Why Gold is Up in this Deflationary Environment

I've run across an excellent commentary at The Privateer, entitled "Puzzling - Gold is Going Up Again." He is responding to an August 20, 2010 article on CNN's Money.CNN.com.

As the Privateer points out, some analysts are scratching their head trying to figure out why gold is rising even as inflationary fears are subsiding. This seems counterintuitive.


[Thanks to Dhirajranka.com for the photo.]

Mr. Privateer puts his figure right on the answer to the quandary: monetary inflating. Some call it quantitative easing (QE). We could also call it Helicopter-Benning, or, as the more old-fashioned among us would say, printing money.

The U.S. central bank is finding itself between the proverbial rock and hard place. The rock: stagnation in the American economy. The hard place: The limitation of its power to do anything about it. But they can't just sit there; they have to act. They're supposed to be controlling this thing.

So the Fed Governors--at least a majority of them anyway--seem to have taken this line of conduct:

When in doubt, pull the checkbook out, and make the bogey-man pout.

Ben Bernanke, the figurehead of this majority, once swore to Milton Friedman that we would never see a deflationary episode like the Great Depression of 1929. Some astute analysts are claiming that we are indeed already seeing the deflationary episode, only it is disguised behind a wall of monetary inflating.

Mr. Privateer is one of them. Here are Mr. Privateer's words:

"Not only is 'quantitative easing' inflationary, it is the absolute last resort of the entire inflationary process. Inflation being defined as an INCREASE IN THE TOTAL STOCK OF MONEY. There are quite a few people out there in the world, and in the US too, who understand what inflation is. These same people understand that rising prices are one amongst very many RESULTS of inflation."

[Ah, a rational human being at last!]

"These same people understand that the destruction of 'wealth' measured in terms of money which has taken place over the GFC [I assume this means Global Financial Crisis] to date has more than offset the creation of new money which governments in general and the US government in particular have been desperately resorting to."

"There is not the slightest chance that there will emerge any GENUINE way out of the GFC until such time as the gargantuan malinvestments propelled by the credit money boom which has now collapsed are liquidated on a market. Every day that this is delayed makes the situation worse. Every new 'Dollar' created by governments and their banking system makes the situation worse. Every new Dollar created in this manner is inflation, pure and simple. The fact that prices are rising or falling has nothing to do with it. Inflation is an increase in the stock of money."

My heart pitter-pattered as I read this. One could hear my sighs of genuine relief at not finding myself alone in this cold world.

The author is correct. I would just add that the nation's "regime confusion" is also contributing to the stagnation. (Robert Higgs calls it "regime uncertainty.")

The question is: what do we do?

Here is the Privateer's response:

"The [CNN] article concludes with the assertion that once the GFC is 'over', there will be no reason to own Gold. The problem is that the GFC will not end - or even properly begin - until money can no longer be 'created' out of thin air. Today, while the Europeans are making some moves towards reducing their deficit spending and while Asia is losing its appetite for US Treasury paper, there is no sign of that happening."

Couldn't have said it better myself.

The 2008 Bailout: The Pandora's Box of All Pandora's Boxes

If there ever was a Pandora's Box, the Big Bailout of 2008 has to be it.


[Thanks to 2highfestival.com for the image.]

How did we get here?

After a difficult time in the early 1900s, we began our drift away from sound monetary and banking policy by turning towards government for the prevention of business cycles.

We thought we were doing the right thing in creating the Federal Reserve. Since then, it has evolved into the monster it is today.

It started as a tool for maintenance of the stability of the banking system, but it has become the all-knowing, all seeing Poobah-Controller of the Issuance of Purchasing Media, in the place of what we had back then, the gold standard. In fact, we've gotten so far away from this standard that we officially abandoned it in 1971.

Today, it is increasing clear that the Fed has no real control of the money-creation process. Meantime, Congress has decided to come to the rescue of one failing institution after another, most recently General Motors. Ford and Chrysler will not be far behind.

Where will it end? How will this turn out?

No one knows; and the more the government messes around with this, the murkier the future becomes.

We are already in a good recession (see the statistics of the American Institute for Economic Research), and it may start out to be deflationary. But our leaders will not let price deflation happen. They will pump as much credit into the system as they think they need to keep prices and the economy stable. After all, that is their mandate. (See what I have to say about their mandate here.)

Yet deflation enriches us through lower prices. (It also means reducing the supply of purchasing media, but that's a separate story. See my discussion of this definition confusion.) If prices were to decrease, we would all be better off. For example, do you prefer the price of tuna fish at $3.99 a can, or $2.99? Duh.

Deflation (i.e. lower CPI) is not bad in and of itself. What is bad is what usually accompanies deflation. In most deflationary episodes we have recession and/or depression: Bankruptcies, decreased consumption, loss of jobs, stock market losses, bank closures.

But the Fed is forgetting that by "curing" the symptom of recession (i.e. by stopping price deflation) they are not necessarily curing the cause of that recession.

To cure this recession, Congress must allow the market to rid itself of a century of inflation. That can only be corrected through a deflationary process, even if it means we must undergo some recession. If the Fed and the Treasury try to keep it from happening, they will maintain the distortion of inflation instead of allowing it to cure itself.

What method will they use to accomplish this? They will try their darnedest to prevent deflation/recession/depression by turning on the printing presses (issuing fiat currency and credit) to whomever needs it the most, or cries the loudest, or threatens to close. They have borrowed billions, and created billions, in this effort. Where will it stop, now that the presses are running full speed?

Businesses are quickly learning that they must start screaming for cash. The cash is available. First come, first served. Yet by continuing the inflationary process and handing out cash, our own elected officials are fleecing us on a daily basis.

They will fund these bailouts with the raises we will not get, with the value we are losing on our houses, with the pension investments we bought at inflated prices and that have vanished.

Our salaries are now in negative growth, banks steal our savings every day through poor interest remuneration (they get cheaper money from the Fed), and our social security incomes and pension allotments are not keeping pace with the CPI. As my Dad used to say, "Stand still, little lambs, to be shorn." (For more about him, see my last post.)

In the longer run (when, I don't know), we the people must reject these shenanigans and turn to gold as a refuge against government destruction of the monetary units of the world.

That's the day Pandora will close her box. I hope I live long enough to see it happen.