Gold: Another Trillion P.A. From the Fed.
Yesterday the Fed spoke. The new Gospel according to Dr. Ben Bernanke, is that all that ails the US economy is that the Fed isn’t creating new fiat US dollars out of nothing fast enough. Henceforth, the Federal Reserve is to add another $45 billion in QE4 to replace “operation twist,” which ends at year end, and will be in addition to the $40 billion of QE3 announced less than 3 months ago. In addition, the Fed’s Zero Interest Rate Policy (ZIRP,) will continue on indefinitely or at least until US unemployment falls below 6.5%. $85 billion here, $85 billion there, and pretty soon in a year you’re talking a trillion dollars a year.
Most economists expect that the Fed will be forced to run this policy all through 2013, no matter what compromise is eventually reached over the year end “fiscal cliff,” with many suggesting that it will also run through most of 2014. If so, the Feds balance sheet in 2014 will approach or exceed 4 trillion dollars, and at that size, I don’t believe it will be possible to reverse it as promised, once a natural self-sustainable US recovery gets underway. I don’t believe they would even try. Reversing the size of the Fed’s balance sheet, requires selling all the assets that they have been buying under QE forever, US interest rates would soar and America would go bust. Even if they were to try, to whom would they sell? Who would step in to buy an asset that can only drop in value the longer the Fed keeps trying to sell? China, Russia, Brazil, India? The UK, Germany, France, the ECB?
So once a self-sustainable US recovery gets underway, and eventually one must, if the Fed can’t reduce its balance sheet meaningfully or timely, a great dollar age of inflation lies ahead, at some point. Not necessarily a hyper-inflation, although that is certainly a calamitous outside possibility, more like the age of inflation that overtook Great Britain after it went bust after fighting the second world war.
In 1946 the UK average yearly pay was ?381. By 1966 it was ? 1,333.67. But that was still a time when each country linked to the dollar, and the dollar linked to gold and was still redeemable in gold. After the dollar-gold link was broken in 1971, by 1976 UK average pay had soared to ?4,419.69, 1986 to ? 12,615.15, 1996 to ?23,059.85, 2006 to ? 35,018.85. Of course the UK was also shedding an empire, and making major productivity gains as well, as new factories and investment rebuilt what was destroyed in the war, and a debt based consumption economy also came into being 1960s onwards. The picture is much more complicated than my simple example, but you get the general idea. A massive deliberate inflation was initiated to overcome the bust, which immensely speeded up once America went off gold, putting the world onto fiat currency.
Once murderous communism failed, fiat currency and globalisation, have largely gone to benefit those former communist countries that were largely self-excluded from the capitalist western system. But like Great Britain after WW2, that western system essentially went bust in 2007-2008. It is why, the Fed, the BOE, the ECB, the BOJ, and others are all deep into unconventional fiscal policy. At some point we are about to embark on a new age of inflation. My guess is that a new self-sustainable global recovery will begin later this decade, as the benefits of the new graphene/carbon nanotechnology age start to gain traction. But whatever the reason, a new recovery will begin to get underway.
It doesn’t take a genius to see where this is going. Those who are fortunately wealthy enough during these difficult times, need to consider putting a part of their wealth into assets of fungible, high intrinsic value. The precious metals represent the easiest way of putting something away for the next inflationary age. In 1946 the price of gold was $34.71 per troy ounce. It stayed pretty much fixed there until fighting the Vietnam war without taxation drove it up to $41.28 in 1969, as the world began to lose confidence in the dollar. After the dollar-gold link was cut it jumped to $58.42 in 1972. It stands at roughly $1,700 now. I expect a similar kind of jump in the decade ahead.
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For the record, although Great Britain’s average yearly wage went from ?381 in 1946 to ? 35,018.85 in 2006, and the average Brit’s lifestyle certainly improved, it didn’t improve as much as the simple figures would imply. Everything else was going up in price too. Yesterday the Fed was indirectly telling us what’s about to happen. (For Europeans the picture is even worse once the Euro unravels. But that’s a story for another day.)
“Increasingly, the wealth of the modern world has come to be represented by financial assets rather than real assets, and this to me is a very unhealthy situation, because financial assets are inherently unstable. Financial assets (currencies, bonds, mortgages, stocks, bank credit, etc.) can be quickly and violently reduced in value, or destroyed completely by either inflation or deflation.”
Donald J. Hoppe
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