An Explanation for Monetary Inflation - And a New Low 19 comments
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By Brad Zigler
Real-time Inflation Indicator (per annum): 6.9%
I still chuckle when I think about a reader's recent reaction to seeing the numbers in this column's daily inflation update. The puzzled financial advisor wrote: "Inflation at 7.7%? [Note: This was in mid-February] Are you kidding? Where did you get that number?"
You can certainly understand his perplexity. More than likely, if you're not a frequent reader of this column, you share it. After all, the government's much-publicized take on inflation, the Consumer Price Index (CPI)-was last clocked growing at an annual rate of, what, zero?
CPI tracks price inflation at the retail level. Say what you will, it is what it is. It doesn't purport to do anything else. Metering worldwide purchasing power parity isn't the mandate of the Bureau of Labor Statistics.
That's where our number comes in. Our indicator allows you to take the daily pulse of the monetary inflation trend in one quick read. It's derived by comparing the purchasing power of the dollar and the world's other reserve currency, the euro, via a universal monetary standard, gold.
Monetary inflation is the wholest of wholesale numbers. It reveals the gizmos and gadgets at work improving or denigrating the greenback's purchasing power long before the retail price of Coca-Cola rises.
Our bewildered advisor should be forgiven, too, if the subhead number looked stark. There's no context. But that's what the graph, the one so many regular readers of this column have come to loathe or love, comes in.
U.S. Monetary Inflation
A new low was scored by the indicator on Thursday, intimating the disinflationary trend continues. We're still waiting for the reflation trade. Just as the inflation indicator turned down as the heretofore heralded inflation harbinger, gold, was peaking (see the chart in early 2008), there ought to be early warning of reflation reflected in the red line.
Stay tuned, and have a nice weekend.
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- Warren Buffett
So basically you measure inflation by the price movements of one commodity, gold. An otherwise useless metal that derives its value from an age old tradition dating back to when gold was actually a currency.
What you are doing, in a sence, is valuing currency by how much gold it can buy. (If that were true, gold mining stocks would be valued at infinate multiples. The more gold people buy the less their money is worth). Pretty much negating the reasoning behind getting off the gold standard in the first place.
The price of gold is only what people are willing to pay for it. Gold is no longer a currency. It has no inherent value. Don't be the last one the figure that out.
But which of these should we use to gauge the value of our currency? Which of these is universally recognized, readily valued and eminently tradeable?
On Mar 06 06:35 PM Deep Value wrote:
> "[Gold] gets dug out of the ground someplace, then we melt it down,
> dig another hole, bury it again and pay people to stand around guarding
> it. It has no utility. Anyone watching from Mars would be scratching
> their head."
> - Warren Buffett
>
> So basically you measure inflation by the price movements of one
> commodity, gold. An otherwise useless metal that derives its value
> from an age old tradition dating back to when gold was actually a
> currency.
>
> What you are doing, in a sence, is valuing currency by how much gold
> it can buy. (If that were true, gold mining stocks would be valued
> at infinate multiples. The more gold people buy the less their money
> is worth). Pretty much negating the reasoning behind getting off
> the gold standard in the first place.
>
> The price of gold is only what people are willing to pay for it.
> Gold is no longer a currency. It has no inherent value. Don't be
> the last one the figure that out.
I am more in the camp that gold's recent price increases have more to do with a pure flight to perceived safety ( same for dollar ), than as an inflation hedge, but everyone has their own conceptions and act accordingly.
I think the graph is useful.
i know that i could sell the gold i purchased at $300 and the dollars recieved would buy about the same goods. i find holding metals reassuring as i don't have faith left in bloated government or the fiat currency. funny thing is it buys about what it would buy when moses walked the earth.
"sound as a dollar"......" not worth a buck." it also is pretty good protection from taxation through inflation. i think it is wise to keep 10 to 20% in metals in these turbulent times. i would like to increase what i hold but will wait for a dramatic drop. it may or may not come.
perhaps this is foolish to wait because as i said the purchasing power to buy is about the same.
gold holds steady value. fiat currencies fluctuate against it.
On Mar 06 10:07 PM Brad Zigler wrote:
> Yes, the price of gold IS what people are willing to pay for it.
> So, too, for refrigerators, candy bars and Swiss francs.
>
> But which of these should we use to gauge the value of our currency?
> Which of these is universally recognized, readily valued and eminently
> tradeable?
While it's value as a currency is a reason for holding gold, to say it's "useless" is completely false. If it wasn't valued as a form of currency, it would still have value as a useful metal.
On Mar 06 06:35 PM Deep Value wrote:
> "[Gold] gets dug out of the ground someplace, then we melt it down,
> dig another hole, bury it again and pay people to stand around guarding
> it. It has no utility. Anyone watching from Mars would be scratching
> their head."
> - Warren Buffett
>
> So basically you measure inflation by the price movements of one
> commodity, gold. An otherwise useless metal that derives its value
> from an age old tradition dating back to when gold was actually a
> currency.
>
> What you are doing, in a sence, is valuing currency by how much gold
> it can buy. (If that were true, gold mining stocks would be valued
> at infinate multiples. The more gold people buy the less their money
> is worth). Pretty much negating the reasoning behind getting off
> the gold standard in the first place.
>
> The price of gold is only what people are willing to pay for it.
> Gold is no longer a currency. It has no inherent value. Don't be
> the last one the figure that out.
Measures of purchasing power have to be weighted by the percent of the budget spent on that particular item.
On Mar 07 07:40 AM patio wrote:
> I'm no gold bug, but why rag on this guy's metric? If you are so
> inclined, it is one more tool to gauge and track on-going events.
>
> I am more in the camp that gold's recent price increases have more
> to do with a pure flight to perceived safety ( same for dollar ),
> than as an inflation hedge, but everyone has their own conceptions
> and act accordingly.
> I think the graph is useful.
On Mar 07 10:30 AM retired aviator wrote:
> If you want to speak generally about inflation, you are talking about
> purchasing power. You should measure that inflation, then, using
> a representative sampling of things people buy. Using the price
> of gold and relative currency strengths to measure inflation is irrelevant
> to someone who purchases no gold or foreign currencies. Their purchasing
> power should be measured by the prices of things they typically purchase.
>
Don't get me wrong. I'm no "gold bug" either. I'm not, for example, advocating a return to the gold standard. And I agree with you; gold has been an imperfect hedge against inflation -- at least as measured by the Consumer Price Index.
If anything, the price of oil has been a better hedge in recent years (see a visual representation of that in the Hard Assets Investor article "A Picture's Worth A Thousand Words (Or Dollars)" at www.hardassetsinvestor...) largely because oil price fluctuations have been the very drivers of inflation.
Of late, gold and the dollar have been safe havens into which global capital has flowed for lack of better hiding holes.
The purpose of the HAI indicator is to provide real-time metering of monetary, not price, inflation.
As you know, CPI measures trailing inflation and is only updated monthly. You can't tell, day-to-day, market impacts through CPI.
The real problem with a measure like CPI, though, is that is implies, in some minds at least, a connection between price changes and the value of currency. That link isn't necessarily causal or correlated.
If, for example, a nation increases its value-added or general sales tax, the price of affected goods increases apace. That's not a monetary phenomenon, though: the value of that country's money hasn't changed in the global marketplace despite the fact that domestic consumers have to pay more to obtain their goods.
The HAI indicator isn't a perfect modeling of monetary inflation. It purposely simulates inflation using a methodology that's simple enough for ANYBODY to follow.
On Mar 07 07:40 AM patio wrote:
> I'm no gold bug, but why rag on this guy's metric? If you are so
> inclined, it is one more tool to gauge and track on-going events.
>
> I am more in the camp that gold's recent price increases have more
> to do with a pure flight to perceived safety ( same for dollar ),
> than as an inflation hedge, but everyone has their own conceptions
> and act accordingly.
> I think the graph is useful.
The indicator is just that--an indicator--much like the gauges a pilot uses to fly an aircraft. One dial doesn't tell the skipper everything he/she needs to know about flight status, but each provides information that, once integrated, guides the pilot's actions.
On Mar 07 10:28 AM TWOfold wrote:
> You'll never understand inflation and deflation until you grasp that
> credit...or credit destruction...is a bigger factor than monetary
> supply (or gold) in a credit based economy.
It seems you're making a case for the Consumer Price Index as an inflation bellwether. CPI might be fine as a measure of domestic price change, but ofers little insight into the value of the dollar in global exchange.
I refer you to my comments made to Patio:
"The real problem with a measure like CPI is that it implies, in some minds at least, a connection between price changes and the value of currency. That link isn't necessarily causal or correlated.
'If, for example, a nation increases its value-added or general sales tax, the price of affected goods increases apace. That's not a monetary phenomenon, though: the value of that country's money hasn't changed in the global marketplace despite the fact that domestic consumers have to pay more to obtain their goods."
[The same reasoning would apply to tariffs imposed on goods imported into the U.S.]
On Mar 07 10:30 AM retired aviator wrote:
> If you want to speak generally about inflation, you are talking about
> purchasing power. You should measure that inflation, then, using
> a representative sampling of things people buy. Using the price of
> gold and relative currency strengths to measure inflation is irrelevant
> to someone who purchases no gold or foreign currencies. Their purchasing
> power should be measured by the prices of things they typically purchase.
>
The dollar/gold cross is depicted in the chart as the black line. You can see how that line diverges from the inflation indicator (the red line).
Think globally. One doesn't necessarily have to pay in dollars when transacting international business.
On Mar 07 01:20 PM Rob Viglione wrote:
> Great point, but this is already accomplished by the gold:USD ratio,
> since gold would have to be converted to USD to purchase goods. Ratios
> of USD:goods changes with gold:USD.
It's monetary inflation we're simulating here, not domestic price inflation.
Again, see my comments to Patio:
"The real problem with a measure like CPI is that it implies, in some minds at least, a connection between price changes and the value of currency. That link isn't necessarily causal or correlated.
'If, for example, a nation increases its value-added or general sales tax, the price of affected goods increases apace. That's not a monetary phenomenon, though: the value of that country's money hasn't changed in the global marketplace despite the fact that domestic consumers have to pay more to obtain their goods."
[The same reasoning would apply to tariffs imposed on goods imported into the U.S.]
On Mar 07 11:30 AM American in Paris wrote:
> Because it is a silly metric. Gold only makes sense as a measuring
> of purchasing power if gold is the only thing you buy.
>
> Measures of purchasing power have to be weighted by the percent of
> the budget spent on that particular item.
>
>
>
>
>
>
This has never been about credit destruction. It is about demand destruction.
On Mar 07 10:28 AM TWOfold wrote:
> You'll never understand inflation and deflation until you grasp that
> credit...or credit destruction...is a bigger factor than monetary
> supply (or gold) in a credit based economy.
* Very little gold has actually perished, so the amount of gold in existence is pretty darn close to the total amount mined throughout history
* It is highly valued
* It has few industrial uses
* It doesn't corrode
* The world supply increases about 1.6% annually
* At various points in time it's been used as directly money or been used as a currency peg.
Once this crisis is over, I personally think we should go back on the gold standard and prohibit the fed from setting monetary targets except to peg the dollar to a particular value of gold. Interest rates should float around this value not the other way around.
Going on a gold standard reigns in the govt from inflating the money indiscriminately thereby in theory reducing credit bubbles and subsequent crashes (recessions & such). It doesn't solve all economic problems but it certainly would provide a more stable monetary unit than we've enjoyed since 1970.
On Mar 07 10:35 AM Matt L wrote:
> Gold is not a useless metal. It is resistant to corrosion, a good
> conductor of electricity, and is ductile and malleable. That makes
> it useful in the electronics industry for electrical contacts. It
> also is a good reflector of infrared and visible light and radio
> waves, which is why it is used to shield satellites and in protective
> faceplates. And people seem to like jewelry made of gold.
>
> While it's value as a currency is a reason for holding gold, to say
> it's "useless" is completely false. If it wasn't valued as a form
> of currency, it would still have value as a useful metal.
We're not positing gold as the ultimate metric of inflation (see the reference to "A Picture's Worth A Thousand Words (And Dollars)" at www.hardassetsinvestor... above). In the indicator's triangulation, the value of two forms of paper money is weighed against a universally acceptable form of hard money.
On Mar 09 11:04 AM Deep Value wrote:
> Great point. I stand corrected. Gold does have some utility. I guess
> the point I should have made more clear is the uses (and therefore
> demand) of gold does not have a direct enough correlation to the
> aggregate demand of the general economy to be used as an indicator
> of inflation.