodity markets often presage even bigger, seismic shifts in the market or even the economy. One such example of a market "omen" would be the crash in the silver market earlier this spring. There are two major lessons that can be learned from the recent silver crash. The first lesson is that policy, no matter how well intentioned, can have profoundly negative consequences on the market. The other lesson is that markets are hyper-sensitive to abrupt changes in policy given where we are in the long-term deflationary cycle.

We've seen several instances in just the last few months how policy is being used to manipulate markets (Treasuries, silver and oil). Yet in every case these policies have backfired and have actually fed the deflationary trend. The Federal Reserve has had a relatively easy going in rejuvenating the financial market with its loose money policy in the last year due partly to the fact that the last of the long-term cycles, namely the 6-year cycle, is still up. The 6-year cycle is due to peak this October, after which time the Fed will likely have its work cut out for it in terms of artificially sustaining the inflationary trend in both stock and commodity prices. Once the 6-year cycle has peaked there will be no long-term cycle of consequence (beyond the 4-year cycle) up until after 2014. It therefore behooves us as wise financial stewards to make preparations for the tough road ahead.

Gold & Gold Stock Trading Simplified

With the long-term bull market in gold and mining stocks in full swing, there exist several fantastic opportunities for capturing profits and maximizing gains in the precious metals arena. Yet a common complaint is that small-to-medium sized traders have a hard time knowing when to buy and when to take profits. It doesn't matter when so many pundits dispense conflicting advice in the financial media. This amounts to "analysis into paralysis" and results in the typical investor being unable to "pull the trigger" on a trade when the right time comes to buy.

Not surprisingly, many traders and investors are looking for a reliable and easy-to-follow system for participating in the precious metals bull market. They want a system that allows them to enter without guesswork and one that gets them out at the appropriate time and without any undue risks. They also want a system that automatically takes profits at precise points along the way while adjusting the stop loss continuously so as to lock in gains and minimize potential losses from whipsaws.

In my latest book, "Gold & Gold Stock Trading Simplified," I remove the mystique behind gold and gold stock trading and reveal a completely simple and reliable system that allows the small-to-mid-size trader to profit from both up and down moves in the mining stock market. It's the same system that I use each day in the Gold & Silver Stock Report - the same system which has consistently generated profits for my subscribers and has kept them on the correct side of the gold and mining stock market for years. You won't find a more straight forward and easy-to-follow system that actually works than the one explained in "Gold & Gold Stock Trading Simplified."

The technical trading system revealed in "Gold & Gold Stock Trading Simplified" by itself is worth its weight in gold. Additionally, the book reveals several useful indicators that will increase your chances of scoring big profits in the mining stock sector. You'll learn when to use reliable leading indicators for predicting when the mining stocks are about o break out. After all, nothing beats being on the right side of a market move before the move gets underway.

The methods revealed in "Gold & Gold Stock Trading Simplified" are the product of several year's worth of writing, research and real time market trading/testing. It also contains the benefit of my 14 years worth of experience as a professional in the precious metals and PM mining share sector. The trading techniques discussed in the book have been carefully calibrated to match today's fast moving and volatile market environment. You won't find a more timely and useful book than this for capturing profits in today's gold and gold stock market.

The book is now available for sale at: http://www.clifdroke.com/books/trading_simplified.html

Order today to receive your autographed copy and a FREE 1-month trial subscription to the Gold & Silver Stock Report newsletter. Published twice each week, the newsletter uses the method described in this book for making profitable trades among the actively traded gold mining shares.

By Clif Droke
www.clifdroke.com

Clif Droke is the editor of the daily Gold & Silver Stock Report. Published daily since 2002, the report provides forecasts and analysis of the leading gold, silver, uranium and energy stocks from a short-term technical standpoint. He is also the author of numerous books, including 'How to Read Chart Patterns for Greater Profits.' For more information visit www.clifdroke.com

Clif Droke Archive

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


Comments

Ashley King
27 Jun 11, 14:06
Real Demand

"Neither the Fed nor the government seem to realize this since their proposed solutions to the economic recession has been to try and stimulate demand by creating more money.

Money creation, however, doesn't create demand, although product creation can actually stimulate demand."

Exactly. Say's Law of Markets.


Post Comment

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