Grant Williams submits his latest weekly thoughts on the big picture.
February 2012 finds the world in its own timeloop as we remain trapped in our very own Groundhog Day watching politicians try endless new and inventive ways to ‘fix’ a simple problem of way, WAY too much debt. It isn’t complicated. The world grew fat and happy on the sugar rush provided by a decades-long injection of cheap and easy credit and now it’s time for the crash diet. Trying to avoid the ‘crash’ seems to be uppermost in everybody’s mind.
Since 2008 and the bursting of the great credit bubble, central banks have been printing money hand over fist in a desperate attempt to generate the inflation they feel is necessary to drag the world out of a perceived deflationary spiral. The chart (left) shows the growth in ‘assets’ of G-3 Central Banks over the last 17 months alone, during which time, they have increased by 32%.
To date, the level of the various benchmark CPI indicators would suggest there have been no deleterious effects, but just because the results aren’t showing up where those in charge of measuring them are LOOKING, doesn’t mean they aren’t showing up at all.
Look at food prices across Asia. Look at housing prices in Hong Kong. Look at fuel prices in Nigeria. Look at heating costs in the UK.
Look at gold.
Targeting inflation is a dangerous game to play because - well, because it is impossible. You cannot target ‘inflation’ per se, only a specific measure of a specific collection of items, and the wider that collection of items is, the harder you make it for yourself. But despite what seems fairly obvious to many - namely that ‘inflation’ cannot be finely controlled by setting interest rates (though, if caught in time and tackled aggressively enough it can sometimes betamed as Paul Volcker demonstrated), the minds in charge of setting policy have a peculiar attitude towards something that is so imprecise and so multi-faceted. The general level of certainty surrounding interest rate policy, quantitative easing and inflation amongst Central Bankers is a constant source of amazement to me.
The playbook for the game we are playing now was drawn up a long time ago and we can’t say we weren’t shown what lay between the covers.
As far back as November 2002, when Bailabankout Ben made his seminal speech to the National Economists’ Club, we were told how this was going to play out.
Firstly, the title:
Deflation: Making Sure “It” Doesn’t Happen Here
‘Sure’? Hard to see how you can be ‘sure’ Ben, but OK.
Secondly, this famous nugget with which most of you are no doubt familiar:
“The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning.”
‘Always’. ‘Basic economic reasoning’.
Thirdly, the big one:
...the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation...
And finally, this little nugget
If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation.
Three quotes. Three uses of the word ‘always’.
If something is ‘always’ guaranteed to work, you just keep doing it until you get the result you expected, right.
The inflation warning light that is built into the gold price has been flashing non-stop for eleven straight years and, after the short-lived and, yes I’ll say it, somewhat suspicious-looking correction in December, gold has resumed its inexorable march higher this year amidst a wave of predictions for both high and higher prices and further inflationary action by the ECB in the form of the LTRO along with consistent and concerted talk of the need to generate inflation by the world’s other Central Banks.
(Incidentally, the recent announcement by the FOMC that they would keep their low rate policy for ANOTHER year - out to 2014 - struck me as incredibly strange. The only possible reason for doing that, in my mind at least, would be to fire a shot across the bow of other Central Banks hell-bent on debasing their currencies in the face of a strengthening dollar. That is NOT something Bailabankout Ben is about to sit quietly and let happen. In fact, a case could be quite easily made for QE3 being not necessarily triggered by poor economic numbers, but by a strengthening dollar - but more of that another time).
Gold is most certainly NOT signalling a nice 2% rise in inflation as its gains since 2000 demonstrate.
Full latest TTMYGH report below (pdf):