It doesn't matter where you look in the western (especially the English-speaking) world. People everywhere are aghast at what seems to be a sudden massive increase in the cost of living. And by cost of living, we mean just that - the cost of putting food on the table, of getting from point "A" to point "B" and the cost of maintaining a roof over one's head. Yes, house prices have fallen, especially in the US. But the "cost" of borrowing money to buy a house has not.
It has already become clear to many, and is quickly becoming clear to many more, that the so called "inflation measurements" put out by governments all over the world are completely ridiculous. The point that few have yet taken onboard is that they have always been ridiculous. The reason for that is simple. They try to "measure" inflation by reference to nothing but prices. The fact that the prices chosen as the units of "measurement" have been increasingly selective is beside the point in one respect. Inflation is an increase in the quantity of money - from whatever source derived. Rising prices are but one of a universe of economic and financial distortions that the practice of increasing the quantity of money brings about.
But there is another aspect in which the selectivity of the prices which will be measured to determine the level of inflation is not beside the point at all. In an economy and financial system which is, on the surface, functioning well, the majority of the new money created by goverments and their central banks with the commercial banking system as the conduit tends to flow primarily into financial assets. This is very advantageous to the powers that be, whether they reside in the legislature or in the hallowed halls of banking (central or commercial) or in the boardrooms of the big corporations.
This is because both sides of the transaction - the "money" and the financial "assets" it is chasing - can and are created out of thin air. The government creates "money" by issuing debt paper. The banks do it by the practices made possible by the fractional reserve system. And big business has long since stopped going to the banks for operating capital. Nowadays, they either create new quantities of stock or print up and sell their own debt paper. And as long as the "money" is confined within this wonderful printed carousel, all is right with the world.
Stocks, bonds, mortgage deeds and debt paper of all types and complexities have prices too, but these prices have never figured in the "inflation" calculations of any government or central bank. The amazing odyssey of the Dow climbing from 776 to 11723 points between 1982 and early 2000 was never equated with inflation. Nor was the immense increase in government debt and the fantastic piling up of other forms of debts and derivatives of debts of all descriptions which took place over the same period.
This is a primary reason why, after the travails of the "inflationary" 1970s, the global financial system based on fiat paper backed by nothing and therefore able to be created at whim by the noxious partnership of government and banking, lasted as long as it has. The vast oceans of new "money" created were channelled into financial assets. And since the US Dollar was the financial asset which "underpinned" all the rest, it was universally acceptable. Thus, the US spent the quarter century betweeen 1982 and last year progressively switching its economic output from goods to Dollars. They could do this because the rest of the world was eager to exchange their goods for these Dollars.
But now, we are facing a radically different situation. The US central bank, the Fed, is doing more than ever in its history to try to keep the monetary inflation going. But it is not succeeding to the extent necessary to keep the credit expansion going because its conduit, the commercial and especially the investment banking system, has broken down. The appetite for financial assets is no longer there - to the extent in recent days where the only place they can be "disposed of" is the central banks themselves.
The stock markets are still holding up, to an extent, but for how much longer?
All of a sudden, as far as most people are concerned, "inflation" has reared its ugly head and is now galloping ahead at speeds not even seen during the worst of the 1970s. On the contrary, "inflation" never went away. Indeed, the period since the 1970s has seen a level of inflation which dwarfs anything which took place during the 1970s. But the "money" produced by this inflation is no longer being "laundered" by the financial asset markets. To an accelerating extent, it is bypassing them and going straight into the markets for REAL GOODS. Inflation is a purely MONETARY phenomenon. To identify its source it is only necessary to identify the source of the "money". Having done that, the solution is simple. Block the source.
Gold has recovered this week. Interestingly enough, it has bounced from $US 850 - the famous January 1980 top - to a spot future close of just under $US 886 since the first day of May. As you can see on the chart below, this has led to the third upturn on the chart since it came off its $US 1000 highs in mid March. But please be assured that the financial powers that be, especially in the US, will do everything they possibly can to keep the Gold price below that $US 1000 level for as long as humanly or inhumanly possible.
The problem is that it is not possible to conjure economic goods out of thin air. Now that the Fed's desperate pumping of new money is heading in that direction, the prices of these goods are rising rapidly. But behind that, there is a much bigger problem. In the long run, it is not possible to conjure money out of thin air either, not if that money is going to retain its status as a viable medium of exchange. At this point, the harder the monetary powers that be keep trying to do it, the sooner Gold will regain that $US 1000 level. And above that, ALL bets are off.
On March 17, we added the $US 1000 "X" to this chart - and that is as far as Gold got. As you can see, Gold has descended in three large "spurts" since then, the most recent taking it all the way down below the $US 855 level - Gold closed at $US 850.90 on May 1. This week, the chart has turned up again with the close above the $US 885 level on May 9
(Chart appears here in original analysis.)
We have extended the table below into 2008, even though Gold in all four currencies in the table is now well above its 2006 highs. Gold breaking out to new all time highs in $US terms at the end of January led to bull market highs in all four currencies. And as you can see, in March, Gold improved upon those January levels in all four currencies as spot future Gold closed above the $US 1000 level for the first time ever in the middle of March. But then came the big Gold sell-off - in two stages - the second of which has now bounced from the $US 850 level reached last week.
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