• 146 days Could Crypto Overtake Traditional Investment?
  • 151 days Americans Still Quitting Jobs At Record Pace
  • 153 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 156 days Is The Dollar Too Strong?
  • 156 days Big Tech Disappoints Investors on Earnings Calls
  • 157 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 159 days China Is Quietly Trying To Distance Itself From Russia
  • 159 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 163 days Crypto Investors Won Big In 2021
  • 163 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 164 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 166 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 167 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 170 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 171 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 171 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 173 days Are NFTs About To Take Over Gaming?
  • 174 days Europe’s Economy Is On The Brink As Putin’s War Escalates
  • 177 days What’s Causing Inflation In The United States?
  • 178 days Intel Joins Russian Exodus as Chip Shortage Digs In
Another Retail Giant Bites The Dust

Another Retail Giant Bites The Dust

Forever 21 filed for Chapter…

Is The Bull Market On Its Last Legs?

Is The Bull Market On Its Last Legs?

This aging bull market may…

Mary Anne & Pamela Aden

Mary Anne & Pamela Aden

Mary Anne and Pamela Aden are internationally known analysts and editors of The Aden Forecast, a market newsletter providing specific forecasts on gold, gold shares…

Contact Author

  1. Home
  2. Markets
  3. Other

Debt, Deflation, The Dollar and Gold

The markets have been very volatile. This has led to many questions and the most frequently asked questions follow...

Q. We're hearing a lot about deflation, but how bad is it?

A. Currently, it's intensifying. Inflation is declining around the world and it's gone negative (deflation) in the Euro area and most recently in the U.S. (see Chart 1).

Consumer Prices

The central banks are fighting these forces with quantitative easing (QE) economic stimulus programs and negative interest rates to help boost their economies and get inflation up to at least 2%.

At this point, the biggest danger would be a deflationary downward spiral, which is what everyone wants to avoid.


Here's the bottom line...

As interest rates fall, it becomes more attractive to borrow rather than save.

So central banks are hoping that banks will lend more money to consumers who will spend, as opposed to just holding the money in their bank reserves. That's primarily why the velocity of money has been falling.

The money created via QE programs has been sitting in banks but it needs to get out there and circulate. That's the main reason why inflation has been declining.

That will also help turn the deflationary pressures around and get inflation to finally pick up. It's not happening yet, but hopefully it will.

Q. What are the chances of another economic crisis?

A. Based on the fact that the stock market is still bullish, despite its recent decline, and it tends to lead, the economy should continue to plug along in the months ahead. But the global economic foundation is not healthy.

The biggest problem is debt and we believe it's passed the tipping point. That is, it's become a real drag on the global economies.

In 2007, for instance, world debt was $142 trillion. In 2014, it had soared to $199. That's a 40% increase in seven years.

So nothing has really changed since the last big recession. In fact, it's gotten worse. There has been no deleveraging and debt is much bigger than the world economy can handle.

Many feel this will lead to another crisis or a collapse, and it's indeed a possibility. Remember, during the last crisis in 2007-08 the world was taken to the brink.

Every major U.S. bank would have failed if the Fed hadn't intervened. And something along these lines could happen again.


Debt is a Deflator

Debt, for instance, is definitely keeping a lid on global growth. In the U.S., average annual economic growth has only been 1.2% over the past eight years. And that's the best it could do after years of QE and super low interest rates.

Plus, median wealth for over half of the people has also dropped 40% since the last recession.

The rich, however, are getting richer via assets that're rising.

So despite the good economic news you keep hearing about, you can see that the underlying economic foundation is on thin ice.

Q. How will this affect gold?

A. Gold prices fell further, hitting an almost four month low, quickly approaching its November lows. The soaring dollar and expectations of higher U.S. interest rates have pushed gold to the back seat.


GOLD: 2nd in currency ranking

Low interest rates are bullish for gold because gold is then not competing with the currencies. And with most major countries dealing with low to negative rates, gold moves up in the currency ranking.

And indeed it has. Gold, as the ultimate currency, is only second to the U.S. dollar in terms of major currency strength. But the soaring fast paced dollar rise is now causing turmoil in the currency market.

This is now very interesting.

It almost seems unreal for investors to think the U.S. will raise rates when the dollar is soaring. It already has the highest rates in the major countries.

But anyway, at some point coming up pretty quick, the dollar rise will be stemmed, either by intervention or exhaustion.

And when that happens, a dollar decline will give gold a boost. To think that gold did not hit new lows near $1143 already during the dollar rise, shows its underlying, subtle strength.

 

Back to homepage

Leave a comment

Leave a comment