Shows how out of things I am. I had no idea about this.
-Jon
Great article. I, myself, have long thought we were in a gigantic asset bubble. There has been unabated bullishness when it came to precious metals and extreme bearishness when it came to the dollar. It is true that the principles of supply and demand aren’t a very good determinate of pricing when it comes to speculative assets such as stocks, metals, and real estate. Lot of the pricing is emotion driven - fear and greed. You can’t make an armchair argument and say that drilling for more oil will automatically bring prices down when futures traders are bidding frantically on it to go up. And it is true that the banks and financial institutions have been mostly responsible for the increase in money supply. The fed doesn’t really ramp up their printing presses to create more inflation contrary to what people think. Their main job is to facilitate credit by encouraging more people to borrow. There is a lot of misunderstandings about the fed and their role in inflation. And a lot of that myth is not just perpetuated by the media, but even on the Mises site itself. George Reisman does a great job of clearing up the misunderstanding about inflation and deflation. You should read his article on that subject matter published in March.
Although I believe we can enter a period of sustained deflation I would still advocate holding on to some sort of gold for safekeeping and also in our uncertain system of fiat money.
Yeah, Reisman is great too.
-Jon
You pointed out that because the US economy is more service threatened, that the situation shouldn’t be as bad as in the past. However, while the employment situation shouldn’t be as bad, wages will be either stagnant or even falling. So people will be employed, but be taking home less. Also service based economy recovers more slowly than a manufacturing based one.
I believe the economic fallout will be worse than most peopl ever imagined. Much of the wealth generated by the American economy over the last couple of decades has been speculation driven instead of savings and investment driven. Speculative booms always end in a bad bust.
Just so you know, the article is by Gary North, not me. [:P]
-Jon
It’s gone down so I have more of a chance to buy, being ever so poor.
The article makes a few assumptions about things, not all of which are set in stone:
I think this is a bit naive. Gold (which is one commodity) is generally priced according to people’s expectactions of future inflation. If people think inflation will be a problem in the future then gold goes up in price and vice versa. Which leads me to the next point (the fundamental assumption that the author makes, which is no doubt the reason he’s ignoring inflation as a “second” possible reason why the commodities market could come back):
True. However if production falls more than consumer demand then prices will go up anyway… So thinking only about demand will only give you half the story. Some manufacturers will cut back production because they see demand slipping. Other manufacturers will cut back production because they’re broke! If, for example, GM were to go broke and stop making cars then it’s entirely possible you could see the price of cars go up in the states. The same is true of any number of companies in other industries that might fail in the wake of the inlationary boom that was going on from 2000 to 2005.
I could go on and on but basically what it boils down to is the assumption that recessions are deflationary. However this quite simply is not the case. See the following post of mine for more on that (I asked this question a while back and eventually tracked down some answers myself):
Clearly the issue is more complicated that most commentators let on - the vast majority of them rolling with the popular assumption that recessions are deflationary (never even considering the alternative realities) and very few of them explaining how or why they can be otherwise (as they so often are).
If we see deflation then yes, commodities will likely sink in price. If we see inflation then they’ll likely keep going up. The chances (historicially) are about 50/50 - so I’m holding about half cash and half gold and silver myself (as a hedge against both possible eventualities - not looking to make massive profits, merely to save about half my skin).
Gold (which is one commodity) is generally priced according to people’s expectactions of future inflation.
While there may be some truth to that, commodities can also be priced to people’s exaggerated expectations of future inflation. That’s why we sometimes see markets all of a sudden collapse (like in 1980), even though we didn’t suddenly experience deflation.
Indeed. Just as they can under estimate future inflation. They don’t always get it right, as individuals or as a group. None the less, the price is based on inflation expectations. My point was that almost everyone appears to be expecting deflation in the years ahead because they seem to believe that recessions and deflation are inseperable. However, looking at historical evidence this appears to be rather a misplaced belief - only about half of the recessions in the last century were accompanied by deflation.
North is very wrong on many points.
The most important is, because of his faulty money definition, he thinks the fed is deflating right now. On the contrary, FED has never inflated as much as it is these days.
You dont need to look at some M numbers for this. It is basic logic.
The US government spends more than ever. Budget deficit is at an all time high. With the war and bail outs on top of regular welfare state.
There are only three ways to cover a budeget deficit.
One is increase in nominal taxes. Which isnt happening.
The other is borrowing from the pool of savings. Which, because of increased demand, would increase the interest rate. And this isnt happening either.
And the final way is monetazing debt by inflating the money supply. In other words government is borrowing more but not from the available pool of savings, but from the pool of newly created inflationary extra money.
If you look at gold only, gold is both a commodity used in industry and a investment tool.
This inflation will definetaly increses the commodity price of gold steadily (the effect of steady inflation is not a buble but steady price increase), but investment part would fluctuate especially in short term because of the actions of traders and central banks.
But these fluctuations can only be temporary because fundementals tells us that, dollars supply are and will be increasing but the gold supply will not be. At least not as fast as dollars.
So this is a very good opportunity to buy commodities including gold, silver and oil.
Ktibuk, you are absolutely right. North did a huge mistake and still hasn’t realized it or is simply going along with it. The Fed is inflating like there is no tomorrow and, while we are waiting for datas from the ECB, there’s little doubt they are following suit. But he was right when he was saying that the commodity bubble was starting to deflate: look at oil prices for example. Without any significative variation in supply and demand it lost about 30% of its value over a three weeks period. Is it ALL down to supply and demand? Or perhaps do speculation and price-fixing (both involving LOTS of government intervention) really exist? Gold, silver and platinum are no different. Prices were driven to stratosphere by enormous quantities of cheap credit coming crushing in. Now the market is trying to find a precarious balance, but rest assured that our good mates in charge will see to that.
Like starting a war with Russia, that’s just what we need in this moment. Wait until Monday and you’ll see that every commodity (including gold and silver) will start to skyrocket again. Oil is already going that way.
Kakugo,
Oil and other commodity prices will rise again. These are technical corrections.
There will be ups and downs but the destination is inevitable.
Also whoever thinks that “in recession demand falls” doesn’t know what stagflation is.
If the FED keeps inflating like it is doing, demand can never fall.
On the contrary because in an inflationary enviroment people would want to get rid of money as soon as possible, demand would skyrocket. People would even demand and buy things they wouldnt need, because those stockable things keep their value unlike the paper money.
Demand falls only during deflationary recession. And deflationary recession only occurs when the FED lets the banks fail, thus deflating the previously inflated money supply. And I dont mean the bank fails that are happening wight now. I am talking about real fails, when most people can not get their money at all and write it off.
Thinking that the Federal Reserve will keep up the rates of monetary expansion that we have now is extremely naive. Bernanke is a monetarist of sorts and I don’t think he’ll be afriad to raise rates when inflation gets out of hand. It is very hard for monetary policy itself to create simultaneous inflation and recession, because there are inherent contractionary forces in an economy when all the loans being issued by the CB during the boom have to be repaid. The Fed would have to lower rates significantly to be able to “paper over” not only the contraction but to even create significant amounts of inflation to prevent commodities from crashing.
There’s no doubt in my mind that commodities are on shaky ground right now. You might be able to still make a buck with gold or silver, but don’t be that person who bought gold right before the 80s bust.
I keep saying it, but no body is listening… look at the numbers:
St Louis Fed CPI Graph
St Louis Fed PPI Graph
50% of all recessions are inflationary - yes, I’ll say it again: inflationary.
So once again, the mantra that keeps getting hammered in public - recessions are deflationary - is completely misguided. No small number of economists, investors and members of the public are currently selling commodities because they believe that recessions are deflationary when the reality is that this quite simply is not true - it’s a wive’s tale.
Straw Man Alert: I never said that most recessions are deflationary. There is, however, a difference between what we call a recession and what we call a stagflation. Commodity prices always fall during normal recessions, they are not like normal consumer goods. There has been only one time in American history that we experienced a stagflation - in the 70s. Our economy most likely won’t face a stagflation unless a bad combination of heavy regulation and high rates of monetary expansion lead us into the same mess.
Just look at the data (warning different time periods):
Straw man? Your post indicated (and I quoted it) that you felt inflation in recessions was very difficult and my post merely pointed to some empirical data implying, quite to the contrary, that recessions are very often (indeed about 50% of the time) accompanied by inflation. Where exactly is the straw man that you’re referring to?
Do you see the logical contradiction in your post? Let me point it out to you:
As you say, my post indicated that for inflation to happen in a recession is very difficult, to which you reply that 50% of the time recessions are inflationary. Where do I say that the majority of recessions are deflationary? As you can see, your statement clearly presents a straw man: that I believe that most recessions are not inflationary when I never said anything of the sort.
Furthermore, you entirely misrepresented my views. If read in the context of this entire thread and the rest of my post, the half-sentence you nit-picked out of my thread indicates that inflation in commodities like gold and silver is hard to achieve during a recession, not that inflation in consumer goods is hard to achieve.
My post in general dealt with stagflation, yet you completely misrepresent what was said by immediately saying that many recessions are inflationary. Inflationary recessions and stagflations are two separate things yet you manage to confound them. You further complicate the ordeal by setting me up with a straw man and singling out half a sentence out of an entire post.
Where did I ever suggest you did?
My reply makes perfect sense to what you did say - that inflation in recessions is diffcult - I pointed to some statistics to show you that this is not the case… that it’s easy - in fact it happens 50% of the time. So no, no straw man. I understood your original post and my reply was logical and consistent. I don’t like logical fallacies (they annoy me) and I don’t generally try to base my arguments on them - so I’m sorry if you misunderstood what I was trying to say.
In any case, all of this is irrelevant pedantic bickering. You saw the data I showed you right? And you can see that recessions aren’t always deflationary right? So you can see that it might actually be possible and even easy for the central bank to inflate, even during a recession… all they have to do is create more loans, which can be done by changing policy (for example, by letting banks swap dodgy assets out for good ones etc. to avoid any credit contraction). As I say, whether this happens this time or not remains to be seen - certainly Bernake has shown himself to be more concerned about growth than inflation so far - we’ll see how he plays out the second half though.