"Everything you need to know about gold"
BULL (THE FED)
Today, more than ever before, focus is on the Federal Reserve. The general public has joined economists, financial analysts, and market participants in monitoring and parsing every statement regarding Fed action and policy.
Each morsel of data receives the the strictest attention. The actions are mostly for naught, of course. That is because most of those asking the questions are unaware of certain facts that would change the nature and tone of Fed focus overnight.
GOLD PRICE RATIOS
There are two charts below for your observation. We will review each of them in sequence and then provide some commentary and conclusions.
FED DILEMMA IS NEVER-ENDING
The Federal Reserve doesn’t know what to do. Even worse, though, is that it probably doesn’t make much difference what they do – or don’t do.
ONCE MORE WITH FEELING
“…try it one more time with feeling
Chairman take it from the top
This one is the big one Jay so give
it everything you got
(You can) make believe your makin’ me
believe each word you say
Let’s try it once more with feeling
and we’ll call it a day”
(original lyrics by Kris Kristofferson)
NOTHING CHANGES AT THE FED
The statement may sound obvious given that Jerome Powell has been nominated to continue his reign as head of the world’s most visible central bank. Some might think this is a good thing; and will allow the Fed to steer a course that will bring our economy back from the living dead.
NOT BIDEN’S INFLATION
You wouldn’t know that by listening to current commentary about inflation. Casual observers, economists, investors and analysts seem to agree that “higher inflation is being generated by abnormally huge amounts of government spending”.
The supposition, however, is incorrect. In fact, no amount of government spending causes inflation.
It is also true that abnormally higher spending by consumers does not cause inflation.
Most people think that the term ‘inflation’ is synonymous with ‘higher prices’.
The rising prices, however, are not inflation. The inflation has already been created.
DEFINITION OF INFLATION
“Inflation is the debasement of money by governments and central banks.“
The inflation is accomplished by expansion of the supply of money and credit. All governments and central banks inflate and destroy their own currencies intentionally.
The inflation leads to a loss in purchasing power of the currency which in turn shows up in the form of increases in prices for most goods and services.
Inflation is not created, or caused, by companies raising prices. It is not triggered by escalating wage demand, hoarding or supply shortages.
Changes in economic demand, hoarding, and bottlenecks in the supply chain for goods and services have nothing to do with inflation.
When someone says “inflation is back”, they are referring to rising prices. They are wrong on two counts.
First, the portion of rising prices resulting from the loss in purchasing power are the effects of inflation.
The current share of rising prices resulting from changes in economic demand, such as supply chain bottlenecks, pent-up demand, etc. have nothing to do with inflation or its effects and are a totally separate factor in price changes for various goods and services.
Second, the inflation isn’t back; because it never went away.
Inflation is an ongoing cancer for all currencies of the world and its effects are unpredictable. Governments and central banks never stop expanding the supply of money and credit.
This means, of course, that all currencies continue to lose purchasing power. The US dollar today is worth one penny compared to its purchasing power of a century ago.
ROLE OF THE FEDERAL RESERVE
The Federal Reserve is a banker’s bank. Its purpose is to create and maintain a financial system that allow banks to lend money in perpetuity.
We are bombarded daily with commentary and analysis regarding the Fed and their actions. We are treated to continual rehashing of the same topics – tapering, interest rates, inflation – over and over.
Fed actions, especially including the inflation that they create, are damaging and destructive. Their purpose is not aligned with ours and never will be.
Today the Fed is restricted by necessity to a policy of containment and reaction regarding the negative, implosive effects of their own making. (see The Federal Reserve – Purpose And Motivation)
THE FED IS THE PROBLEM
One of the self-proclaimed objectives of the Federal Reserve is to manage the stages of the economic cycle so as to 1) avoid recessions and depressions and 2) extend the prosperity phase of the cycle.
How well have they done? Not very well.
In their initial attempt to avoid and defer the natural corrections associated with economic recession, the Fed ushered in the most severe depression in our country’s history beginning with the stock market crash in 1929. Even former Fed chairman, Ben S. Bernanke agrees:
“Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”…Remarks by Governor Ben S. Bernanke (At the Conference to Honor Milton Friedman, University of Chicago -Chicago, Illinois November 8, 2002)
But they did do it again.
Six years after his speech, Governor Bernanke presided over another catastrophe in the financial markets. Cheap credit and ‘monopoly’ money had blown bubbles in the debt markets that popped.
Alan Greenspan was Chairman of the Federal Reserve at the time Bernanke made the above statement. When testifying before Congress after the credit implosion of 2007-08 and after he had been replaced by Mr. Bernanke, Greenspan had this to say:
“I discovered a flaw in the model that I perceived is the critical functioning structure that defines how the world works. I had been going for 40 years with considerable evidence that it was working exceptionally well.”
And lets not forget the Fed induced bubble surrounding stocks in the late nineties which was pricked in early 2000. Greenspan was at the helm then, too.
But is this really any wonder? What can you expect after reading what Danielle DiMartino Booth says…
“The economists were satisfied parsing backward-looking data to predict future events using their mathematical models. Financial data in real time were useless to them until it had been “seasonally adjusted,” codified, and extruded into charts. Fed employees had no interest in financial news.”
IT WILL BE MUCH WORSE NEXT TIME
Similar events today would bring about a price collapse in all markets as well as usher in deflation and a full-scale depression. All of this would be resisted on every front by government and the Federal Reserve.
They would launch an all-out financial war (and maybe another real war, too) by opening the money and credit spigots full force in a futile attempt to reverse the credit implosion and negative price action of all assets.
The depression would also last much longer than needed. And the price declines which are necessary to correct the excesses of the past and cleanse the system would be countered every step of the way by regulations and programs of dubious value.
The efforts of government would actually worsen things and prolong the suffering; and the results would be much worse than anything we could imagine.
It will be quite a ride. (also see Federal Reserve And Market Risk; see here for ThinkMarkets review)
Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!
A VISIT TO JEKYLL ISLAND
Earlier this year, I had the opportunity to visit Jekyll Island and see some of the landmark buildings where secret meetings took place which led to the origin of the Federal Reserve in 1913…
With all the attention that the Federal Reserve gets today, it might be a good idea to learn a bit more about that origin which is steeped in controversy regarding claims of conspiracy.
As investors, analysts and commentators warm to the idea that “inflation is likely transitory”, much of what we have been hearing from the the Fed and the United States Treasury seems to encourage and support that interpretation.
Team Fed member (aka Secretary of Treasury) Janet Yellen, who has used the word ‘transitory’ on other occasions, followed up her own attempts (here and here) to introduce the word into mainstream financial vocabulary with additional comments in a press conference after the G-7 meeting in London…
OVERHEATED ECONOMIES AND MARKET PREDICTIONS
Janet Yellen said the following last week…
“It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat”
Later that same day, she said this…
“It’s not something I’m predicting or recommending. If anybody appreciates the independence of the Fed, I think that person is me, and I note that the Fed can be counted on to do whatever is necessary to achieve their dual mandate objectives.”
Also last week, we heard from the Federal Reserve which released the following statements on Thursday, May 6, 2021…
Before we can understand how to interpret these statements and any possible conflictions, there are four key topics which need to be explained: inflation, the Federal Reserve, interest rates, and the economy.
FED HAS NO FEAR OF INFLATION
The Fed wants to have their cake and eat it too, but the cake is stale. Jerome Powell’s remarks in testimony before the Senate recently provoked considerable attention.
Responses, interpretation, and analysis by observers were many and varied. Unfortunately, no one learned anything different from what they thought they knew before Powell’s testimony.
The Fed is well aware of the problem. It is systemic in nature and goes far beyond corporate due diligence, bank liquidity, and the safety of your broker.
Most everyone else (with the exception of Janet Yellen, Ben Bernanke, and Alan Greenspan) thinks they understand the problem, but their limited understanding doesn’t allow for the subtleties of Fed Chair behavior.
POWELL AND YELLEN…
Flashback 11/21/2017:
“President Trump nominated Jerome H. Powell as the new Chairman of the Federal Reserve Bank. Don’t look for much to change. And Janet Yellen’s announcement that she will resign from the board upon Mr. Powell’s induction as board chair is pretty much a non-event.” (see New Fed Chairman, Same Old Story)
Currently, comments by Jerome Powell last week regarding inflation and its effects spooked some investors and analysts. Investors in leveraged Treasuries were dealt a severe blow when yields spiked and bond prices fell. Others have claimed that the sky is falling and that inflation is all around us.