It’s just that simple, I was advised this morning. Over coffee I was speaking with an authority on inflation and whether or not he thought inflation was here to stay. He told me that inflation is 100% too much money chasing too few goods, despite the Fed and some economists not being a fan of that phrase.
There is no way that inflation is going away, he continued, as he brought me a cup of Jim’s. “The first thing we need to do is get rid of the ******* Fed,” which I, still under-caffeinated, felt was a little too earlier and too bombastic to give a reply. Instead, I complimented him on the coffee he just made using Jim’s Organic Espresso and prepared to listen.
Back to the 70s
It doesn’t take too many trips to the grocery store or your local gas station to realize that our dollars are buying less food, fuel, and other necessities. Contrary to President Biden’s specious claims, inflation is not going away.
How to Depress Spending
Inflation is here to stay, my in-house coffee guru explained. Any increase in interest rates would lead to a catastrophic increase in interest payments on our national debt. This at a time when the Biden administration’s regulatory policies and tax uncertainty are working against encouraging business investments in productivity.
The Department of Labor’s 3rd Q productivity reports shows a 5% decline – the steepest drop since 1981, which as E.J. Antoni, an economist at the Texas Public Policy Foundation, claims is the result of the productivity decline. Replacing older workers as they retire are less experienced workers who are being paid more in order to entice them into the workplace.
One thing is clear: Most Americans seem not to understand that the government does not have its own bank account. All government spending can come from only three sources: taxing, borrowing, printing.
Sobering Bad News
Chuck DeVore at The Federalist offers some sobering news: At the end of 2007, the Federal Reserve held about $891 billion in securities. By the first week of November 2021, that amount grew almost 10-fold, to $8.6 trillion.
But the overall national debt is $28.4 trillion. What happened to the other $19.8 trillion? Well, that’s held by individuals, funds, and other governments.
Unlike the promises of Green Energy, inflation is not a clean formula. According to Mr. DeVore, psychology, economic variables, and even international affairs also affect inflation.
Nixon Takes the U.S. off the Gold Standard
For instance, the inflation of the 1970s wasn’t just about soaring federal deficits relative to GDP. When President Richard Nixon imposed wage and price controls in 1971, that discouraged domestic oil production. At the same time, Nixon took America off the gold standard.
Currency as a Harbinger of National Strength
The sustained inflationary surge crushing our financial security doesn’t just risk cutting the value of our dollar savings by almost a third, it also risks seeing the United States plunged into conflict far more deadly than the desultory wars of the past 20 years.
Your Investment Program Keyed to the Fed – By Dick Young
Former congressman and presidential candidate, Dr. Ron Paul, discusses his expectations for the Federal Reserve’s coming actions, and what investors may expect from the central bank. He writes at LewRockwell.com (abridged):
What do the Federal Reserve and neoconservatives have in common? They both refuse to admit that their policies — the neocons’ promotion of perpetual war and the Fed’s manipulation of the money supply — are complete failures, having produced the opposite of the promised results.
The latest example of the Federal Reserve engaging in Bill Kristol-like levels of denial is the Fed’s continued insistence that the return of 70s-style inflation is a “transitory” phenomenon resulting from the end of the lockdowns. The Fed has acknowledged the “transitory” inflation will last until at least 2022, yet it is still determined to keep interest rates at or near zero until the “jobs situation” improves.
To be fair, the Fed has finally announced plans to cut back on its money-pumping activities by reducing by 15 billion dollars a month its monthly purchase of 80 billion dollars of Treasury bonds and 40 billion dollars of mortgage-backed assets.
It is unlikely that the Fed will stick to its plans to “taper” its purchase of Treasury bonds. The Fed’s Treasury bond purchases enable the federal government to run up the debt without increasing taxes or paying punishingly high interest on the debt.
The Fed may also take dramatic action to keep interest rates low if other purchasers of federal debt demand higher interest rates in anticipation of future inflation. Such a situation would be a sign of what Ludwig von Mises called a crack-up boom. A crack-up boom occurs when the public anticipates continuing devaluation of the currency, causing them to factor future price increases into their economic plans.
Crack-up booms are preceded or accompanied by economic crises that can lead to the rise of authoritarianism. However, this is not inevitable. Important steps can be taken including cutting spending on militarism and corporate welfare, phasing out the entitlement and welfare programs, and auditing and ending the Fed.
Dr. Ron Paul
I Started with Gold in 1971 at $35/oz – By Dick Young
Hardika Singh of The WSJ writes, “investors are seeking greater protection from the prospect of lingering consumer-price increases”. She continues (abridged):
A three-decade high in inflation has broken gold from its long 2021 rut, a sign investors are seeking greater protection from the prospect of lingering consumer-price increases.
Most-actively-traded gold futures just notched their best week in six months, rising 2.9% to $1,868.50 a troy ounce after data showed persistent supply shortages and strong consumer demand lifting prices at the fastest 12-month pace since 1990. That data spurred bets that inflation could linger longer than Federal Reserve officials expect, driving gains in assets including Treasury inflation-protected securities and gold.
The haven metal’s surge carried it to a five-month high, ending months of sideways trading, which some analysts had taken as a sign of Wall Street sanguinity about inflation. Investors prize gold for its history as a store of value, so its stability suggested they didn’t expect inflation to erode returns in other assets.
Prices remain down nearly 10% from their record highs above $2,050, hit in August 2020, when nervous investors worried the pandemic might upend their recovering stock portfolios. Still, last week’s gain marked a sign that investors fear inflationary pressures could linger longer than initially expected, some said.
“We’re really seeing investors say, ‘Well, this inflation could be a little more sticky, so we do need to add precious metals,’ ” said Chris Gaffney, president of world markets at TIAA Bank. He is recommending clients increase their gold allocations toward the upper end of his normal 5% to 10% range.
Gold’s True Story – By Dick Young
Back in 1971, I had just started in the institutional research and trading business on Federal St. in Boston. Our firm traded and researched gold shares. I would in fact shortly be on the way to London to begin research on a lengthy gold study. This presentation by Claudio Grass published on LewRockwell.com is pretty much as I remember events, and is a great summary of the facts and events of that time. He writes (abridged):
This year marked the 50th anniversary of President Nixon’s decision to unilaterally close the “gold window”. The impact of this move can hardly be overstated. It triggered a tectonic shift of momentous consequences and it changed not just the global economy and the monetary realities, but it also shaped modern politics and severely affected our society at large.
The Nixon Shock
In July 1944, representatives from 44 nations convened in the resort town of Bretton Woods, New Hampshire, to figure out how the global monetary system should be structured after the end of the war. The US took the clear lead during these talks, exploiting the considerable leverage it had over other countries devastated by WWII or even still occupied by Germany. After all, at that point, Americans were the creditors of the world and had accumulated tons of gold throughout the 1930s and during the war, as the US was widely seen as a safe haven amid the conflict and uncertainty that prevailed at the time.
Indeed, the Bretton Woods system didn’t last long. It wasn’t fully implemented until 1958 and by the mid 60s it was already obvious that its days were numbered. The US gold stockpiles were dwindling as European central banks soon began redeeming their dollar claims, and there were real fears that US gold holdings might eventually be exhausted. Also, the Bretton Woods system, even though it was “managed” and much weaker form of the classical gold standard, did still at least partially keep government spending and deficits in check, something that Nixon resented, especially with a view to the next election.
Indeed, the Bretton Woods system didn’t last long. It wasn’t fully implemented until 1958 and by the mid 60s it was already obvious that its days were numbered. The US gold stockpiles were dwindling as European central banks soon began redeeming their dollar claims, and there were real fears that US gold holdings might eventually be exhausted. Also, the Bretton Woods system, even though it was “managed” and much weaker form of the classical gold standard, did still at least partially keep government spending and deficits in check, something that Nixon resented, especially with a view to the next election.
And yet, there were a few voices that spoke out, for common sense and Reason. As the Cato Institute outlined, “Milton Friedman wrote in his Newsweek column that the price controls “will end as all previous attempts to freeze prices and wages have ended, from the time of the Roman emperor Diocletian to the present, in utter failure.” Ayn Rand gave a lecture about the program titled “The Moratorium on Brains” and denounced it in her newsletter. Alan Reynolds, now a Cato senior fellow, wrote in National Review that wage and price controls were “tyranny … necessarily selective and discriminatory” and unworkable. Murray Rothbard declared in the New York Times that on August 15 “fascism came to America” and that the promise to control prices was “a fraud and a hoax” given that it was accompanied by a tariff increase.”
Claudio Grass is an independent precious metals advisory based in Switzerland.
Click here to read about how to invest in gold.
Gold’s 50-Year Price Explosion – By Dick Young
Part I
I was there from the start. In early August 1971, I had just joined internationally focused research and trading firm Model Roland & Co.
On 15 August 1971, President Nixon shocked the world by announcing that the U. S. would no longer officially trade dollars for gold. At that time, gold’s fixed price was $35/oz.
By 1980, gold would hit an astronomical $800/oz.
OK then, back to Model and the firm’s wonderful head partner Leo Model. From my first day onboard at Model, I started covering a bevy of major Boston institutional accounts. I was 30 years old, and I would become friends with analysts, portfolio managers and traders at Wellington Management, Fidelity Investments, First National Bank of Boston, State Street Bank, State Street Research, Endowment Management, Studley Shupert, and Keystone Management through my entire investment career on Federal Street in Boston.
I immediately realized that international trading (including gold shares and arbitrage), as well as monetary strategy and world currencies, was going to be my focus from August 1971 onward.
Five decades later, these subjects remain today my daily focus. I have been a buyer of gold, silver, and Swiss francs for decades, and I have never sold a single one of my positions.
By 1972 I was off to London on a mission for Leo Model. My job was to produce a strategy report for Model, Roland & Co on the international gold shares market. It took eight days in London to meet all the insiders with whom Mr. Model had arranged visits. Except for a single, most unpleasant glitch, (understatement) all went well.
I went on to submit a 25-page strategy report to Mr. Model. Shortly thereafter I was informed that Mr. Model had sent my report along to the firm’s chief monetary guru, one Edward M. Bernstein, one of the architects of the Bretton Woods monetary agreement.
Remember, I was 31 years old, and quite terrified to hear that EMB had been brought into the loop.
On 7 August 1972, I received the surprise of my young life: EMB wrote back on his corporate letterhead:
I think the collection of papers on gold is excellent. It seems objective and pointed. I have no suggestions. Put me on the list to get what you put out on gold.
Sincerely,
Edward M. Bernstein
Although I did not know it at the time, a year later, I would no longer be at Model, Roland.
Check back in with richardcyoung.com for my introduction Part II and the kickoff of our industry-leading precious metals, currencies, monetary madness, fed maleficence and dollar destruction weekly update.
Warm regards,
Dick
Originally posted on Young’s World Money Forecast.
William McGurn writes in The Wall Street Journal:
Biden’s Spending Gives Milton Friedman the Last Laugh
“ Milton Friedman isn’t running the show anymore.”
So declared Joe Biden in an interview with Politico in April 2020, not long before he locked up the Democratic presidential nomination. The context was Mr. Biden’s ambitions for a stimulus that would be “a hell of a lot bigger” than the $2 trillion coronavirus relief bill Donald Trump had signed. It was a curious way to invoke an economist who died 15 years ago Tuesday, but it appears to be Biden shorthand for his preference for big government action over market modesty.
Outside this editorial page and some Friedman fans such as our friends at Reason magazine, it didn’t get much attention. But Mr. Biden’s swipe at the University of Chicago monetarist may be coming back to haunt him. After only 10 months of President Biden, Americans are today facing the worst inflation in 31 years.
No doubt most people couldn’t explain M2 or quantitative easing. But they know inflation when they see it, because it hits them in their everyday lives.
It hits them when the price of heating jumps from $574 to $746, which is what the U.S. Energy Information Administration reckons it will cost to heat the average American house this winter because of the 30% hike in natural-gas prices. It hits them in the extra $20 it takes to fill up a Chevy Malibu. It will hit them at their Thanksgiving tables, with frozen turkeys going for an average 22% more than last year, according to the Agriculture Department.
All this is hard for politicians to spin. It’s also why Americans aren’t likely to have their inflation concerns alleviated by reassurances that it’ll all go away next year—often from the same people who didn’t see it coming in the first place.
Friedman called inflation a “hidden tax,” “taxation without representation.” He meant that inflation acted as a tax in a way that was both sneaky and a double whammy: The nominal increase in a worker’s paycheck pushed him into higher tax brackets even as inflation meant that what he had left bought fewer goods and services.
Once let loose, moreover, inflation becomes difficult to contain. When Federal Reserve Chairman Paul Volcker took on double-digit inflation in 1979, he cured it. But the price was 20% interest rates and a recession—and Jimmy Carter’s loss to Ronald Reagan in the 1980 election. Not a happy thought for Mr. Biden.
Though today’s inflation is nowhere near the levels of the late 1970s, the Biden-Carter analogies grow stronger. What a comedown for a man who a few months ago was hailed as a transformational president in the mold of FDR. With each day Mr. Biden, like the hapless Mr. Carter before him, seems to persuade more Americans he simply isn’t up to the job.
Mr. Carter’s fecklessness was highlighted by his inability to persuade Iran to free the American hostages it held captive over the final 444 days of his administration. And by the infamous lines at gas stations. And by the double-digit inflation that finally led him to appoint Volcker.
For his part, Mr. Biden owns a humiliating withdrawal from Afghanistan. So dysfunctional is America’s southern border that his hand-picked czar, Vice President Kamala Harris, doesn’t want to go anywhere near it. Meanwhile Mr. Biden’s latest expression of presidential resolve—a claim that inflation is now a “top priority,” which he vows to tackle “head on”—will only make him look weaker if inflation nonetheless persists.
There are other areas where Friedman’s ghost haunts the president. Probably Friedman’s most popular saying was that “there’s no such thing as a free lunch.” But Mr. Biden is now trying to sell Americans the biggest “free lunch” in history: his Build Back Better bill, which will certainly spend more than the $1.75 trillion Democrats claim.
“The fact of the matter is, my Build Back Better Agenda costs $0—and it won’t raise taxes on anyone making under $400,000 a year,” Mr. Biden claims. Friedman might have pointed out that if inflation is the problem Mr. Biden now admits it is, it’s already taxing plenty of Americans earning less than $400,000.
Then again, perhaps Mr. Biden is reconsidering. In a Nov. 10 speech at the Port of Baltimore, he invoked the humble pencil to illustrate the complexity of supply chains that combine raw materials that are then delivered to the American consumer as a finished product. It sounded like a crib from Leonard Read’s famous essay “I, Pencil,” or from a Friedman clip on the pencil from his “Free to Choose” TV series. Needless to say, both Friedman and Read went unmentioned.
Maybe the White House and its supporters are right that inflation will go away as the pandemic recedes and the supply chain sorts itself out. Mr. Biden must hope so. Because if inflation doesn’t go away, Americans are going to wish Milton Friedman really were running the show.
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