Inflation ain’t coming, and other howlers…

September 23, 2009 at 04:46 | Posted in economics, Gold bug, inflation, Uncategorized | Leave a comment

Just found this in the Globe and Mail, one of our leading national newspapers. That’s why I read the National Post.

For special laughs, watch out for the hidden Phillips Curve reference…

Sorry, gold bugs, but the facts just don’t add up

Boyd Erman

It seems a shame to trash the party just when it’s finally becoming fun to be a gold bug.

Bullion is flirting with $1,000 (U.S.) an ounce and hoarding the metal is no longer just a pursuit for Eric Sprott and assorted conspiracy theorists with caches of canned food. Even the guy behind the bar at dinner the other night was long gold and happy to expound on why.

It’s all about inflation they say, and gold as a store of value. Except for one thing: The facts don’t back it. (Unless you’re an American buying bullion because you’re worried about the inexorable decline of your dollar. In that case, you should be worried.)

Almost every real measure of actual inflation pressure – as opposed to the inflation paranoia inherent in the gold price – shows little in the pipeline. One of the best long-term indicators of inflation expectations for the next decade, the price premium built into inflation-protected U.S. Treasury bonds, is indicating that prices will rise 1.75 per cent a year.

Yet the bullion pushers forge ahead. After 20 years of being wrong when gold was stuck around $350 an ounce through the 1980s and 1990s, they are nothing if not persistent.

The key to their argument is the man they call “Helicopter” Ben Bernanke, the head of the U.S. Federal Reserve, and all the cash he and his peers at central banks around the world are creating to revive growth in the world economy. At some point, that money will sluice out of the banks into the economy, inflation will be upon us like a tsunami, and gold will be treasured as a store of value.

The proof, as gold bugs see it, is in the price of gold. It rises when inflation is a risk, so inflation must be a risk. Get it?

The problem is one of simple math: Those helicopter-loads of cash, even if they were making it into the real economy, are not nearly big enough to fill the Sudbury-size crater in the global economy created by the crash in the world’s housing and stock markets.

The Fed balance sheet, a focal point of inflation hawks, has expanded by about $1.3-trillion as Mr. Bernanke pumped cash into the lending system. Added to that, the Obama administration has come up with close to $1-trillion in stimulus, the biggest of a global group of packages totalling about $5-trillion.

However, the decline in assets is much bigger. The value of global stocks has fallen by more $17-trillion since the markets peaked in 2007 and U.S. housing is down more than $4-trillion since topping out in 2006.

On top of that, the financial institutions that are supposed to push that cash into the economy aren’t doing it.

U.S. bank lending, by some estimates, is contracting at the fastest rate since the Depression. Bank credit in August in the U.S. shrank at an “epic” pace equal to 9 per cent a year, according to David Rosenberg, chief strategist at Gluskin Sheff.

The result is a real money supply that’s actually shrinking at the same time as the jobless rate is at a cyclical high and factories are idle.

Not surprisingly, executives scoff at the idea of raising prices any time soon, with one telling The Globe and Mail not so long ago that it would be “very cavalier” to even try. That utter lack of pricing power is clearly reflected in Friday’s numbers showing that underlying inflation is still slowing on both sides of the border.

To that, many gold bulls retort that central banks are going to miss the transition to hyperinflation when it comes, or be unwilling to fight it with higher interest rates because of political pressure from indebted governments.

That seems far-fetched. Central banks have become very good at keeping inflation anchored. In the 18 years since the Bank of Canada adopted the goal of keeping inflation centred between 1 and 3 per cent in Canada, consumer price increases have averaged a 2.1-per-cent pace. Not bad.

There will likely be plenty of warning before inflation takes hold, as capacity use creeps up and unemployment ebbs.

Those real facts go a long way to explaining why even though gold is at $1,000, inflation fears have yet to become mainstream, and discussion of exit strategies to pare back government stimulus programs before prices take off – talk that dominated the last big G20 meeting in April – has largely, and mercifully, fallen by the wayside.

Mercifully, because if the gold bulls and their view on inflation really held sway, the exit would already be on. Interest rates would already be rising and the world would be well on its way back into recession. The bugs should be careful what they wish for.


Gold Standard no Protection against Inflation

April 30, 2009 at 14:16 | Posted in economics, Gold Standard, inflation, Irving Fisher | Leave a comment


In this fascinating letter to the editor from June 1, 1917 Irving Fisher discusses inflation brought about by an increase in the supply of gold. It seems that increasing the supply of money always causes inflation, regardless of what kind of money is used.

The Black Market for Credit

December 19, 2008 at 23:48 | Posted in economy, inflation, interest rates, payday loans | Leave a comment

The current credit crisis seems to me like a perfect illustration of what happens when the governmnet tries to establish price ceilings for goods in high demand and low supply. One of the effects is scarcity: if banks are supposed to lend at effectively zero, they will refuse unless forced to by the government. That’s no different from farmers refusing to sell their grain at government mandated prices below the free market price. 

But – does this mean there is no credit available? I don’t think so – if I went to the local Money Mart, I could get credit on the spot. At a price. Not the fictional interest rate set by the government, but the interest rate agreed to by free actors in a free market. Granted, many people who use payday loans are high-risk folks who take drugs, gamble, and are otherwise indulging in that most expensive of hobbies – stupidity. So one should not be surprised that these folsk are charged pretty stiff interest rates.

But, it is no longer only druggies and gamblers who use these services, but increasingly middle class folks as well. And to make matters even more interesting, the effective cost of borrowing from banks seems to be going through the roof as well.

It’s easy to decry the payday loan folks as loan sharks, and to seek some kind of political solution. But this misses the basic problem that the price of credit is far above the official interest rate. High average interest rates mean at least two things. The first, and most obvious, is that there is a growing number of people who are unlikely to pay back the money they are lent. Interest rates are compensation for risk, and the higher the risk, the greater the interest rates. More and more people likely to declare bankruptcy is clearly not an indicator of a stable economy. 

The second is less obvious – and I may be wrong about this – but rapidly rising interest rates can also mean that lenders feel the need to protect themselves against inflation. Charging the official interest rate would not be profitable even if the debtor was completely solvent and guaranteed his job for many years to come. Lenders not only have to secure themselves against the risk of individual debtors going bankrupt, but also against the effects of inflation.

So, maybe the interest rates charged by payday loan operators – when averaged out over the entire economy – are also an indicator of inflation? Maybe even a better indicator of inflation than many others? I haven’t given much thought to how one could calculate this, but maybe somebody smarter than I – and with access to good data – could.

One thing, however, is clear: there is no difficulty to get credit – if you are willing to pay the market interest rate. The reason banks are not lending is that they are not willing to lend at the ‘official rate’. Go to your local bank and offer them 30 percent interest, and I’m sure you’ll get a loan (provided you have collateral). After all, if your local payday loan operator will be more than happy to lend you money for the right price – why wouldn’t banks with their much greater resources want a piece of the action as well?

If you want a loan, you can have one – just be willing to pay the market price.

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