Chart usGOLD   Chart usSILVER  
 
Food for thought
A man’s mind is so formed that it is far more susceptible to falsehood than to truth
Erasmus  
Search for :
LATEST NEWS  :
MINING STOCKS  :
Subscribe
Write Us
Add to Google
Search on Ebay :
PRECIOUS METALS (US $)
Gold 1217.13-7.72
Silver 17.87-0.64
Platinum 1335.40-6.85
Palladium 809.00-17.25
WORLD MARKETS
DOWJONES 1730537
NASDAQ 4580-13
NIKKEI 16321254
ASX 543718
CAC 40 4461-3
DAX 97991
HUI 208-4
XAU 87-2
CURRENCIES (€)
AUS $ 1.4367
CAN $ 1.4055
US $ 1.2837
GBP (£) 0.7873
Sw Fr 1.2071
YEN 139.8610
CURRENCIES ($)
AUS $ 1.1199
CAN $ 1.0949
Euro 0.7790
GBP (£) 0.6134
Sw Fr 0.9403
YEN 108.9650
RATIOS & INDEXES
Gold / Silver68.11
Gold / Oil13.16
Dowjones / Gold14.22
COMMODITIES
Copper 3.090.00
WTI Oil 92.48-0.59
Nat. Gas 3.84-0.07
Market Indices
Metal Prices
RSS
Precious Metals
Graph Generator
Statistics by Country
Statistics by Metals
Advertise on 24hGold
Projects on Google Earth
In the same category
Inflation-Targeting Dead, Long Live Inflation
Published : December 16th, 2012
1089 words - Reading time : 2 - 4 minutes
( 0 vote, 0/5 ) Print article
 
    Comments    
Tweet

 

 

 

 

The Fed actually thinks it can drive 315 million souls through a 0.2% gap in its forecasts...

REMEMBER INFLATION? Central bankers do – and they want to get rid of it, writes Adrian Ash.

Not in the way they used to get rid of it. Back then they would raise interest rates to curb debt-fuelled spending. Whereas now they want to throw inflation out of their policy targets instead.

The true aim being to welcome it back to the real economy.

America's zero interest rates, said the US Federal Reserve on Wednesday, "will be appropriate at least as long as the unemployment rate remains above 6.5%." Coming just a day after 2013's new Bank of England governor Mark Carney said he wants to swap inflation for GDP targeting, this marks a new stage in a big and global shift.

Yes, inflation does get a look-in. The Fed swore Wednesday that it will keep rates at zero only so long as inflation "is projected to be no more than a half percentage point above the Committee's 2% longer-run goal" over the next one to two years. But that projection is of course the Fed's to make. And its 2.0% inflation target is already being fudged.

Half-a-point here, half-a-point there, who cares? Other than consumers, businesses, savers and everyone else.

Also note – the Fed didn't say that hitting its new jobless rate will definitely trigger a rate rise. And that 6.5% level for
US unemployment is itself an ambitious goal. Since 1948, US unemployment has averaged 5.8%. It stood at 7.7% in November, and it has stood at or below 6.5% in only 550 of the last 780 months.

In short, strong returns to cash savers remain a very long way off yet. Higher inflation will meantime be tolerated – welcomed, even – as part of cutting Western governments' huge debt burdens. Real rates of interest, after inflation, are likely to get worse below zero. Not least because, while failing to raise interest rates, central banks will continue to print money to buy government bonds – thereby pushing down the interest rate they offer to other investors (ie, you and the entire retirement savings industry).

"If Ben Bernanke thinks 4% is an appropriate level for inflation in the US," says Jim Leaviss, blogging at UK fund giant M&G, "you wouldn’t be lending money to the government at 0.65% for the next 5 years would you?

"And with Mark Carney taking over at the Bank of England next year, market inflation expectations [you would imagine] would be overshooting the 2% inflation target over the next few years too?"

Put another way, "It's fairly clear, although not explicitly stated," says the Fed chairman's sometime colleague and chum,
Paul Krugman, "that the goal of this pronouncement is to boost the economy right now through expectations of higher inflation and stronger employment than one might otherwise have expected."

So why would anyone hold fixed-income government debt? Abandoning all pretence (at last) of targeting low inflation, central banks clearly want to see higher inflation. Because in the Fed's plan – if not in reality, history or anyone else's model since the late 1970s – the idea is that this will boost employment. So looking ahead to 2015, the US Fed's previous dateline for any fear of a rate hike, "Financial institutions that want to report nominal earnings, let alone avoid real losses on portfolios that will then include $15.5 trillion of US obligations that pay essentially zero, will be desperately reaching for yield and risk," writes
Berkeley professor Brad DeLong. "And whatever risky assets they buy to get some yield into their portfolios will trigger somebody to then spend more on currently-produced goods and services.

"[So] that possible future world," says DeLong, "is not a future world in which unemployment is still above 6.5% and forecast core inflation is still below 2.5% per year." And yet the US Fed itself, also
issuing new forecasts after Wednesday's new policy announcement, says precisely that. All the new policy aim has achieved, together with a fresh $45 billion of quantitative easing each and every month from hereon, is to tweak the forecast 2015 range for US joblessness from September's guess of 6.0-6.8% to this month's guess of 6.0-6.6%. Core US price inflation is actually forecast to fall, hitting a 2015 range of 1.8-2.0%.

Is DeLong saying Ben Bernanke is lying? Or did he fail to check the Fed's new predictions? Maybe the Fed is being disingenuous, ignoring the impact of its policies on inflation so it can gain the political support needed to allow them. Or maybe, just maybe, the fact is that the Fed – like all other central banks today – is worse than clueless.

Frantically yanking its levers and smashing its dials, it actually imagines it can direct the economy, now this way, now that, and drive 315 million souls through a 0.2% gap in its forecasts. Yet instead, it risks driving the currency over a cliff.

"At the surface level," Brad DeLong explained long ago, in
a 1996 paper, the awful inflation of the 1970s happened because no one who could "placed a high enough priority on stopping inflation." Worse still, "no one had a mandate to do what was necessary." Beating unemployment with cheap money was thus the only tool in the box. So by God they would use it, even if it worked about as well as beating an egg with a shovel.

Viewed from the zenith of central-bank independence in the mid-1990s, "It is hard to see how the Federal Reserve could have acquired a mandate [to tackle inflation by raising rates sharply] without an unpleasant lesson like the inflation of the 1970s," concluded DeLong in that paper.

You might think that keeping inflation low is what central banks are for. But that's so late-20th century! And the Fed this week walked further away from that mandate. Central banks everywhere are similarly losing their "independence" to keep inflation in check. So guess what comes next – what must come next – before there's any true chance of central banks hiking their rates to try and curb your cost of living.

 

Adrian Ash

 

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

 

 

Tweet
Rate :Average note :0 (0 vote)View Top rated
Previous article by
Adrian Ash
All articles by
Adrian Ash
Next article by
Adrian Ash
Receive by mail the latest articles by this author  
Latest comment posted for this article
Be the first to comment
Add your comment
TOP ARTICLES
Editor's picks
RSS feed24hGold Mobile
Gold Data CenterGold & Silver Converter
Gold coins on eBaySilver coins on eBay
Technical AnalysisFundamental Analysis

Adrian Ash

Adrian Ash is head of research at BullionVault.com, the fastest growing gold bullion service online. Formerly head of editorial at Fleet Street Publications Ltd – the UK's leading publishers of investment advice for private investors – he is also City correspondent for The Daily Reckoning in London, and a regular contributor to MoneyWeek magazine.
Adrian Ash ArchiveWebsiteSubscribe to his services
Most recent articles by Adrian Ash
5/31/2014
4/5/2014
2/13/2014
11/24/2013
11/24/2013
All Articles
Comment this article
You must be logged in to comment an article8000 characters max.
 
Sign in
User : Password : Login
Sign In Forgot password?
 
Receive 24hGold's Daily Market Briefing in your inbox. Go here to subscribe or unsubscribe.
Disclaimer