Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Gold & Silver Begin New Advancing Cycle Phase - 6th May 21
Vaccine Economic Boom and Bust - 6th May 21
USDX, Gold Miners: The Lion and the Jackals - 6th May 21
What If You Turn Off Your PC During Windows Update? Stuck on Automatic Repair Nightmare! - 6th May 21
4 Insurance Policies You Should Consider Buying - 6th May 21
Fed Taper Smoke and Mirrors - 5th May 21
Global Economic Recovery 2021 and the Dark Legacies of Smoot-Hawley - 5th May 21
Utility Stocks Continue To Rally – Sending A Warning Signal Yet? - 5th May 21
ROIMAX Trading Platform Review - 5th May 21
Gas and Electricity Price Trends so far in 2021 for the United Kingdom - 5th May 21
Crypto Bubble Mania Free Money GPU Mining With NiceHash Continues... - 4th May 21
Stock Market SPX Short-term Correction - 4th May 21
Gold & Silver Wait Their Turn to Ride the Inflationary Wave - 4th May 21
Gold Can’t Wait to Fall – Even Without USDX’s Help - 4th May 21
Stock Market Investor Psychology: Here are 2 Rare Traits Now on Display - 4th May 21
Sheffield Peoples Referendum May 6th Local Elections 2021 - Vote for Committee Decision's or Dictatorship - 4th May 21
AlphaLive Brings Out Latest Trading App for Android - 4th May 21
India Covid-19 Apocalypse Heralds Catastrophe for Pakistan & Bangladesh, Covid in Italy August 2019! - 3rd May 21
Why Ryzen PBO Overclock is Better than ALL Core Under Volting - 5950x, 5900x, 5800x, 5600x Despite Benchmarks - 3rd May 21
MMT: Medieval Monetary Theory - 3rd May 21
Magical Flowering Budgies Bird of Paradise Indoor Grape Vine Flying Fun in VR 3D 180 UK - 3rd May 21
Last Chance to GET FREE Money Crypto Mining with Your Desktop PC - 2nd May 21
Will Powell Lull Gold Bulls to Sweet Sleep? - 2nd May 21
Stock Market Enough Consolidation Already! - 2nd May 21
Inflation or Deflation? (Not a silly question…) - 2nd May 21
What Are The Requirements For Applying For A Payday Loan Online? - 2nd May 21
How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part1 - 1st May 21
INDIA COVID APOCALYPSE - 1st May 21
Are Technicals Pointing to New Gold Price Rally? - 1st May 21
US Dollar Index: Subtle Changes, Remarkable Outcomes - 1st May 21
Stock Market Correction Time Window - 30th Apr 21
Stock Market "Fastest Jump Since 2007": How Leveraged Investors are Courting "Doom" - 30th Apr 21
Three Reasons Why Waiting for "Cheaper Silver" Doesn't Make Cents - 30th Apr 21
Want To Invest In US Real Estate Market But Don’t Have The Down Payment? - 30th Apr 21
King Zuckerberg Tech Companies to Set up their own Governments! - 29th Apr 21
Silver Price Enters Acceleration Phase - 29th Apr 21
Financial Stocks Sector Appears Ready To Run Higher - 29th Apr 21
Stock Market Leverage Reaches New All-Time Highs As The Excess Phase Rally Continues - 29th Apr 21
Get Ready for the Fourth U.S. Central Bank - 29th Apr 21
Gold Mining Stock: Were Upswings Just an Exhausting Sprint? - 29th Apr 21
AI Tech Stocks Lead the Bull Market Charge - 28th Apr 21
AMD Ryzen Overclocking Guide - 5900x, 5950x, 5600x PPT, TDC, EDC, How to Best Settings Beyond PBO - 28th Apr 21
Stocks Bear Market / Crash Indicator - 28th Apr 21
No Upsetting the Apple Cart in Stocks or Gold - 28th Apr 21
Is The Covaids Insanity Actually Getting Worse? - 28th Apr 21
Dogecoin to the Moon! The Signs are Everywhere, but few will Heed them - 28th Apr 21
SPX Indicators Flashing Stock Market Caution - 28th Apr 21
Gold Prices – Don’t Get Too Excited - 28th Apr 21
6 Challenges Contract Managers Face When Handling Contractual Agreements - 28th Apr 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

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