-- Published: Tuesday, 3 February 2015 | Print | Disqus
GOLD MARKET FLASH NOTE
Let’s say you run a Central Bank. What’s your agenda? You need to keep your financial system liquid and inflating. Why? Well, your economy has way too much debt and you don’t want a debt collapse, especially in your Treasury market (which of course you cannot talk about). You need to finance your government’s deficits. And you need to keep your banking system afloat, which requires a lot of cheap money to be profitable because the banks keep making stupid mistakes. So, your job is to create inflation. But you can’t say that because you can’t say why.
What to do? Create a deflation narrative. You need to expand the money supply and keep interest rates low to prevent deflation. The ECB just launched a trillion euro Quantitative Easing program last month with this rationale. The latest European consumer price inflation print was negative for the first time since 2009 thanks to falling oil prices (never mind that ex-energy, the inflation rate was actually positive and up from the month before). The Federal Reserve in its latest policy statement re-iterated its concern that price inflation is too low (it’s well below their 2% target). In fact, all the central banks visibly quake with fear at the mere mention of deflation. It’s the perfect cover for what CBs do best—create inflation—which is their real mandate.
For your amusement and edification, here is the definitive word on deflation from an excellent site, MISH'S Global Economic Trend Analysis (January 20/2015) http://globaleconomicanalysis.blogspot.ca/2015/01/deflation-bonanza-and-fools-mission-to.html).
“Challenge to Keynesians
I challenge Keynesians and Monetarists to prove rising prices provide an overall economic benefit.
The absurd underlying notion behind the battle cry for inflation is that if prices fall people will stop buying things and the economy will collapse. The idea that falling prices are bad for the economy is ridiculous. Taking out insurance against falling prices is even more absurd. Ask any consumer if he wants lower gas prices, lower food prices, lower hotel prices, lower computer prices, or lower prices on any consumer items and the answer will be yes.
Keynesian Theory vs. Practice
Keynesian theory says consumers will delay purchases if prices are falling. In practice, all things being equal, it's precisely the opposite. If consumers think prices are too high, they will wait for bargains. It happens every year at Christmas and all year long on discretionary items not in immediate need.
Reality Check Questions
If price of food drops will people stop eating?
If the price of gasoline drops will people stop driving?
If price of airline tickets drop will people stop flying?
If the handle on your frying pan falls off or your blow-dryer breaks, will you delay making another purchase because you can get it cheaper next month?
If computers, printers, TVs, and other electronic devices will be cheaper next year, then cheaper again the following year, will people delay purchasing electronic devices as long as prices decline?
If your coat is worn out, are you inclined to wait another year if there are discounts now, but you expect even bigger discounts a year from now?
Will people delay medical procedures in expectation of falling prices?
If deflation theory is accurate, why are there huge lines at stores when prices drop the most?
Bonus Question If falling prices stop people from buying things, how are any computers, flat screen TVs, monitors, etc., ever sold, in light of the fact that quality improves and prices decline every year?”
Jim Anthony is a private investor who trades for his own accounts.He co-founded Seabridge Gold and has helped to finance and advise a number of junior gold producers and exploration companies over the past 30 years.His gold market commentaries have been published by Seabridge since 2000. Originally a student of economics, Mr. Anthony has become a disciple of markets: "The tape can tell you much more than any economic model." He is not a registered investment advisor and his opinions expressed above are not intended as investment advice.
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