Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
General Artificial Intelligence Was BORN in 2020! GPT-3, Deep Mind - 20th Jan 21
Bitcoin Price Crash: FCA Warning Was a Slap in the Face. But Not the Cause - 20th Jan 21
US Coronavirus Pandemic 2021 - We’re Going to Need More Than a Vaccine - 20th Jan 21
The Biggest Biotech Story Of 2021? - 20th Jan 21
Biden Bailout, Democrat Takeover to Drive Americans into Gold - 20th Jan 21
Pandemic 2020 Is Gone! Will 2021 Be Better for Gold? - 20th Jan 21
Trump and Coronavirus Pandemic Final US Catastrophe 2021 - 19th Jan 21
How To Find Market Momentum Trades for Explosive Gains - 19th Jan 21
Cryptos: 5 Simple Strategies to Catch the Next Opportunity - 19th Jan 21
Who Will NEXT Be Removed from the Internet? - 19th Jan 21
This Small Company Could Revolutionize The Trillion-Dollar Drug Sector - 19th Jan 21
Gold/SPX Ratio and the Gold Stock Case - 18th Jan 21
More Stock Market Speculative Signs, Energy Rebound, Commodities Breakout - 18th Jan 21
Higher Yields Hit Gold Price, But for How Long? - 18th Jan 21
Some Basic Facts About Forex Trading - 18th Jan 21
Custom Build PC 2021 - Ryzen 5950x, RTX 3080, 64gb DDR4 Specs - Scan Computers 3SX Order Day 11 - 17th Jan 21
UK Car MOT Covid-19 Lockdown Extension 2021 - 17th Jan 21
Why Nvidia Is My “Slam Dunk” Stock Investment for the Decade - 16th Jan 21
Three Financial Markets Price Drivers in a Globalized World - 16th Jan 21
Sheffield Turns Coronavirus Tide, Covid-19 Infections Half Rest of England, implies Fast Pandemic Recovery - 16th Jan 21
Covid and Democrat Blue Wave Beats Gold - 15th Jan 21
On Regime Change, Reputations, the Markets, and Gold and Silver - 15th Jan 21
US Coronavirus Pandemic Final Catastrophe 2021 - 15th Jan 21
The World’s Next Great Onshore Oil Discovery Could Be Here - 15th Jan 21
UK Coronavirus Final Pandemic Catastrophe 2021 - 14th Jan 21
Here's Why Blind Contrarianism Investing Failed in 2020 - 14th Jan 21
US Yield Curve Relentlessly Steepens, Whilst Gold Price Builds a Handle - 14th Jan 21
NEW UK MOT Extensions or has my Car Plate Been Cloned? - 14th Jan 21
How to Save Money While Decorating Your First House - 14th Jan 21
Car Number Plate Cloned Detective Work - PY16 JXV - 14th Jan 21
Big Oil Missed This, Now It Could Be Worth Billions - 14th Jan 21
Are you a Forex trader who needs a bank account? We have the solution! - 14th Jan 21
Finetero Review – Accurate and Efficient Stock Trading Services? - 14th Jan 21
Gold Price Big Picture Trend Forecast 2021 - 13th Jan 21
Are Covid Lockdowns Bullish or Bearish for Stocks? FTSE 100 in Focus - 13th Jan 21
CONgress "Insurrection" Is Just the Latest False Flag Event from the Globalists - 13th Jan 21
Reflation Trade Heating Up - 13th Jan 21
The Most Important Oil Find Of The Next Decade Could Be Here - 13th Jan 21
Work From Home £10,000 Office Tour – Workspace + Desk Setup 2021 Top Tips - 12th Jan 21
Collect a Bitcoin Dividend Without Owning the King of Cryptos - 12th Jan 21
The BAN Hotlist trade setups show incredible success at the start of 2021, learn how you can too! - 12th Jan 21
Stocks, Bitcoin, Gold – How Much Are They Worth? - 12th Jan 21
SPX Short-term Top Imminent - 12th Jan 21
Is This The Most Exciting Oil Play Of 2021? - 12th Jan 21
Why 2021 Will Be the Year Self-Driving Cars Go Mainstream - 11th Jan 21
Gold Began 2021 With a Bang, Only to Plunge - 11th Jan 21
How to Test Your GPU Temperatures - Running Too Hot - GTX 1650 - Overclockers UK - 11th Jan 21
Life Lesson - The Early Bird Catches the Worm - 11th Jan 21
Precious Metals rally early in 2021 - 11th Jan 21
The Most Exciting Oil Stock For 2021 - 11th Jan 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Greeks Paying the Price for Worshiping the Keynesian False God

Commodities / Gold and Silver 2010 Mar 08, 2010 - 03:57 PM GMT

By: Ned_W_Schmidt


Best Financial Markets Analysis ArticleThe Greeks are learning the tough consequences of worshiping a false god. For years they sought the blessing of Keynesianism, only now to find it comes with a price. Keynes introduced the notion of government debt as salvation, the road to prosperity. Issue debt, and you will prosper. With those words, citizens of many nations turned their minds and ears off to reason. How could so many come to believe that borrowing money was the secret to prosperity? 

Despite the decade when many nations of Latin America demonstrated clearly that debt as a road to prosperity was a delusion, the world seems forced to relearn that lesson. With Iceland, Ireland, Portugal, Spain, Italy, California, New Jersey,  and Illinois now paying the price for their Keynesian debt binges, the U.S. continues down the merry road to the same financial armageddon. According to The Washington Post, the Congressional Budget Office now estimates the Obama Deficit will be more than $9.7 trillion over the next ten years, rather than $8.5 trillion. Does anyone remember when deficits were measured in billions?

One would think that after the bursting of the global mortgage bubble that debt would be a dirty word. Keynesian dogma does not allow for such heresy. The holy writings of the followers of Keynes  ignore the ramifications of issuing one form of government debt, fiat money. For all our money today is someone’s, be it a government or a private entity, debt.

Since we last visited another line has been added to the above chart. Plotted in that graph are two different measures of the rate of growth for the U.S. money supply, M-2 NSA. The blue line is the one year percentage change of that money measure. The new line is the red one. It measures the six-month rate of change for the U.S. money supply at an annualized rate.

As we have talked before, the spike in those measures of money supply growth that occurred in late 2008 and early 2009 was a consequence of the massive liquidity injection by the Federal Reserve  in response to the financial implosion of that period. That spike in the money supply growth rate was much feared by many as a harbinger of future inflation. We, as it happened, thought inflation would rise.

That inflation surge did not develop as so much damage had been done to the banking system that lending collapsed. Along with the collapse of bank lending came a collapse in the growth rate of the U.S. money supply. Be wary of reading much into the recent upturn in the six-month measure as seasonal forces often cause such a rise. Non seasonally adjusted data is used as the seasonal adjustment factors built with data of the last three years should be considered pure garbage.

Why did the surge in the growth rate of the U.S. money supply not lead to higher inflation? First, the surge was temporary, as can be observed in the graph. A second reason is that output, U.S. GDP, ceased collapsing. For example, if the money supply grows by 5% and output does not expand, prices should rise. If money supply growth is 5% and output increases by 6%, prices should decline. Money supply growth cannot be viewed in isolation, but also in the context of what is happening with output.

Our second graph, above, will help in understanding what was just described. In this graph we have taken the two previous measures of U.S. money supply growth and subtracted the rate of change of U.S. industrial production. The blue line is now the 12-month rate of change for the U.S. money supply minus the twelve-month rate of change for U.S. industrial production.

As is readily apparent, the surge now looks for more inflationary, and it was. However, the slowing of the U.S. money supply growth is now price depressing as industrial output has shown a recovery. That might be a dead cat bouncing, but it is what is happening at the present.

Notice now that the two adjusted money supply measures are both in negative territory. That means that U.S. output is rising at a faster rate than the U.S. money supply is expanding. Such a development is price depressing, or non inflationary. It also means that the U.S. dollar, on a relative basis, is becoming more valuable, rather than less valuable. Looking for inflation in the U.S. AT THE PRESENT TIME is a futile search.

This reality has implications for the value of the dollar on foreign exchange markets and the dollar value of Gold. The dollar has been appreciating as it should be. $Gold has been weak for now near  three months, as it should have been. While the mindless trading of hedge fund managers can push the value of $Gold up in any week, such trading is swimming against the current. $Gold has been rightly weak, and should continue to be. U.S. dollar-based investors should probably defer buying until the next period of serious price weakness.

None of the above discussion should be construed as altering the longer term arguments for North American investors to own Gold. Deficit spending, nationalization of the health care system, confiscatory taxation, and business killing regulations by the Obama Regime will crush any possibility of economic growth. That reality will force the Federal Reserve into serious and overt monetization of the Obama Deficit. THAT will cause inflation to again be a problem.

The situation just described for U.S. investors is reversed for many others. English investors are experiencing rising Gold prices as the pound goes through its final liquidation as a global currency. Combination of a miserable economy being made worse by a dismal political situation is crushing investor interest in the pound. While they too should wait for price weakness to buy, they should buy with gusto when it happens.

The Euro price of Gold has reminded EU investors that the EU is still work in progress. The EU is not going to collapse over the financial mismanagement of individual states no more than the U.S. will crumble over the financial disasters in California, New Jersey, and Illinois. All are simply cases of Keynesian dogma coupled with inept politicians. This financial frailty is likely to reappear over the years, making the ownership of Gold a wise move. Being so close to an Iran armed with nuclear weapons might also be a good motive. However, the recent surge of Euro Gold probably should be simply watched rather than be reason to buy. EU investors should wait for price weakness to buy, and then do so with enthusiasm.

By Ned W Schmidt CFA, CEBS

Copyright © 2010 Ned W. Schmidt - All Rights Reserved

GOLD THOUGHTS come from Ned W. Schmidt,CFA,CEBS, publisher of The Value View Gold Report , monthly, and Trading Thoughts , weekly. To receive copies of recent reports, go to

Ned W Schmidt Archive

© 2005-2019 - 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

6 Critical Money Making Rules