-- Posted Thursday, 15 July 2010 | | Source: GoldSeek.com
By Dr. Jeffrey Lewis
Already months into a “recovery,” we're hearing about how this will turn out to be a jobless recovery – that is, the economy will grow without adding any actual jobs or reducing at all the number of unemployed persons. While we would all like to embrace that idea, the theory that an economy can grow without anyone being employed simply isn't practical. However, precious metals investors should like it for one simple reason: higher prices.
The Mechanics of Jobless Recoveries
The government collects data on the economy, and then it puts it all together to create what we know as the GDP, or gross domestic product. Included in this figure is the worth of all goods, services, investment, government spending and net exports. Under a Keynesian model, this would be the best way to see growth in the economy.
First, you find the growth in the GDP and then subtract the change in prices in the same time. Thus, if the GDP were to grow by 10%, but prices were to rise just 2%, then the GDP would be said to have grown 8% adjusted for inflation. We know this is entirely false.
How it Really Works
The GDP is a very basic and far too simplified measure of economic achievement. Since the GDP is tied to four things – consumption, investment, government spending, and net exports – the figures can be easily manipulated in two ways.
First, during a recession, the government can spend more to influence the GDP. If government spending were to equal 50% of the GDP (it doesn't...yet), then a 10% increase in government spending as a “stimulus” could add a total of 5% to the GDP in one year. For all intents and purposes, the economy would have grown, as calculated by GDP, at a rate of 5%. Of course, that money was likely spent on ditch digging, bean counting, wars, or other investments that do not bring about productive employment.
The second way the GDP can be manipulated is by increasing the money supply. By increasing the money supply, more money can chase the same amount of goods, and the GDP, as measured in dollars, will increase. You see, since the GDP is tied to the change in prices – and not the change in the money supply – this is one of the most convenient ways for the government to claim economic recovery. Just print up the money, put it in the economy, and hope that prices do not rise to an equal degree as monetary inflation. Of course, prices always catch up eventually, but not immediately.
“Jobless Recovery” is Great for Metals Investors
Since prices tend to be delayed when catching up with the money supply, a few parts of the economy rise before the others. Money added into the system flows first to the freest portions of the economy, where the price of goods is centralized and there is enough liquidity and volume. This usually happens at the base, where commodity goods rise first, only to be followed by their value-added counterparts.
Oil, for example, may rise well before the price of transporting goods, even though they are highly related. Oil is easily bought and sold on the exchange, while other inputs like ships, docking infrastructure, and labor are not as easily bought and sold, and it takes time for inflation to reach those goods and services. For example, the price of labor would adjust only when there is a shortage of labor (there isn't), and only after enough people have been hired, fired, or replaced would today's new wages come into play. Oil can be bought, sold, and swapped within seconds. Labor is very much illiquid.
Precious Metals
In a jobless recovery, precious metals will be the first of any real prices to rise. Since the GDP is inflation adjusted by the change in price of goods at the store, not on the commodities exchange, inflation is misinterpreted early on until the velocity kicks in and it catches up.
For gold and silver, this means that higher prices will hit the metals market long before they hit your pocket book, giving you both long term wealth growth and short term appreciation in your purchasing power.
However, be careful. Inflation is a matter of not “if,” but when it will come. The best way to prepare, of course, is to buy the basic commodities, and for monetary inflation, nothing is better than simple gold and silver coins.
Dr. Jeffrey Lewis
www.silver-coin-investor.com
-- Posted Thursday, 15 July 2010 | Digg This Article
| Source: GoldSeek.com
