The London Telegraph published an insight piece of commentary on the 24th talking about gold, monetary policy and government policy of devaluing currency instead of doing untenable actions like massive reductions in spending or tax hikes. Lately the gold price has been hitting nominal highs against all currencies (except Australia who was not affect by the global downturn) but is still well short of its inflation-adjust highs that would peg the yellow metal at over $2,000.00 per ounce.
The article mention that deflation is seen as a much larger threat in the central bankers minds than price inflation. According to the Telegraph, the Federal Reserve on average raises the federal funds interest rate 19 months after unemployment peaks in the United States. In my opinion the fear of deflation are much more hyped than real for this simple fact. It hurts savers much more when you artificially try and maintain prices and make it even harder for people make large purchases because historically incomes have not kept up with the inflation rate over the long-term. We can see evidence in this with the Dow Jones Industrial average at 10,000 which it was 10 years ago. Here is the kicker, oil was at $15 a barrel and gold was around $290 per ounce. So what has caused this?
Well this article makes reference to this and I agree, the U.S. Treasury is concert with the Federal Reserve have debauched and debased the U.S. dollar at it has shown up in this massive increase in asset prices across the board and the only reason we are seeing this so-called “jobless recovery” is because we have kept interest rates much lower than the real risk in the economy and this also helps corporate earnings and brings people into the stock market because of the negative real rate of return you are getting by sitting in cash.
Arguably, governments have no viable alternative. Drowning in debt they could default, but it is scarcely conceivable that this is being considered in either Washington or London. The only honest way out is the slow grind of tax hikes and spending cuts but anything that is remotely acceptable politically will be totally inadequate fiscally. The required cuts in the US – perhaps a quarter of government spending – are even more implausible.
Printing money remains the time-honoured way out – and it will end as messily as it always has. Hard assets, the king of which is gold, and the shares of companies that produce them are a must for anyone looking to survive this institutionalised generational theft.
Analysis: Deflation is still a real threat and we could see a double-dip or depression. On the other hand the risk of run-away inflation increases at the same time, it is already apparent if you look at the inflation rate and not take out energy and food prices which affect everyone and the lower incomes much more than is reported.