On December 13, it was revealed that in November, US wholesale prices rose by 3.2 percent. This sounds like a lot, and it most certainly is. The report went on to say that this was the biggest monthly rise since August - NINETEEN SEVENTY-THREE! Yep, that's a little over thirty-four years ago at the dawn of the global fiat currency era.
Don't forget, this number was announced by the US Labor Department less than two days after the FOMC met and decided to LOWER official US rates, with the Fed Funds and the Discount rates each having 0.25 percent shaved off them. Is there ANYBODY out there who does not think that the Fed officials at that FOMC meeting knew all about this number BEFORE they decided to lower rates?
Of course they did. But it is not the function of FOMC officials, or anybody else charged with the stewardship of the modern global financial system, to worry about mere "price stability" when "liquidity" in the system has frozen solid. This is serious. As Mr Jim Grant so cogently pointed out in a recent Reuters article: "The word 'liquidity' is a phony word that sounds sophisticated. It clearly means money, money that is being materialised out of thin air through the actions of the central banks." Mr Grant is admirably precise here, although it must be added that up until recently, the commercial banks have been an indispensible "partner" in this endeavor.
The core of the problem represented by the current "credit freeze" is that the commercial banks are no longer playing the game, simply because they don't dare to. In "normal" times, one of the most important means of creating money out of thin air is having it lent into existence by the commercial banks. Of course, the Central Banks have other methods, all of which have been pressed into overdrive since August. Further, this week the Central Banks announced brand new methods of keeping the "liquidity" flowing at least until the end of the year.
The problem is that with commercial banks all over the world neither borrowing nor lending, the prime means of INFLATING - increasing the total stock of money - has siezed up. In a global system which measures economic "growth" primarily by tallying up how much "money" is borrowed and spent, this is disastrous. In a global system which measures "wealth" primarily by adding up the nominal "valuations" of financial assets (debt paper) of all descriptions, this is potentially catastrophic. How potentially catastrophic? Well, just take a look at the "new measures" announced by the major western Central Banks this week. We have MUCH more to say on this topic in the Mid December (#593) issue of The Privateer, published on December 16.
Since the credit freeze hit in August, Central Banks everywhere have been INFLATING - increasing the total stock of money" - at a rate never seen before. Now, the EFFECTS of this inflation are coming out, as witness the quantum leap in November US wholesale prices announced this week. It was only a matter of time before no amount of statistical manipulation would be enough to keep this quiet anymore. The time is now up.
Actually, the $US Gold price is down a mere $US 1.10 from where it was last Friday (December 7). But over the last two days of the week just ended, it has plummeted by $US 20.20. The catalyst was the December 12 announcement of the co-ordinated actions of the Fed, the Bank of Canada, the Bank of England, the ECB and the Swiss Central Bank. Since then, the Gold price has plummeted - DESPITE the huge price rises announced. The US Dollar, as measured by the USDX, has soared - DESPITE the huge price rises announced. World stock markets have had another attack of the vapours. Short-term interest rates have not budged from their positions up to 100 basis points above official rates.
More ominous still, the yields on US government debt are inexorably rising and have been doing so ever since the Fed's rate cut on December 11. If a risk premium is starting to be built in to the yield on Treasury debt paper, the situation is about to get a LOT worse than it already is.
And what is the "reason" given for this sudden dive in the Gold price and surge in the US Dollar in the wake of the Central Bank plans announced on December 12 and the huge jump in US wholesale (and retail) prices? Simple, the "analysts" have concluded that the Fed might not be cutting rates any further after all in the New Year. That's all it took for Gold to swoon and the US Dollar to soar, the latter primarily on a massive wave of short covering, at least so far.
In reality, inflation has been rampant in the US and throughout the world for decades past. What has kept it "acceptable" is the simple fact that up until recently, the prices which rose as a result of this inflation were almost all the prices of financial (paper) assets. Between 1982 and 2000, for example, the Dow went from less than 780 to more than 14000. Now, a vital part of the system, commercial bank lending and borrowing, has siezed up. Central Banks are trying to compensate with ever larger doses of "liquidity" but they are losing control of MARKET interest rates in the process. This is precisely what happened in the 1970s, only this time the scale is VASTLY larger. Gold is certainly a political metal, and there has seldom been a better illustration of that fact than Gold's "price action" since it threatened its $US 850 all time high in early November.
Right now, the powers that be in the financial community are praying that they can get through the rest of THIS year without a financial explosion. They might just make it. But there's no way they can get through the rest of NEXT year in similar fashion. Remember, RISING interest rates ALWAYS reflect an increased perception of risk. We now have the first indications that this risk perception is starting to invade the market for US Treasury debt paper. The indication is simple. On December 14, the Dow fell almost 1.5 percent. In normal times, a US stock market fall of this magnitude would invariable result in lower yields in the Treasury market as investors swapped stocks for bonds. On December 14, that didn't happen, Treasury yields were up.
If this continues, it is the last straw. And once there is no more "quality" in the paper markets to fly to, there will only be one remaining destination. That's Gold and REAL economic goods.
|