As you know, the FOMC met for the last time this year on Tuesday, December 9. As you may not know, a couple of days after a FOMC meeting, the minutes of the previous FOMC meeting are released. That meeting was held on October 28, 2003, and here is a quote from a report from the New York Times on the minutes:
"WASHINGTON, Dec. 11 - Federal Reserve policy makers concluded at their October meeting that inflation could remain low until 2005 and that they should not raise interest rates until they saw concrete signs of rising prices, according to minutes of the meeting released on Thursday."
(emphasis by The Privateer's Gold This Week GTW)
Here is the record of a few prices (many more could be selected) thus far in 2003:
We guess that the Fed didn't notice these, and the many other prices we could have listed here.
But here is the price which controls ALL other prices, and its record in 2003.
As everyone who actually lives in the United States (as opposed to inside the Beltway in Washington) knows, prices of all descriptions, most notably prices for government "services" which no-one can refuse, have been storming upwards all year. The members of the FOMC have noticed this, but because most of these prices do not appear in the Consumer Price Index (CPI) or Producer Price Index (PPI), they conveniently don't appear on the Fed's radar. Judging by the minutes of the October 28 FOMC meeting just released, whatever the amount of myopia required, the Fed is determined NOT to see any "concrete signs of rising prices" until the next presidential elections are over and done with.
Here is a quote from a very fine book (now sadly out of print) called "Understanding The Dollar Crisis". The book is a compendium of a series of lectures on economics and money given by Mises student, Percy L. Greaves Jr. in June 1969. Please note the title of the book and the date of the lectures. A little over two years later, that Dollar Crisis was "resolved" by the simple expedient of cutting the last official tie between the Dollar and Gold.
"In all older books, those written fifty or more years ago, inflation was always treated as an increase in the quantity of money. Almost everyone knows who increases the quantity of money. However, those who increase the quantity of money do not want the public to know who is responsible for inflation, which everyone admits is bad. So those in high places, and their sycophants, have twisted the definition of inflation around to one of its consequences - higher prices."
Mr Greaves made this statement 34 years ago in 1969. We are now nearing the end of 2003. It has now been nearly 85 years, or more than three generations, since inflation has been treated as an increase in the quantity of money. Hence the ever accelerating and now astronomic explosion in the increase of money over those same 85 years. How else could the official debt of the US government have gone from just over $US 18 Billion to just under $US 7000 Billion over that period? In 85 years, the population of the US has increased by 200 percent. Government debt has increased by 38789 percent. 85 years is a respectable but quite achievable lifetime. My wife's mother is 94 - and still going strong.
It should not take any amount of deep thought to realise that the "traditional" definition of inflation - an increase in the quantity of money - is and has always been the correct one. Thinking further, it becomes clear that a mighty effort has been required to replace that correct definition with the "modern" one - an increase in prices. A mighty effort there has certainly been, including three generations of "education", the pressure to conform which has branched out from academe and government to envelop almost all commentators on matters financial and economic, and, especially in more recent years, a growing realisation of the dire consequences which would instantly follow if a return to the original definition gained widespread currency.
The irony of the situation, which has been building for nearly a century, is now approaching its apogee. Up until the late 1970s, it was seen as being necessary to minimise the official measurements of the increase in the quantity of money, which showed that the original definition of inflation still persisted. Since the early 1980s, it has become more and more necessary to minimise and distort the REAL increase in prices. This indicates that the replacement definition of inflation is reaching its "use by" date.
To assert that the Fed sees no concrete signs of rising prices as the FOMC minutes of the October 28 meeting does, shows that the favored definition of inflation - rising prices - has indeed outlived its usefulness. Such an assertion is ridiculous, transparently ridiculous, and worst of all, SEEN to be ridiculous.
The inexorable descent of the Dollar, despite all the pressure that can be brought to bear by the most powerful nation on earth, is evidence of this. The increasing desperation of Japanese currency intervention - the Japanese dropped $US 5 Billion IN ONE DAY this week trying to sink the Yen - is more evidence. The only remaining "hold" on the situation is actually Gold. Gold has spent the past two weeks above the 400 level in $US terms and closed on December 12 at a new 2003 high of $US 409.40. However, it has hardly moved in terms of most other major currencies and, in terms of those same currencies, it is still WELL below the highs it set earlier this year.
ANY cursory glance at the history of currency crises will show that LONG before a nation sports a government deficit and official interest rates as far out of "synch" as those now displayed by the US, that nation's currency has CRASHED in ruins. Barring a RADICAL change in direction, that fate awaits the US Dollar. Judging by the latest FOMC ruminations, there is no prospect of a change in direction, radical or otherwise.
The "trigger point" for Gold? It will come when the present illusion as described above can no longer be maintained. The Japanese cannot maintain their ridiculous level of intervention much longer. In the absence of Japan in the currency markets, the US authorities will have to choose between defending their currency - with MUCH higher interest rates - or doing nothing and watching it collapse.
If the Fed follows its stated policy, the Dollar will collapse. That collapse will inexorably push up both MARKET (longer-term) interest rates AND $US prices of all descriptions. That in turn will make Fed policy TOTALLY untenable.
If the Fed decides to change policy and acts to defend the Dollar with higher rates, they will require the assistance of the federal government. In the absence of a RADICAL reduction of government spending, a higher rate defense will not work. The problem is that 2004 is a presidential election year. Higher rates will impose increased fiscal hardship on American voters. Decreased government spending will impose increased "entitlement" hardships on those same voters. The combination is a guaranteed recipe for a defeat for the Bush Administration. Barring a financial calamity of the magnitude of 1923 Germany or the 1932 US, it ain't gonna happen.
Gold will go up if US rates are held down and it becomes clear that no attempt is to be made to defend the Dollar. Gold will go up if rates are raised, thereby making it clear that the present situation is so dire as to require such a course.
"Price" triggers for Gold? Well, the top of the last bull market, on a closing basis, was $US 414. Gold has now traded as high as $US 412 on December 10 and closed at $US 409.40 (up $US 4.80) on December 12. It's almost there. One has to go back to the late 1980s for any Gold price above $US 414. The most likely "target" for an upward acceleration of the Gold price is some point between $US 414 and $US 420