Why price inflation will take off

IMG Auteur
Published : February 04th, 2013
553 words - Reading time : 1 - 2 minutes
( 4 votes, 4.8/5 )
Print article
  Article Comments Comment this article Rating All Articles  
0
Send
0
comment
Our Newsletter...
Category : Gold and Silver

24hGold - Why price inflation ...There are key aspects of economics that neo-classical monetarists do not apparently comprehend; the most important, given their job-description, being the relationship between money and prices. They are like motorists who drive on the basis of the chaos and destruction viewed in the rear-view mirror. This is what happens when you use historic prices to guide monetary policy.

We are all aware, through application of logic if nothing else, that if you increase the quantity of money, prices will increase as that extra money is spent. What is less appreciated is that prices can change dramatically due to shifts in preference for money over goods. An illustration of this was the fall in prices during the financial crisis five years ago, when over-extended consumers responded to the global banking crisis. Government interventions in capital goods markets, such as for residential property and automobiles, were urgently implemented to stop prices collapsing. Shifts in money-preference can be very dramatic, as that episode showed.

Since that time, preferences for money have not changed much. Despite the massive expansion of money-quantities in the major economies, prices for goods have been generally stable, though government CPI statistics tend to be self-serving rather than reliable price inflation indicators. Instead of fuelling price increases, money has instead been applied to reducing indebtedness, or to speculation in the capital markets.

What is important to understand is five years ago there was a large one-off shift in favour of money, which suggests that the next large shift will be away from money; not because suddenly we are all going to like spending again, but because we will like money even less. This is not to say that some of us won’t become more cautious, rather the reverse. If the economic outlook deteriorates it will be because we are cutting back spending on inessential goods. It is just that the price effect of this reduced spending is unlikely to be anything like as dramatic as what we saw at the time of the banking crisis.

So where will a reduced preference for money come from? The clue is from all that extra money that has been channelled into capital markets since the banking crisis. When the bullish factors for government bonds and other financial assets are replaced by the prospect of rising interest rates and falling prices, there will be a rush for the exit across a wide range of markets. And here the reaction of the monetarists at the central banks will be crucial.

It is a virtual certainty that collapsing bond and other asset prices will set off a new crisis by undermining the collateral backing the entire banking system. Central banks will see no alternative to keeping interest rates as low as possible, accelerating the expansion of the money-quantity to prevent a new systemic crisis. This is true for all major currencies, not just the US dollar. Cash will therefore be an unattractive alternative to owning financial assets, which leaves vital commodities and monetary hedges, such as precious metals, as the only refuge for monetary capital.

Today’s lull in the flow of bearish news will probably be over in a few months. It only serves to conceal the repositioning of the sovereign wealth funds and of other prescient institutional investors, seeking to protect themselves, ahead of this increasingly certain event.

<< Previous article
Rate : Average note :4.8 (4 votes)
>> Next article
FinanceAndEconomics.org is the website of Alasdair Macleod, who has a background as a stockbroker, banker and economist. Alasdair is available for seminars, speeches and interviews. Please check on Services to get further detalils.
WebsiteSubscribe to his services
Comments closed
Latest comment posted for this article
Be the first to comment
Add your comment
Top articles
Latest Comments
State of Failure
11 AprThe Recusant1
My, my...James's article almost sounds as if Trump himself might have gassed the people as a deflection and not Syria at all! Why...why...that's co...
State of Failure
09 AprGypsy
The STOCK MARKET trend has been DOWN. In fact, the word after Friday's Crash was "Standby for Monday." In a Moment of Severe Stress, the so-calle...
Flat-Earther FINALLY Launches Himself Into The Air, Crashes, Goes T...
05 Aprsirqitous
Seen realistically, however, this was money well spent for TPTB, even if they never get that loan repaid! As free advertising for the MSM cover st...
Flat-Earther FINALLY Launches Himself Into The Air, Crashes, Goes T...
03 Aprprljr
The really really really really unfortunate thing is that there are people and i use that word "people" lightly, are for no other explanation that ...
Flat-Earther FINALLY Launches Himself Into The Air, Crashes, Goes T...
28 Marprblmsolved
The really unfortunate thing about this story; For that kind of money he probably could have hired someone with access to a modern performance ...
Drums Along the Potomac
23 MarGypsy2
I see there's a HUGE market for Conspiracy Theories and FAKE NEWS in the U.K. ~ from the Top down. Theresa May runs her Conspiracy Theory up her f...
Drums Along the Potomac
18 MarThemis-1
While I, too, don't give a hoot about the Skripals, the UK cannot tolerate foreign agents running amok and potentially endangering innocent British...
Most commented articlesFavoritesMore...
World PM Newsflow
ALL
GOLD
SILVER
PGM & DIAMONDS
OIL & GAS
OTHER METALS