The Inflation Versus Deflation Argument - Part 1

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

One of the Federal Reserves two major purposes is to provide price stability for the American economy, a goal they chose to abandon in September 2007. While the Fed's interest rate policies after that time were highly inflationary, Fed officials excused their actions by denying that inflation was a problem, making rosy predictions that it would subside, and by assuring the public that they were capable of handling it and taking care of it in case it became a problem. None of this was true of course and the Fed's position increasingly lost credibility as gasoline and food prices skyrocketed in the U.S.

The Fed's biggest cover for its actions was the official inflation figures produced by the U.S. government statistical agency, the BLS (Bureau of Labor Statistics). The method of calculating the CPI (Consumer Price Index) was modified several times during the 1980s and the 1990s, with each modification producing a lower reported inflation number. Essentially these modifications involved reducing the importance in the CPI calculations of anything that was experiencing significant prices rises, thereby automatically lowering the final reported inflation numbers. It was hard for significant inflation to show up in the official government figures given this approach. By May of 2008, year over year CPI was only 4.2% in the U.S. despite rapidly rising energy and food prices during that period.

Recalculating CPI using the 1970s methodology indicated U.S. inflation was more likely around 12% (for more info: http://www.shadowstats.com/), almost as bad as it had been at its height in 1980. It became increasingly hard to convince the public otherwise, when the average U.S.consumer saw regular price increases at the gas pump and in the supermarket. Nevertheless, U.S. media continued to dutifully report the unrealistic official inflation figures as if they were true, helping the Federal Reserve perpetuate the fantasy on which it based its irresponsible monetary policy.

While the Federal government altered inflation calculations to produce the desired numbers in order to fool the general public about current inflation, lying about future inflation could not be done so easily. The augurs of where inflation was going, the money supply, are generally only looked at by the financially sophisticated. To solve this problem, the Federal Reserve simply stopped publishing the broad M3 money supply figures, the most telling number series of all, in 2006. Since many people realize that when a government hides information, its almost always information that would be particularly damaging if known, attempts to reconstruct M3 by private parties began immediately. By the spring of 2008, the reconstructed figures indicated that M3 was growing at approximately 20% (MZM, zero money, or cash and its equivalents was growing at an over 30% rate). The money supply figures indicated that U.S. consumer inflation was likely to peak at a minimum of 20% to 30% sometime around 2011. Depending on future readings, much higher inflation levels were possible.

The U.S. government's long-term misinformation campaign about inflation rates and its secrecy concerning money supply figures apparently didn't provide enough cover for the Federal Reserve. One group of apologists for the Fed (and the Fed had a legion of apologists who were feeding off the easy money gravy train that it was providing them at the expense of the American public) began publishing arguments about the risks of deflation in the U.S and how this justified an even easier money policy. Claiming that deflation actually existed in a period when inflation was getting out of control was by no means a new idea. It was in fact a prelude to some of the worse inflationary episodes in history.

NEXT: The Inflation Versus Deflation Argument - Part 2

For notes related to this talk, please see, 'Inflation vs Deflation Argument' at:
http://investing.meetup.com/21/Files

Daryl Montgomery,
Organizer, New York Investing meetup

For more about us, please see our web site: http://investing.meetup.com/21

Gold, Silver, Oil, and Stocks - Spring 2008

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Please see our video related to this entry: Gold, Silver and Oil - March 2008
http://www.youtube.com/watch?v=wVpcdxh1Jv8


Gold and silver both had price lows in mid-August of 2007, with gold around $640 an ounce and silver just under $11. Both started a long rally just as the U.S. Federal Reserve began it's rate lowering campaign by dropping the discount rate on August 17th. Rallies in gold and silver indicate that the Fed has set interest rates too low and its interest rate policy is inflationary. Gold and silver both did indeed rally during almost the entire period when the Fed lowered rates sending a clear message about the inflationary implications of the Fed's actions (clear to almost everyone but the Fed that is).

Since the Fed was in a race against time to prevent a recession in a presidential election year and it takes about six months for a Fed rate cut to have full impact on the economy, it was quite predictable that the Fed would be finished lowering rates by March 2008 (only one additional quarter point drop took place after that) and the gold and silver rally might end (temporarily) around that time.

Gold and silver both peaked at the time of the Fed's March meeting and began selling off immediately thereafter. Gold had psychological resistance at $1000 an ounce (a nice round number that many traders were looking for it to reach and where they planned to sell once it did). It hoovered around this level for several days and actually reached 1033 in overnight trading before the selling began. Silver, like gold, was technically overbought and even more overextended on the charts making it even more vulnerable to a sell off. Both gold and silver dropped sharply. Within only 3 days, silver lost 20% of its value.

Oil (Nymex light-sweet crude) followed a different pattern from the precious metals. It had psychological resistance at 100 and got stuck around this level in November and December of 2007. It finally broke through the 100 level in February 2008 and rallied into July until it got just over $147. While oil was rallying, gold and silver sold down in a choppy fashion until they
hit a price low in the beginning of May.

The notes for our talks on this subject can be found at: http://investing.meetup.com/21/files
1. Gold, Oil, Silver, and Stocks - March 2008
2. Gold, Silver, and Oil - April 2008

NEXT: The Inflation Versus Deflation Argument - Part I

Daryl Montgomery
Organizer, New York Investing meetup

For more about us, please see our web site: http://investing.meetup.com/21

Gold, Silver and Oil - Basics of Price Movements

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

The Fed's easy money campaign that began in August 2007 started when the U.S. dollar was hoovering just above its historical low. It was inevitable that lowering interest rates at that time would weaken the dollar till it hit a new all-time low and once this happened how far the dollar would fall would not be predictable and stopping its fall would prove to be difficult. Since commodities are priced in dollars and gold and silver move opposite to the dollar, a new rally phase began for oil, gold and silver.

Price movements for oil, gold and silver usually do not take place simultaneously, but in sequence. Oil tends to move first and since it has such a strong impact on inflation, people then bid up gold because prices are rising and the U.S. dollar is falling. Gold is being purchased during this time because it is seen as a monetary substitute that will retain its value unlike paper currency. Since gold is the preferred monetary substitute, its price moves up first. When the gap becomes too big in the price between gold and silver, the price of silver, the second choice for 'real' money, then starts to rise.

The value assigned to gold and silver as monetary substitutes is minimal during periods of steady prices, but this aspect overwhelms their pricing during periods of high inflation and their value for jewelry and industrial purposes can become almost irrelevant. Nevertheless, analysts and financial 'pundits', continue to estimate reasonable prices for the precious metals as if their functional uses were the only source of their value. This approach will have worked successfully during the as much as 20 years of steady prices that precede an inflationary period, so it is continued even though a period of rising inflation has begun. During this period, gold and silver appear to become increasingly overvalued based on the exclusively non-monetary price calculations of analysts. The claims that the precious metals are overvalued become widespread and shrill in articles with charts 'proving' they are overvalued. The vested interests, such as jewelery makers, who want the prices of gold and silver to come down because high prices are affecting their profits are behind much of the news warning investors against buying 'overpriced' gold and silver.

It is highly likely if not inevitable that oil, gold, and silver will experience price bubbles once inflation starts rising. The cries that they are in a bubble will first occur years before the actual end of the bubble and it's blow off phase when prices explode upward. By the spring of 2008, claims that gold was in a bubble as it's price reached a $1000 an ounce were already being heard. Late in the spring, as oil soared way past $100 a barrel the same was being said about it. Experts on bubbles were wondering when in the decade of 2010 and 2020 these bubbles would actually end.

NEXT: Gold, Silver and Oil - Spring 2008

Daryl Montgomery

Organizer, New York Investing meetup

For more about us, please see our web site: http://investing.meetup.com/21