In our 11th
January 2012 commentary we argued that a certain 'technical analyst' was
wrong to extrapolate gold's recent price action into a forecast of imminent
deflation. We did so by pointing out that a) the year-over-year (YOY) rate of
growth in US True Money Supply (TMS) was about 14% at the time, b)
December-2011 was the 36th consecutive month in which the YOY rate of TMS
growth was 10% or more, and c) if the YOY rate of TMS growth remained above
10% for two more months then it would be the longest period of double-digit
money-supply growth in US history. That is, we pointed out that far from
being in 'danger' of experiencing a serious bout of deflation, the US was in
the midst of a record-breaking period of monetary inflation.
preliminary data for January-2012, the YOY rate of growth in US TMS has
accelerated to 15.4% over the past month. The situation is illustrated below.
This leaves no doubt that a new US monetary inflation record (the longest
period of double-digit money-supply growth in US history) will soon be set.
is: considering that there has been so much monetary inflation over the past
few years, why hasn't there been much "price inflation"?
question is misleading, because it is based on the false premise that prices
generally haven't risen by much in response to the growth in the money
supply. The reality is that a lot of prices have been driven upward by
monetary inflation and are now much higher than they would otherwise be. For
example, monetary inflation explains why the S&P500 Index, despite being
12 years into a valuation-compressing secular bear market, is only about 13%
below its 2000 peak in nominal dollar terms. For another example, monetary
inflation explains why copper is priced at around US$4/pound and oil is priced
at around $100/barrel, despite the economic problems in Europe, China, the US
and Japan. It also explains why the soybean market, which for decades had a
price floor at US$5-$6 and a price ceiling at US$10-$11, now appears to have
a price floor at US$10-$11 (the old ceiling is the new floor).
The idea that
prices haven't risen by much is based on government price indices that
purport to measure the economy-wide movement in prices. These indices clearly
understate the extent to which prices have risen,
meaning that the amount of "price inflation" reported by the US
government is a lot less than the actual amount of "price
said, the actual amount of "inflation" in consumer prices has
certainly been less, to date, than we expected to see in response to such a
large expansion of the money supply. This is not a shock to us, though,
because we understand how monetary inflation works. One of the dangerous
characteristics of monetary inflation is that it is never possible to know,
in advance, exactly how it will distort the price system. What we do know is
that a large increase in the money supply ALWAYS leads to large price
increases somewhere in the economy. The best we can do is make
an educated guess as to which items/investments will be the main
beneficiaries of monetary inflation.
line is that monetary inflation in the US is doing what it always does. It is
boosting prices in ways that can't be predicted with complete accuracy by
anyone, let alone by central bankers employing hopelessly flawed Keynesian