austrian63

Gold: The Only Remaining Bubble?

Alan,

It was the "inflation" increase in the money supply, that caused the inflated prices in real estate, equities, etc. from 2002 - 2006. The Fed is inflating the money supply now at an even greater rate. All of this new money represents cash balances in some one's possession. The increase in the money supply debases the currency over time. As a result, assets with intrinsic value will increase in value as measured by inflated/debased currencies. Inflation does not impact all goods at the same rate or time. For example, the CPI, which is merely a measure of the general price level, as defined by the Fed, and does not measure monetary growth. The CPI is also a metric developed by the goverment which also grows/inflates the money supply. Like grading your own tests in high school.

Growth in the money supply is inflation and is the proximate cause of increases in the general price level over time.

Even though real estate prices are still falling due to their inflated levels, most other prices in dollar terms are not falling. Creating money out of thin air defies the economics of scarecity and devalues all existing dollars in circulation as they were not created from capital investment or labor but by government "fiat." This leads to another Keynesian myth of the nutrality of money. As the domestic and international markets begin to realize the debasement that is occurring and the increased credit risk of the U.S., interest rates and prices, in dollars, will rise. This is a natural economic law and cannot be prevented by Ben Bernancke, the President, Congress or any of the economically illiterate expert economists that most politicians listen to. Low growth does not preclude currency debasement and rising prices. Low growth and higher prices can and will exist together if our current monetary and fiscal policies are continued.


On Feb 18 05:26 PM Alan Brochstein wrote:

> You raise a good point. I wasn't trying to cite Japan as an example
> of deflation but rather that inflation never came despite years and
> years of stimulus, low interest rates and monetary expansion. I don't
> think that our situation is quite the same as Japan's, unfortunately,
> in that as many of the gold proponents point out, we are externally
> financed. Our consumption for years above and beyond our means at
> all levels (government, consumer and business) helped to keep the
> economy going and prices rising. We now have asset prices of all
> sorts (except gold) declining dramatically and credit constricting.
> These conditions will keep a lid on prices no matter what the Fed
> and the Treasury try to do in my opinion. The higher savings rate
> ahead for individuals and the conscious efforts of companies to constrain
> their own debt will lead to low levels of consumption. Additionally,
> as governments face pressure on their fiscal fronts, they will be
> forced to raise taxes, another impediment for growth.

Gold: The Only Remaining Bubble?

Gold is simply a safe haven. Your arguments against inflation are not correct. I challenge you to research and publish the actual year over year rate of deflation (reduction in the general price level) in Japan during the 1990's. In fact, you must strip out real estate, equities and fuel from your rate. Then see if actual daily costs, food, insurance, health care, wage rates, commodities, etc. actually were in a "deflationary spiral." I bet the rate of general price decline in the daily costs of living will surprise you by how small it was and that many costs actually increased.

General price level declines are not possible in fiat currency economies as the paper money is not backed by a tangible asset.

I also disagree with your asessment of the Treasury bubble or lkack thereof. This is the current bubble and when it pops, gold will probably become more of a safe haven. Treasuries, and the dollar, are only backed by the "full faith and credit" of the U.S. Government which has no ability or intention of paying off its debt. Here are the "assets" that back the dollar and Treasury Debt Securities:

The U.S. tax revenues, which are decreasing.
The U.S. budget deficit which is increasing-lack of fiscal discipline usually harms borrowers-it will eventually harm the U.S.
The U.S. trade deficit is large and will continue in perpetuity.
Unfunded Social Security and other entitlement liabilities
The now "unknown" assets on the Fed's expanding balance sheet.

Once holders of treasuries realize this, they will begin to liquidate their treasury holdings as their yields are not compensating them for their risk. Moody's created a new AAA rating for the U.S. and the U.K. that states these countries' securities are "AAA with a risk of default." The U.S.'s sovereign rating is now lower than Norway's.

In my college finance courses years ago, the Treasury rate was the "risk free" rate. I suppise things change when a nation goes on a 20 year deficit spending spree. The U.S. is broke and mathematically insovent. Treasury yields will eventually reflect this.

It will be interesting to see how our government addresses these issues as they begin to bubble up.

The Coming Dollar Deflation

David,

It's all about timing. You are correct re: the short-term uptrend in the dollar vs. other currencies, gold and other commodities. This caught me by surprise. The medium term 2 - 5 years, is hard for us to grasp. The tide will turn as the Fed and Treasury continue to create more currency. We already have massive inflation (growth in the money supply). This will be the proximate cause of higher prices in dollars for most things we purchase in the future.