Adrian Ash, Bullion Vault
'No Inflation, Constant Expansion' was a misnomer to start with, the lie of the first half undone by the scam of the second. Plenty more academics (most of them policy-wonks, too) also stepped up to put a name on that era, variously calling it "The Great Moderation" (Ben Bernanke) or "Great Stability" (Tim Besley, again at the BoE).
Fact was, however, there was nothing stable or moderate about the 10 years to summer 2007. Joy it may been to live through that phase of history, that final blow-off in the seven-decade bubble of spending and debt that followed the last Great Depression. But "non-inflationary" does not apply - not when you remember that, just like it's evil twin (deflation), inflation in truth refers to a trend in the money supply... a growth in this case, which - if it outpaces production, as the last 10 years so clearly did, winds up in prices. That then requires a deflation to get costs back to even. Unless you play Faustus, repeatedly damned, yet somehow believing that you might yet escape.
"The current weakened state of the economy is such that it could not withstand a body blow like a disorderly bankruptcy in the auto industry," said a White House press secretary after the Senate rejected the 'Big Three' bail-out today. "Because Congress failed to act," chips in a Treasury wonk, "we will stand ready to prevent an imminent failure until Congress reconvenes and acts to address the long-term viability of the industry."
Never mind how much it costs. This is just money after all. And there's always more to be printed in a world free of gold. Right up until the cost of the wood-pulp outstrips the value of cash, and money reverts to its base purpose once more.
Scarce resources made vivid by a rare, precious asset.
Adam Hamilton, Zeal
The bottom line is negative real rates are one of gold's most powerful fundamental drivers. And thanks to the Fed refusing to let housing speculators fail as they should, negative real rates are going to persist for a long time to come. Maybe years. But bond investors are not dumb. They won't invest for long in an environment where their capital is guaranteed to lose real purchasing power. Some will migrate into gold.
Negative real rates were the monetary foundation of the biggest secular gold bulls in modern history, the 1970s and the 2000s. And just as it took radically high 6%+ real rates to end that 1970s gold bull, this bull isn't likely to end until we see sustained hugely positive real rates as well. In the meantime, gold will continue to thrive on balance despite big pullbacks from time to time driven by capricious sentiment.
Ambrose Evans-Pritchard, Telegraph
Debt deflation is tightening its grip over the entire global system. Interest rates are creeping towards zero in Japan, America, and now across most of Europe. We are beyond the extremes of the 1930s. The frontiers of monetary policy are being pushed to limits that may now test viability of paper currencies and modern central banking.
You cannot drop below zero. So what next if the credit markets refuse to thaw? Yes, Japan visited and survived this policy Hell during its lost decade, but that was a local affair in an otherwise booming global economy. It tells us nothing. This time we are all going down together. There is no deus ex machina to lift us out. Certainly not China, which is the most vulnerable of all.
As the risk grows, officials at the highest level of the British Government have begun to circulate a 6-year-old speech by Ben Bernanke -- at the time of its writing, a garrulous kid governor at the US Federal Reserve. Entitled "Deflation: Making Sure It Doesn't Happen Here," it is the manual of guerrilla tactics for defeating slumps by monetary means.
"The US government has a technology, called a printing press, that allows it to produce as many US dollars as it wishes at essentially no cost," he said.
Critics had great fun with this when Bernanke later became Fed chief. But the speech is best seen as a thought experiment by a Princeton professor thinking aloud during the deflation mini-scare of 2002.
His point was that central banks never run out of ammunition. They have an inexhaustible arsenal. The world's fate now hangs on whether he was right (which is probable), or wrong (which is possible).
Robert Higgs, Independent Institute
Which brings us to the second question: for better or worse, does deflation actually loom at present? If it does, its occurrence will surprise me greatly, because the Fed has been creating base money as if there were no tomorrow, and if the bailouts continue, as seems likely, more of the same is virtually certain. So far, the huge spurt in base money has simply been absorbed and held by the banks in the form of (legally) excess reserves, but the likelihood that the banks will sit on $268 billion of excess reserves forever is nil. Once they feel more secure, their loans and investments will go forth in search of a higher yield than the Fed pays them (since a recent change in policy) on their reserves, and at that point the banking system's money multiplier will kick in with terrific force.
In short, given the monetary conditions now prevailing, the greater threat by far is inflation, not deflation. And contrary to what the investment "experts," the politicians, and the mainstream economists believe, inflation is not a benign element in the economy's operation. It is, as it has always been, the most dangerous and destructive form of taxation.
James Howard Kunstler, Kunstler.com
So much artificially-generated pixel "money" is being pumped into the system now that it will eventually overtake the quantity of capital currently vanishing in the form of exposed securities swindles, unwinding bad debt, and imploded worthless counter-party contracts. The pixel money will express itself as super or hyper inflation, lagging from 6 to 18 months from the time it was actually introduced in the form of bailouts. For the moment, money is moving into the presumed safety of US Treasury paper. Personally, the safety of this is not something I would presume. But in the current deflationary stage it's hard to find any other place to park cash, and when asset values are crashing everywhere, cash is king. Gold is physically unavailable in the form that non-millionaires usually buy it in, ounce and half-ounce coins.
President-elect Obama has announced his intention to kick off a massive "stimulation" program when he hits the White House "running" in January. Early indications are that it will be directed at things like highway repair. If so, we will be investing long-term in infrastructure that we probably won't be using the same way in ten years. But I doubt there is any way around it. The American public can't conceive of living any other way except in a car-centered society. Anyway, some parts of our highway-bridge-and-tunnel system are already so decrepit that they pose a menace right now, and the clamour to direct "stimulation" there is already very strong -- backed by all the fraternities of engineers.
Stimulus aimed at perpetuating mass motoring will be a tragic waste of our dwindling resources. We'd be better off aiming it at fixing the railroads (especially electrifying them), refitting our harbors with piers and warehouses in preparation to move more stuff by boats, and in repairing the electric grid. Unfortunately, our tendency will be to try to rescue the totemic touchstones of everyday life, things familiar and comfortable, regardless of whether they have a future or not.
The ominous forces gathering out there will defeat these efforts and everyday life will reorganize itself some other way consistent with the single greatest trend: the force of contraction. Every sign we see is pointing in that direction, from the inability of the earth's ecology to support more human beings, to the dwindling of mineral and energy resources, to the destruction of farmland, to mischief in the climate. We just don't know how badly things will fall apart in the meantime, or how kind (or cruelly) people will act in the process.
The economy we're moving into will have to be one of real work, producing real things of value, at a scale consistent with energy resource reality. I'm convinced that farming will come much closer to the center of economic life, as the death of petro-agribusiness makes food production a matter of life and death in America -- as opposed to the disaster of metabolic entertainment it is now. Reorganizing the landscape itself for this finer-scaled new type of farming is a task fraught with political peril (land ownership questions being historically one of the main reasons that societies fall into revolution). The public is completely unprepared for this kind of change. We still think that "the path to success" is based on getting a college degree certifying people for a lifetime of sitting in an office cubicle. This is so far from the approaching reality that it will be eventually viewed as a sick joke -- like those old 1912 lithographs of mega-cities with Zeppelins plying the air between Everest-size skyscrapers.
Greg McCoach, GoldWorld
Thing is, in addition to being editor of Gold World and investment director of the Mining Speculator, I've been an independent authorized bullion dealer for the past 10 years with my company, AmeriGold. Right now, as I write this letter to you, I can hear the phones ringing off the hook. Everyone wants the same thing: To buy gold!
But there's a problem. A big problem. For the past several weeks, bullion dealers around the world, including myself, have been restricted in how much gold we can order from our distributors. The distributors are allocating gold orders to dealers because the mints have had to significantly cut back on -- and even completely halt -- production of gold bars and coins due to boisterous demand and the shortage of supplies that I just mentioned. As a result, it has become very difficult -- sometimes impossible -- for bullion dealers like AmeriGold to fill all customer orders because of the veracious appetite for gold in the market. In fact, when I receive new inventory, it's out the door the next day.
Back in March, when gold prices climbed over $1,000 an ounce, the business was about 70% buyers and 30% sellers. Now, it's 99% buyers and 1% sellers. People are buying whatever is available.
Axel Merk, Merk Funds
After all, the massive stimuli under way should be highly inflationary; but if the Fed helps to engineer that markets cannot price inflation into bond prices, there has to be a valve. This valve, in our view, will be the U.S. dollar; we cannot see the dollar hold up in face of the types of intervention that are under way and that we see play out. Incidentally, a substantially weaker dollar may be exactly what Fed Chairman Bernanke wants. He has repeatedly praised Roosevelt for going off the gold standard during the Great Depression to allow the price level to adjust to the pre-1929 level; this is Fed talk for praising the pursuit of inflationary policies. His only criticism has been that he didn't act fast enough. Similarly, his criticism of the Japanese encounter with deflation has been that the Japanese have not acted forceful and fast enough to fight it; what he may underestimate is that the Japanese have traditionally financed their deficits domestically. In the U.S., these days, most of the deficit is financed abroad; the U.S. is lucky that at least the debt is U.S. dollar denominated so that it can, at any time, repay its debt by simply printing more money. However, the value that foreigners may place on the U.S. dollar may be substantially less the more inflationary the policies are the U.S. is pursuing.
Doug Noland, Prudent Bear
The 2002-2007 dollar bear market did not manifest into a full-fledged currency crisis simply because of the massive purchases of U.S. securities by the Chinese (and to a lesser extent OPEC, Russia, and India). At this point, I would not want to count on the Chinese (or others) accumulating another Trillion of our IOUs anytime soon. I don't expect their appetite to return for U.S. securitizations, corporate bonds, and "repos" anytime soon (market perception of "moneyness" has been lost). Indeed, these IOUs have lost their acceptability as a means of global payment remuneration. It also seems reasonable that this year's market dislocations have reduced the appeal of the strategy of holding U.S. securities while hedging underlying currency exposure in the derivatives market. And, at today's pitiful yields, there would seemingly be little ongoing incentive to continue hording Treasuries.
It is impossible to know how much remains of the Crowded Dollar Bear Unwind. But if this dollar buying hasn't yet about run its course, when it eventually does global markets will again face the specter of massive and seemingly unending dollar liquidity flows. At the end of the day, I expect the dollar to suffer from its relative dismal position with respect to both financial flows and our economy's deep structural maladjustment. Years of egregious Credit and spending excesses have left an economic structure uniquely dependent upon, on the one hand, huge ongoing public sector Credit injunctions and, on the other, huge unending imports. This is a terrible predicament for a currency.
Texas Congressman Ron Paul
Throughout the ages, gold has stood the test of time as a consistently reliable medium of exchange, and has frequently been referred to as "God's money," as only God can make more of it. Seeking superhuman power over money in the way alchemists did in ancient times caused society to shun them as charlatans. In much the same way, free people today should be sending the message that this power and control over our money is no longer acceptable.
The irony is that even had the ancient practice of alchemy been successful, and gold was suddenly, magically made abundant, alchemists still would have failed to create real wealth. Creating gold from lead would have cheapened its status to that of rhinestones or cubic zirconia. It is unnatural and dangerous for paper to be considered as precious as a precious metal. Our fiat currency system is crumbling and coming to an end, as all fiat currencies eventually do.
Julian Phillips, Gold/Silver Forecaster
The gold market currently is tiny compared to the cash markets of the world, but it was not always so. There was a time in yesteryear when gold backed the entire global monetary system and removed doubt from the question of what really is paper money worth? Since the system of gold backed money was dropped, the sheer quantity of money has increased so much so that many will say it can no longer be used to back money. That is true with gold at its current prices. The uneven spread of gold in the world's system also mitigates against its use to back paper money, even if the gold price were raised to the level where it could back money again [five figures + ?]. But if gold is used as a back-up to paper money, it will engender confidence in currencies [held only in Central Bank Vaults?]. It could even find a valuable home in the monetary system on a more active basis.
Steve Saville, Speculative Investor
No reasonable person would be against economic stimulus schemes involving increased government spending if these schemes actually worked as advertised, or even if they only smoothed the transition from one growth period to the next. But as we've noted many times in the past, such schemes cause long-term damage by a) preventing or delaying necessary economic adjustments and b) reducing the quantity of real savings in the economy. It must always be kept in mind that the government does not have any real savings of its own, so it can only fund its various job-creating/economy-boosting packages by borrowing or plundering the private sector's savings. It then uses these savings in a sub-optimal way, usually by targeting spending with the primary goal of increasing its own popularity. It should also be noted that the less real savings the private sector has to begin with the more long-term damage will be done by an increase in government spending.
By preventing or delaying necessary adjustments and destroying real savings, the government's counter-cyclical economic policies lead to greater imbalances, slower real growth during the next economic upturn, and, quite likely, an even bigger bust in the future. Furthermore, the monetary inflation stemming from the attempts to counteract the bust will eventually cause boom conditions to emerge somewhere in the economy, which, in turn, will promote more mal-investment. But whereas busts are considered bad, inflation-fueled booms -- the natural precursors of busts -- are considered good. Therefore, monetary and fiscal policy will typically be framed with the aim of extending the boom for as long as possible, even though the longer the boom the greater the misallocation of real savings and the more devastating the ensuing bust.
The logical consequence of government intervention designed to prolong booms and curtail busts should be a long-term boom-bust cycle with increasingly large oscillations, which is exactly what is occurring (it's nice when the data meshes with the theory).
Peter Schiff, EuroPacific Capital
Once the government runs out of foreign and private sector bidders for new treasuries, the Federal Reserve will be the only buyer, and the hyper-inflation cat will be completely out of the bag. Sensing this, the Fed has recently indicated a desire to begin issuing its own bonds. However, since dollars are already recorded as liabilities on the Fed's balance sheet (dollars are in actuality Federal Reserve Notes) the Fed already issues debt. The difference now is that they are proposing to issue interest bearing debt. Perhaps the Fed feels this will make holding its notes more appealing. However, since the interest will be paid in more of its own script, I do not believe this con will work.
In the end, rather than filling our stockings with Christmas goodies, our foreign creditors will likely substitute lumps of coal. Of course given how high coal prices will ultimately rise as a result of all this inflation, in Christmas Future perhaps our stockings will be stuffed with nothing but our own worthless currency. It might night burn as well as coal, but at least we will have plenty of it.
Mike Shedlock, Mish's Global Economic Trend Analysis
The Fed is looking at the "benefits" of purchasing longer-term Treasury securities. The benefit is to banks who are front running the trade. Banks can now borrow from the Fed at the discount rate of .5% and invest somewhere out on the yield curve at a higher rate. And as long as the Fed is not going to contract credit, banks can hold to maturity and pocket "free money". The odds of Bernanke contracting credit any time soon are essentially zero.
Christopher Whalen, Institutional Risk Analyst
But amidst the gloom and doom, we see signs of hope. We see evidence that individuals and institutions are again focused on value instead of transient indicators of price. We see fund managers and individuals alike thinking about the most likely path to ensure the return of capital rather than the prospective and thus speculative expectation for the return on capital. We expect to see growing numbers of cash investors moving to the banquet table of restructuring even as the economic indicators - and the political response - dominate the headlines in 2009.
While we see the turmoil besetting members of the "bubble in trouble" club, we also see the grassroots movement to fence off the problems of high finance moving along nicely below the radar screen. America adapts and learns quickly. We hear from corporate and non-profit treasurers that they are paying stricter attention to asset preservation. They are voting with deposits and direct placements that the volatility and leverage has been trumped by tangible and sustainable value. Just under the skin, America is as alive as ever.