Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Stock Maket Trading Lesson - How to REALLY Trade Markets - 26th Nov 21
SILVER Price Trend Analysis - 26th Nov 21
Federal Reserve Asks Americans to Eat Soy “Meat” for Thanksgiving - 26th Nov 21
Is the S&P 500 Topping or Just Consolidating? - 26th Nov 21
Is a Bigger Drop in Gold Price Just Around the Corner? - 26th Nov 21
Financial Stocks ETF Sector XLF Pullback Sets Up A New $43.60 Upside Target - 26th Nov 21
A Couple of Things to Think About Before Buying Shares - 25th Nov 21
UK Best Fixed Rate Tariff Deal is to NOT FIX Gas and Electric Energy Tariffs During Winter 2021-22 - 25th Nov 21
Stock Market Begins it's Year End Seasonal Santa Rally - 24th Nov 21
How Silver Can Conquer $50+ in 2022 - 24th Nov 21
Stock Market Betting on Hawkish Fed - 24th Nov 21
Stock Market Elliott Wave Trend Forecast - 24th Nov 21
Your once-a-year All-Access Financial Markets Analysis Pass - 24th Nov 21
Did Zillow’s $300 million flop prove me wrong? - 24th Nov 21
Now Malaysian Drivers Renew Their Kurnia Car Insurance Online With Fincrew.my - 24th Nov 21
Gold / Silver Ratio - 23rd Nov 21
Stock Market Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First - 23rd Nov 21
A Month-to-month breakdown of how Much Money Individuals are Spending on Stocks - 23rd Nov 21
S&P 500: Rallying Tech Stocks vs. Plummeting Oil Stocks - 23rd Nov 21
Like the Latest Bond Flick, the US Dollar Has No Time to Die - 23rd Nov 21
Why BITCOIN NEW ALL TIME HIGH Changes EVERYTHING! - 22nd Nov 21
Cannabis ETF MJ Basing & Volatility Patterns - 22nd Nov 21
The Most Important Lesson Learned from this COVID Pandemic - 22nd Nov 21
Dow Stock Market Trend Analysis - 22nd Nov 21
UK Covid-19 Booster Jabs Moderna, Pfizer Are They Worth the Risk of Side effects, Illness? - 22nd Nov 21
US Dollar vs Yields vs Stock Market Trends - 20th Nov 21
Inflation Risk: Milton Friedman Would Buy Gold Right Now - 20th Nov 21
How to Determine if It’s Time for You to Outsource Your Packaging Requirements to a Contract Packer - 20th Nov 21
2 easy ways to play Facebook’s Metaverse Spending Spree - 20th Nov 21
Stock Market Margin Debt WARNING! - 19th Nov 21
Gold Mid-Tier Stocks Q3’21 Fundamentals - 19th Nov 21
Protect Your Wealth From PERMANENT Transitory Inflation - 19th Nov 21
Investors Expect High Inflation. Golden Inquisition Ahead? - 19th Nov 21
Will the Senate Confirm a Marxist to Oversee the U.S. Currency System? - 19th Nov 21
When Even Stock Market Bears Act Bullishly (What It May Mean) - 19th Nov 21
Chinese People do NOT Eat Dogs Newspeak - 18th Nov 21
CHINOBLE! Evergrande Reality Exposes China Fiction! - 18th Nov 21
Kondratieff Full-Season Stock Market Sector Rotation - 18th Nov 21
What Stock Market Trends Will Drive Through To 2022? - 18th Nov 21
How to Jump Start Your Motherboard Without a Power Button With Just a Screwdriver - 18th Nov 21
Bitcoin & Ethereum 2021 Trend - 18th Nov 21
FREE TRADE How to Get 2 FREE SHARES Fractional Investing Platform and ISA Specs - 18th Nov 21
Inflation Ain’t Transitory – But the Fed’s Credibility Is - 18th Nov 21
The real reason Facebook just went “all in” on the metaverse - 18th Nov 21
Biden Signs a Bill to Revive Infrastructure… and Gold! - 18th Nov 21
Silver vs US Dollar - 17th Nov 21
Silver Supply and Demand Balance - 17th Nov 21
Sentiment Speaks: This Stock Market Makes Absolutely No Sense - 17th Nov 21
Biden Spending to Build Back Stagflation - 17th Nov 21
Meshing Cryptocurrency Wealth Generation With Global Fiat Money Demise - 17th Nov 21
Dow Stock Market Trend Forecast Into Mid 2022 - 16th Nov 21
Stock Market Minor Cycle Correcting - 16th Nov 21
The INFLATION MEGA-TREND - Ripples of Deflation on an Ocean of Inflation! - 16th Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Gold and the Credit Crash

Commodities / Gold & Silver Dec 12, 2008 - 03:48 PM GMT

By: Adrian_Ash

Commodities

Best Financial Markets Analysis Article"... To stay ahead of inflation, don't beg for a raise. Just borrow the money instead...!"

The TROUBLE with GOLD...? If you choose to use it as money, then you can only abandon it once. Once done, it's done forever. You can't keep floating the value of cash time and again.


Quitting the Gold Standard is a one-shot deal only. Unlike the Doctor in Kit Marlowe's Faustus , gold cannot be damned twice in Act One and then in every last scene that follows.

The fillip given to business, exporters and shopping is a one-shot deal, too – if it comes off at all. Britain's decision, for instance, to abandon gold altogether in 1931 sure looked a smart move from Birmingham southwards. By the mid-to-late Thirties, the UK enjoyed a house-building boom across the Midlands and Home Counties. But Northern ship-builders, however, missed out on the bounce, right up until the outbreak of WWII.

Across the Atlantic, debate still yawns today about Roosevelt's half-way house of 1933-35. Fearing no fear but Gold , he devalued the Dollar (down from 4.8% of an ounce to 2.8% of one ounce) and banned private "gold hoarding" to stop people looking after themselves. Did it boost prices, however? By 1938, the United States suffered a depression within depression. Economists in Washington were so shocked by the slump, they were forced to coin a new word – "recession" – to describe the phenomenon!

And gold...?

"The champion of free enterprise, Ronald Reagan, knew that growth of the private sector was in no small way dependent on deregulation and the lowering of tax rates," writes Bill Gross at Pimco.com .

"Now that those trends have necessarily come to an end, no rational investors should expect innovation and productivity to be unaffected. Profit and earnings per share growth will suffer."

De-regulation is just like abandoning gold, in that – even if it takes twenty years – you can only pull it off once. And is this trend towards loose lending and credit that "something" which we're now watching die, seven decades on from the bitter end of the international Gold Standard ? Have we at last reached the end of the post-1970s settlement – non-stop inflation of money, enabled (and masked) by the non-stop de-regulation of credit and markets?

"Commodity prices rose strongly in recent years until mid-2008," write two data-jockeys at the Bank for International Settlements (BIS), "driving inflation up worldwide. [But] higher commodity prices have generally not spawned strong second-round effects on inflation."

Second-round "effects" in this context, of course, would mean higher wage claims – the bête noir of central bankers worldwide. "It's very important that wage rises don't pick up to compensate for the rise in inflation," said Bank of England chief Mervyn King way back in 2005. "We must ensure that second-round effects and risks to price stability over the medium term do not materialize," said Jean-Claude Trichet, head of the European Central Bank (ECB), more than two years later.

Why not let wage rises...ummm...rise? Because the '70s inflation was so clearly the fault of too-powerful unions, all demanding above-inflation wage rises – and all-too often getting their money from union-backed politicians. Or so central bankers agree, picking up where Margaret Thatcher and Ronald Reagan left off. Curbing unionized labor would cost workers (and thus voters ) their bargaining power in wage claims, threatening to curb real living standards as the value of money declined.

But policy-makers had an answer at hand, even as double-digit interest rates stemmed the collapse of confidence in cash at the start of the '80s.

To stay ahead of inflation, don't beg for a raise. Just borrow the money instead!

Oliver Twist was thus saved the shame of asking for more from his boss, and cutting red-tape in the markets made debt look democratic. By 2007, even the poorest of households could owe a million on housing! Easy money gave easy terms to Western electorates. And so who needed a pay rise – not least after losing their union card – when the bank was only too willing to help? Who needed to risk "second round" pressures when credit was cheap and so freely available?

In straight Dollar terms, the US economy grew by 2.7% per year between 1996 and 2007. To help giddy things up, "broad money (M2) in the US grew by an average annual rate of 7.9% per year," write two European professors in the Financial Times' Fund Management Supplement , "well above the growth rate of nominal gross domestic product."

Here in London, the same story. The British economy grew by two-thirds in the ten years to summer '07; the supply of money more than doubled meantime, while private-sector debt – used to fuel constant expansion in housing and retail – rose faster still. It outpaced growth in the money supply by almost half-a-trillion pounds ($700bn)!

Both Washington and Westminster fell for their own myth, of course. But what we're living through now – or so we guess here at BullionVault – is the end of this seemingly pain-free inflation.

No, not simply the "death of inflation", first reported (à la Mark Twain's obituary) by London economist Roger Bootle more than 12 years ago. And certainly not the end of the "N.I.C.E decade" described by Mervyn King, chief pooh-bah at the Bank of England, in repeated speeches (all of them absurd) from autumn 2003.

" No Inflation, Constant Expansion" was a misnomer to start with, the lie of the first half undone by the scam of the second. Plenty more academics (most of them policy-wonks, too) also stepped up to put a name on that era, variously calling it "The Great Moderation" (Ben Bernanke) or "Great Stability" (Tim Besley, again at the BoE).

Fact was, however, there was nothing "stable" or "moderate" about the 10 years to summer 2007. Joy it may been to live through that phase of history, that final blow-off in the seven-decade bubble of spending and debt that followed the last Great Depression. But "non-inflationary" does not apply – not when you remember that, just like it's evil twin (deflation), inflation in truth refers to a trend in the money supply...a growth in this case, which – if it outpaces production, as the last 10 years so clearly did, winds up in prices. That then requires a deflation to get costs back to even. Unless you play Faustus, repeatedly damned, yet somehow believing that you might yet escape.

"The current weakened state of the economy is such that it could not withstand a body blow like a disorderly bankruptcy in the auto industry," said a White House press secretary after the Senate rejected the "Big Three" bail-out today. "Because Congress failed to act," chips in a Treasury wonk, "we will stand ready to prevent an imminent failure until Congress reconvenes and acts to address the long-term viability of the industry."

Never mind how much it costs. This is just money after all. And there's always more to be printed in a world free of gold. Right up until the cost of the wood-pulp outstrips the value of cash, and money reverts to its base purpose once more.

Scarce resources made vivid by a rare, precious asset.

By Adrian Ash
BullionVault.com

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2008

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Adrian Ash Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in