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ABX, AUY, Bernanke, business, Chairman of the Federal Reserve, Deflation, economy, GG, Gold, Inflation, Silver, worst case scenario
QE III (+)
The great Q.E. III has formally been launched. Its open ended, and the mid 2013 goal posts for easing has been pushed out to 2015. The comments made at Jackson Hole 2012 were foreshadowing to the catalyst for the announcement made on Sep 9/13/2012.
Mr. Bernanke was extremely clear in his speech on deflation back in 2002, what his actions would be in a worst case scenario. He has followed up on those statements with actions taken by the Federal Reserve under his leadership.
… The sources of deflation are not a mystery. Deflation is in almost all cases a side effect of a collapse of aggregate demand–a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers.1 Likewise, the economic effects of a deflationary episode, for the most part, are similar to those of any other sharp decline in aggregate spending–namely, recession, rising unemployment, and financial stress.
When this speech was written, the US was just starting to come out of the great tech crash of 2000. The US was starting to turn the corner economically speaking, as low interest rate fueled our housing bubble.
…Deflation great enough to bring the nominal interest rate close to zero poses special problems for the economy and for policy. First, when the nominal interest rate has been reduced to zero, the real interest rate paid by borrowers equals the expected rate of deflation, however large that may be.3
Outside of residential or commercial real estate, most liquid assets are being bid up around the world. Just look at the prices being paid for ranch land or the crops generated by them; grains or livestock.
The irony is that Bernanke talks of a parable about gold and its value dissipating overnight do to alchemy. At the time, gold was going for about $300 per oz.
…What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.
As I write this, the US Equity Markets are up significantly this year. Bonds were at near historic lows, and the US Dollar had enjoyed a sharp bounce over the last year, as the European Union showed signs of unraveling.
This started to really change around the time of Jackson Hole this year. As word leaked out that the Federal Reserve was going to initiate its third round of Qualitative Easing.
Over the last year, the giant cash flush stocks, which have instant liquidity, and pay out a yield over 3% have become the retail and professional savings account of the past. This is the 21 Century version of the old Widow’s & Orphan equivalent investments of the 1930’s-1940’s.
Big safe cash yielding companies, with balance sheets strong enough weather what the economy is going to do in the near future, have already been bid up significantly in this period of a very old Bull Market.
High Yield is currently at historic low levels, as everyone chases yield. These moments never end well, but for now, even high risk companies have demand for their paper.
So where does that leave the average investor, Retail or Professional? In my humble opinion, the metal complex which has been cooling off for over 1 year, is now fully back in play. The Global Central Bank printing press wars are going to generate inflation, if it’s the last thing they do.
In my opinion its time to ponder the $AUY, $GG, $ABX, & $SLW and other larger producers that have the capacity to book higher precious metal prices. They tend to be debt free, have built in massive organic growth (AUY & SLW come to mind) over the next few years and pay a dividend competitive with sovereign debt yields for the US or Germany with out the same levels of risk.
Today’s world is not the world of Keynes. In Keynes’ world, through FDR’s New Deal, money was placed directly into the hands of private sector unemployed citizens as they built long lasting assets. This lifted aggregate demand.
Somehow Bernanke’s expressed plan has electronic money floating around (much of it throughout the world) in hot hands of the TBTF and New York hedge funds. Bumping up asset prices does not, in and of itself, generate National Income.
Without lifting National Income (and the accompanying creation of American Private Sector, taxpaying Middle Class jobs) Bernanke fails.
In contrast to Bernanke’s notion of Deflation from his speech in 2002 quoted above, I want to share this take on Deflation from Jim Grant’s speech “Piece of my mind” at the New York Federal Reserve on 23 March, 2012:
For reasons you (Chairman Bernanke) never exactly spell out, you pledge to resist “deflation.” You won’t put up with it, you keep on saying—something about Japan’s lost decade or the Great Depression. But you never say what deflation really is. Let me attempt a definition. Deflation is a derangement of debt, a symptom of which is falling prices. In a credit crisis, when inventories become unfinanceable, merchandise is thrown on the market and prices fall. That’s deflation.
What deflation is not is a drop in prices caused by a technology-enhanced decline in the costs of production. That’s called progress. Between 1875 and 1896, according to Milton Friedman and Anna Schwartz, the American price level subsided at the average rate of 1.7% a year. And why not? As technology was advancing, costs were tumbling. Long before Joseph Schumpeter coined the phrase “creative destruction,” the American economist David A. Wells, writing in 1889, was explaining the consequences of disruptive innovation.
“In the last analysis,” Wells proposes, “it will appear that there is no such thing as fixed capital; there is nothing useful that is very old except the precious metals, and life consists in the conversion of forces. The only capital which is of permanent value is immaterial—the experience of generations and the development of science.”
Much the same sentiments, and much the same circumstances, apply today, but with a difference. Digital technology and a globalized labor force have brought down production costs. But, the central bankers declare, prices must not fall. On the contrary, they must rise by 2% a year. To engineer this up-creep, the Bernankes, the Kings, the Draghis—and yes, sadly, even the Dudleys—of the world monetize assets and push down interest rates. They do this to conquer deflation.