EDITOR: | December 19th, 2012

Gold And The Coming Great Age of Inflation.

| December 19, 2012 | No Comments
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Crumpled-Dollars-Curreny-CountdownOur world has taken leave of its senses, at least, in money anyway. Last week the “Helicopter” Ben Bernanke Federal Reserve, bet the ranch on yet another new Quantitative Easing program, taking the total to 85 billion a month, until US unemployment falls back to 6.5%. 85 billion a month is over 1 trillion dollars a year added to the Fed’s balance sheet. New money created out of thin air.

But to get US unemployment down to 6.5% will likely take at least two years, since as the US economy starts to pick up, many of those who have dropped out of the labour pool in recent years, and are now no longer counted in the USA as unemployed, will re-enter the labour pool and seek again to try to get a job. The Fed’s balance sheet is headed towards $5 trillion if not more. Not to worry, says the Fed, once a sustainable recovery is underway we intend to reverse it, to head off the prospect of a Giant Inflation breaking out.

To this old dinosaur commodities trader who first made the floor of the old London Commodity Exchange in Plantation House, in 1969, I don’t believe that they can or will even try. Selling off some 4 trillion of the Fed’s balance sheet assets would destroy any recovery by sucking out 4 trillion from the reviving private sector. I don’t believe they would even dare to try to do 1 trillion in sales. Which means that when at last a real sustainable recovery gets under way, and my guess is that it will come mid-decade as the technology gains from graphene and carbon nanotechnology start to arrive, we are going to enter a massive age of global inflation. It’s not if merely when.

But now things are about to get many times worse. On Sunday Japanese voters elected by a landslide Shinzo Abe and his Liberal Democratic Party, with a policy to rearm, reflate and confront China. While a confrontation with China risks a real war, and America in its wisdom has just given a “blank cheque” to Japan over the disputed Diaoyu/Senakau Islands, much like Germany gave Austria in July 1914 setting the stage for World War One, it is the reflate part that is about to put the coming Great Inflation on to speed when it comes.

Under Mr. Abe, Japan is to be put on a diet of massive central bank reflation. Mr Abe has a massive two thirds majority in the lower house and is able to override any blocking attempt in the upper house.  To quote from the respected UK Daily Telegraph:

Armed with a crushing mandate, Mr Abe said he would “set a policy accord” with the Bank of Japan for a mandatory inflation target of 2pc, backed by “unlimited” monetary stimulus.

“Its very rare for monetary policy to be the focus of an election. We campaigned on the need to beat deflation, and our argument has won strong support. I hope the Bank of Japan accepts the results and takes an appropriate decision,” he said.

The menace behind his words did not have to be spelled out. He has already threatened to change the Bank of Japan’s governing law if it refuses to comply. “An all-out attack on deflation is on its way,” said Jesper Koll, Japanese equity chief at JP Morgan.

—- The LDP plans what some have dubbed a “currency warfare fund” to weaken the yen with a blitz of foreign bond purchases, copying Switzerland’s success in capping the franc.

The effect of Switzerland’s unlimited bond purchases has been to finance most of the eurozone’s budget deficits for the last year with printed money. If Japan tries to do this – with a vastly bigger economy – it would amount a blast of quantitative easing for the world.

Starting next month, our central bankers are collectively staking all on a massive uncoordinated reflation, the ECB has already stated it “will do whatever it takes” to buy up the debt of the EU’s sick Club Med to hold down their interest rates. Neither the Fed, nor the ECB, nor the Bank of Japan will be able to reverse, in my opinion, once a sustainable recovery gets underway. What has to give is the value of the fiat currencies, aka purchasing power. At the start of the First World War in mid 1914, gold was worth just under $21 per troy ounce. Today slightly less than 100 years later, gold fetches $1700 an ounce. My guess is that in 10 years’ time, we can add another zero to that figure.

Out of shear desperation and to try to maintain the Great Nixonian Error of fiat currency, our misguided bankers and politicians are about to make another great historic error. Those wealthy enough and wise, will place a part of their paper wealth in physical precious metals, ahead of time.

“We think this could be the beginning of a fresh reflation cycle for the global system, combining with the US recovery to mark a turning point in the crisis,” said Simon Derrick from BNY Mellon.


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