No Inflation? Look again. It's there alright:
What A Difference A Week Makes
One Hundred and Sixty-Eight Little Hours
The huge present irony of the situation is that U.S. market players are now more or less resigned to another rate hike at the August 24 FOMC meeting, taking as their cue the blow out in hourly earnings announced on August 6. The consensus is that "inflationary pressures" are building up in the U.S. economy.
What is actually building up in the U.S. economy is another lending freeze, just like the one last Fall which prompted the three Fed rate cuts. All this was analysed in detail, including the possible implications for Gold, in the most recent issue of The Privateer.
(From August 6)
That was last week. This week, things are different! The Fed said so. In their "Beige Book" report, they poured warm honey all over the incipient fears of investors who were starting to think that they had found the long-elusive "inflation" which the Fed is threatening to pre-empt. And, of course, to underscore the lack of any real "inflation", the July PPI came in at a lower than expected 0.2% on Friday (August 13).
The "lending freeze" is still there, in spades. The latest casualty of this is Municipal Bonds: '"The secondary market in municipals is almost nonexistent,'' a senior Wall Street muni trade said. It's the weakest it has been in God knows how long." (Reuters - August 12)
But that only affects city governments in various hamlets, large and small, across the U.S.. Stock market investors (the majority of adults across the U.S.) have no cognizance of and less interest in such esoterica. All they know, this week, is that there still ain't no "inflation" out there.
This situation is dangerous in the extreme. In the new issue of The Privateer (Published on August 15), we examine the great economic deception of the last half of the 1990s ("there's no inflation") in detail. U.S. inflation is rampant and has been for years. Evidence? Look at the stock market!
Inflation is an increase in the total stock of money and credit. Price rises are an inevitable result of this increase. Price rises there will always be, the only question to be answered is, which prices will rise?
But if you want to maintain that there ain't no inflation, here's what you do. First, put a positive spin on increases in money and credit (debt). How? Simple, call it "economic growth". Second, single out an area of the economy where prices have not been rising, and use that one as your yardstick for "inflation". What have you got? Economic "growth" and no "inflation". This is the great economic scam of the 1990s, and it has worked astonishingly well, especially in the U.S..
Whether it continues to work so well will be determined in the next week and a half, the time leading up to the August 24 FOMC meeting. The last time that the Fed inflicted more than one consecutive rate rise on the U.S. economy was way back in 1994.
There's no doubt that the bull market which has taken off since late 1994 is still intact, but it has been gasping for air lately. Even with the 184 point rise on the Dow on August 13, the market is still below the high it set three months ago (11107 on May 13). And the broader U.S. indexes have fared far worse than the Dow has.
Gold itself has had a good week. It is up $US 4.60 from its level of August 6. Even more encouraging, it has staged rallies in all major currencies, notably in the major European currencies, the Euro itself, and the Yen. But Gold's day will not really come until the great inflation scam of the late 1990s is finally exposed for what it is. Integral with that scam, of course, has been a concerted effort to make absolutely sure that the Gold price behaves itself.
While Gold is slowly improving, the price is still behaving itself. All around it, the argument still rages. Some are again convinced that "inflation" is under control - see the jump on U.S. stock markets and the crash dive in Treasury bond yields on August 13. Some are convinced that it is about to soar - see the recent big rises in gold stocks and resource stocks on the Aussie stock exchange.
But the point is that the inflation has already occurred. The recent gyrations on U.S. stock and bond markets, the recent falls of the US Dollar, the recent freezes in U.S. secondary debt markets, and the recent slow rise of the $US Gold price, are all symptoms that the effects of that prior inflation are beginning to shop up. In any duel between perceptions and reality, the ultimate winner is always reality. We watch, and wait.
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