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Choose your poison:
the trickle of excess cash or the trickle of excess bond redemptions...
NOT FOR THE first time the Financial Times says we gold
buyers are "nuts" - a word which all too often follows on from
"gold" in the financial media.
I should rise above
this sort of thing. What does it matter if the FT thinks me nuts? But
I find I'm irritated, both for myself and on the collective behalf of
successful gold investors. I don't think we deserve to be called
"nuts" after our gold has for 6 years so consistently outperformed
all those other serious investment classes so diligently analysed on Wall
Street and in the City.
Gold continues to
strengthen against the Dollar. Faint hopes of a swift "V-shaped"
recession are dwindling, which is hardly surprising. Global economic activity
up to 2007 was driven by rich world consumers buying things even they
couldn't afford. In the US
alone they have since lost about $12 trillion of private wealth - $120,000
per family. Judging by estimates published in The Economist this
should induce a demand slump of about $500 billion per year, for 10 more
years.
That means a typical
family will be cutting back spending at the rate of $5,000 per year for a
decade. So our economies will stay shrunk, threatening deflation.
To combat this
governments are trying to engineer some inflation. Deficit spending here,
quantitative easing there, and zero interest rates everywhere; with all of it
geared to stimulating more production in a world already suffering
over-capacity. This is where they step into dangerous territory.
Retail prices
inflate in an overheating economy when there is a supply shortage of consumer
goods. Because demand outstrips supply the producer has the whip hand, and he
exploits it by asking more money for his goods. But look around you today and
you will see there is no supply side shortage in the world economy. So if we
do get inflation it's not going to be because of overheating.
Hyper-inflation, on
the other hand, has little to do with supply side shortages and overheated
economies. It happens when a currency dies. Once the realization grips savers
(not consumers) that their money is losing its purchasing power then they
exit money and look for better stores of value.
So while 'normal'
inflation is driven by consumer-pull for goods, hyper-inflation is driven by
saver-push of money, and this explains a big qualitative difference between
inflation and hyper-inflation.
Modest inflation
through undersupplied goods has a negative feedback because new supply
pulls prices back, bringing the economy back to equilibrium. Hyper-inflation
does the opposite. Once it starts it suffers a positive feedback by
encouraging more and more savers to dump cash. What starts as a trickle
accelerates into an unstoppable torrent of savings pouring into circulation.
The unusual problem
we now have is that after using cash rescues to protect the overcapacity in
our economies we are not going to be able to create normal, controllable,
supply-shortage inflation. It's increasingly likely that the only style of
modest price rises which the central banks can engineer will be the trickle
which precedes a hyper-inflation.
Indeed, what caused
the Financial Times to wheel out the old "gold nuts"
phraseology was the strange case of last week's bond markets. Bond prices -
the best proxy for the future value of cash - were falling when they should
have been rising. The markets are telling us that cash 10 years forward is
becoming less valuable. This is a hint of savers losing faith in their
currency.
And why wouldn't
they? Their deposits will pay them no interest for the foreseeable future.
Inflation and tax will eat into their savings. The economy looks mired in
recession. Governments, which are now welcoming devaluations as a trade
benefit, are deep in debt and are toying with hyper-inflationary policies
like quantitative easing. It all points to the inflationary transfer of the
government's enormous debt into plummeting values for depositors' cash and
investors' bonds.
An insight -
courtesy of Bill Bonner - suggests what could soon happen. There is an $11 trillion bond mountain, which is $96,000 of issued US Dollar bonds per US
family. With total federal obligations now reaching above $63 trillion, this is the polar
icecap of contemporary finance, and it holds the bulk of the savings of two
generations, all denominated in dollars which are frozen solid until their
redemption date. If the Fed gets what it wants, then a modest dose of
inflation now will forestall a depression. But inflation will heat that
icecap and make the bond market more jittery, and at exactly this point
the Fed says it will reverse its QE policy and sell bonds back into the
market, because this is how it plans to get cash back out of circulation
to control the inflation it has created.
Choose your poison:
The trickle of excess QE cash or the trickle of excess bond redemptions, both
in a world of over-supply. It seems all roads lead to inflation. Don't assume
it will be the manageable kind.
Paul Sustain
Director and Founder
Bullionvault.com
Also
by Paul Tustain
Paul
Tustain is director and founder of BullionVault
- the world's fastest-growing gold ownership service, where you can buy gold today vaulted
in Zurich on
$3 spreads and 0.8% dealing fees.
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.
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