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Market News Economic data is difficult to describe the truth of inflation, analysts call for buying gold to hedge
Economic data is difficult to describe the truth of inflation, analysts call for buying gold to hedge
Last week, Goldmoney Insights strategist Alasdair Macleod (Alasdair Macleod) said in a report: The root cause of the inflation problem is precisely the depreciation of the U.S. dollar and other major currencies. This so-called inflation and rising prices will cause interest rates to rise, posing a threat to the market that is undoubtedly in the bubble region. And gold may be the best choice to resist this risk.
2021-09-21
9036
McLeod believes that there is only one way to avoid this risk, and that is to hold currencies without counterparty risk. This is gold. When fiat currencies fail, gold is often more reliable. However, gold is currently ignored by almost everyone because it is anti-bubble. The more people believe in assets denominated in legal tender, the less they believe in gold. Until their "funny currency" game inevitably imploded due to the sharp rise in interest rates.
Since the third quarter of 2020, the US GDP has shown a strong recovery momentum, which has greatly increased market confidence, and it is judged that the economic recovery momentum is also strong. However, McLeod believes that GDP is only the sum of accumulated money and credit, and cannot objectively reflect the momentum of economic recovery. Such a boom may be just a funny money game that will go horribly wrong.
Figure 1 below shows the relationship between the US broad money supply (M3) and GDP over the past 61 years. There is a high degree of correlation between the two, but the difference is getting bigger and bigger. The massive inflation of money and credit, because the Federal Reserve issued a blank check to rescue the financial system, was reflected in the subsequent acceleration of M3 relative to GDP growth.
Since the financial crisis, nominal GDP has increased by 55% (to April 2021), while M3 has increased by 140%. In addition, there is an unknown level of credit creation in shadow banking. Although GDP growth has accelerated significantly under the impact of the new crown epidemic, it is surprising that GDP has not actually grown more.
Part of the reason is temporary, because it takes time from the creation of money and credit to the general circulation. Therefore, it is expected that the rapid growth of M3 in the past 18 months will further promote GDP growth. In addition, increasing money and credit are pushing up asset price inflation, especially through quantitative easing policies. Therefore, they are excluded from GDP statistics and it will take more time to affect the goods and services included in GDP.
Since GDP only reflects monetary expansion, we can draw the conclusion that under the excessive growth of money and credit, regardless of the subsequent monetary policy, unless for some reason, money and credit will shrink suddenly and sharply, then GDP is still in the balance. The foreseeable future will continue to rise. But considering that the Fed clearly believes that GDP means economic conditions, we can be sure that the result of a sudden and sharp contraction in money and credit will not be allowed.
Since GDP only reflects the amount of money and credit in the economy, it is meaningless to use a price index to curb economic expansion. It is only consistent with the belief that the change in the quantity of money is almost or completely independent of the price.
On the contrary, the recovery of gross domestic product (GDP) after the COVID-19 pandemic is hailed as evidence of the successful management of the economy by the monetary authorities. But they use the price index to measure inflation, which will bring a huge trouble. We have noticed that the annualized increase in CPI in August has risen to 5.3%. Therefore, the Fed believes that this increase is temporary, and the statisticians of the Bureau of Labor Statistics are more and more hopeful that it can be controlled. Slim.
The general level of price is just a concept, so it cannot be measured. Independent statistical analysis from Shadowstats.com highlights the shortcomings of the CPI statistical method, which is to generate a competition index after removing all statistical modifications introduced since 1980 to reduce data. Current data shows that the unadjusted annualized price increase is more than 13%. It is undeniable that even the official price increase is now out of the 2% management level.
Changes in monetary value cannot be defined by recording changes in the size and weight of objects. In any case, the price index is a collection of historical prices, with little connection to the future. To use it as the basis of monetary policy is to make the same mistake, that is, to assume that GDP growth is evidence of economic growth.
The impact on interest rates and financial markets.
Speeding up the printing of money has led to inflation as judged by the current market. These are not so-called price increases, they are the result of monetary expansion. In general, rising prices are nothing more than currency devaluation. And a currency devaluation will inevitably lead to an increase in interest rates, just like the day after night. Higher interest rates lead to a decline in the value of assets. In turn, central banks of various countries have been trying to eliminate the uncertainty of the free market and have strictly controlled interest rates. Believing in their own propaganda, central bankers themselves are completely attracted by this funny currency game.
It's not just the Federal Reserve. All major central banks are plagued by similar illusions about currency, or rather, the central bank’s management of currency no longer has the simple goal of controlling purchasing power. On the contrary, money and credit have become important tools for funding excessive government spending. Leaders such as Biden and Johnson (Boris Johnson) will face tasks that rapidly escalate social responsibilities, such as pensions and health care and have nothing to do with the covid crisis. The establishment is fully committed to currency depreciation in order to fund the country’s growing income needs. This needs to cover up the real situation, which is why Powell and his colleagues in the central bank are encouraged to ignore the connection between currency expansion, credit expansion, and prices.
The situation in the United Kingdom is similar to that in the United States. The most extensive monetary indicator (M4) exceeds GDP, which is worrying. Figure 2 shows this. It is based on 1993. After the Big Bang in the mid-1980s, the financialization of banks will begin to affect the relationship between bank loans and GDP.
Research on the true relationship between money, credit, and the economy strongly suggests that price inflation shocks are still at an early stage. These factors are expected to lead to a general unexpected decline in the purchasing power of the US dollar. We have further noted that major central banks have adopted similar monetary policies, which will have similar consequences.
Interest rates must rise, and the dollar and pound interest rates must rise sufficiently to stabilize these currencies if they do not collapse completely. But at this critical moment, we are more concerned about the impact of legal currency on the value of financial assets, rather than the ultimate future of legal currency.
The yield of fixed-rate Treasury bonds will rise sharply, which means that prices will fall. Higher interest rates and bond yields will in turn hurt the value of stocks. In view of the existence of bubbles in the value of financial assets, we can expect a substantial depreciation of risky assets.
The monetary countermeasures of central banks will try to prevent the market from falling sharply for three reasons: Central banks have promised to finance government deficits, and rising government bond yields hinder this goal. They believe that active financial markets are essential to maintaining the public’s economic outlook. Their confidence is crucial; they are keenly aware that falling asset prices are likely to trigger banks to accelerate the liquidation of collateral, a theory put forward by Irving Fisher after the Great Depression in the 1930s.
Figure 3 shows the relationship between the US dollar gold price and the US M3 money supply. The gray line shows the difference between the two. The gold price currently displayed is 42% lower than the price at the time of the Lehman crisis.
In general, the acceleration of monetary expansion can be expected to lead to an increase in the price of gold. Although M3 has grown substantially in the past 18 months, gold has been left behind. Because only when people have the highest and sustained confidence in asset values and currency prospects, the current financial asset bubble and interest rates will remain in the zero range. In other words, when there is a financial bubble, gold can be regarded as an anti-bubble, so it will inevitably become obsolete.
After the Lehman crisis broke out, the price of gold rose to $1,925 per ounce, amid growing concerns about the global banking system. Compared with the trajectory of M3, when the premium of gold was 40%, we can now say that the possibility of discounting currency inflation is too great without an uncontrollable financial crisis. Today, its discount rate is 42%, which shows that optimism about the fiat currency system is similar to but opposite to 2011.
Once the financial asset bubble bursts due to rising interest rates, it will be beyond the control of the Federal Reserve. At the same time, the large discount to the relative growth rate makes gold seem unusually undervalued. In the face of such risks, the only reliable way to completely isolate yourself from it is to invest in physical gold that has no counterparty risk.
GDP growth may not necessarily reflect economic recovery, M3 expansion GDP is expected to continue to rise
Since the third quarter of 2020, the US GDP has shown a strong recovery momentum, which has greatly increased market confidence, and it is judged that the economic recovery momentum is also strong. However, McLeod believes that GDP is only the sum of accumulated money and credit, and cannot objectively reflect the momentum of economic recovery. Such a boom may be just a funny money game that will go horribly wrong.
Figure 1 below shows the relationship between the US broad money supply (M3) and GDP over the past 61 years. There is a high degree of correlation between the two, but the difference is getting bigger and bigger. The massive inflation of money and credit, because the Federal Reserve issued a blank check to rescue the financial system, was reflected in the subsequent acceleration of M3 relative to GDP growth.
Since the financial crisis, nominal GDP has increased by 55% (to April 2021), while M3 has increased by 140%. In addition, there is an unknown level of credit creation in shadow banking. Although GDP growth has accelerated significantly under the impact of the new crown epidemic, it is surprising that GDP has not actually grown more.
Part of the reason is temporary, because it takes time from the creation of money and credit to the general circulation. Therefore, it is expected that the rapid growth of M3 in the past 18 months will further promote GDP growth. In addition, increasing money and credit are pushing up asset price inflation, especially through quantitative easing policies. Therefore, they are excluded from GDP statistics and it will take more time to affect the goods and services included in GDP.
Since GDP only reflects monetary expansion, we can draw the conclusion that under the excessive growth of money and credit, regardless of the subsequent monetary policy, unless for some reason, money and credit will shrink suddenly and sharply, then GDP is still in the balance. The foreseeable future will continue to rise. But considering that the Fed clearly believes that GDP means economic conditions, we can be sure that the result of a sudden and sharp contraction in money and credit will not be allowed.
CPI rose to 5.3% but still failed to objectively guide the future trend of prices
Since GDP only reflects the amount of money and credit in the economy, it is meaningless to use a price index to curb economic expansion. It is only consistent with the belief that the change in the quantity of money is almost or completely independent of the price.
On the contrary, the recovery of gross domestic product (GDP) after the COVID-19 pandemic is hailed as evidence of the successful management of the economy by the monetary authorities. But they use the price index to measure inflation, which will bring a huge trouble. We have noticed that the annualized increase in CPI in August has risen to 5.3%. Therefore, the Fed believes that this increase is temporary, and the statisticians of the Bureau of Labor Statistics are more and more hopeful that it can be controlled. Slim.
The general level of price is just a concept, so it cannot be measured. Independent statistical analysis from Shadowstats.com highlights the shortcomings of the CPI statistical method, which is to generate a competition index after removing all statistical modifications introduced since 1980 to reduce data. Current data shows that the unadjusted annualized price increase is more than 13%. It is undeniable that even the official price increase is now out of the 2% management level.
Changes in monetary value cannot be defined by recording changes in the size and weight of objects. In any case, the price index is a collection of historical prices, with little connection to the future. To use it as the basis of monetary policy is to make the same mistake, that is, to assume that GDP growth is evidence of economic growth.
The impact on interest rates and financial markets.
Speeding up the printing of money has led to inflation as judged by the current market. These are not so-called price increases, they are the result of monetary expansion. In general, rising prices are nothing more than currency devaluation. And a currency devaluation will inevitably lead to an increase in interest rates, just like the day after night. Higher interest rates lead to a decline in the value of assets. In turn, central banks of various countries have been trying to eliminate the uncertainty of the free market and have strictly controlled interest rates. Believing in their own propaganda, central bankers themselves are completely attracted by this funny currency game.
It's not just the Federal Reserve. All major central banks are plagued by similar illusions about currency, or rather, the central bank’s management of currency no longer has the simple goal of controlling purchasing power. On the contrary, money and credit have become important tools for funding excessive government spending. Leaders such as Biden and Johnson (Boris Johnson) will face tasks that rapidly escalate social responsibilities, such as pensions and health care and have nothing to do with the covid crisis. The establishment is fully committed to currency depreciation in order to fund the country’s growing income needs. This needs to cover up the real situation, which is why Powell and his colleagues in the central bank are encouraged to ignore the connection between currency expansion, credit expansion, and prices.
The situation in the United Kingdom is similar to that in the United States. The most extensive monetary indicator (M4) exceeds GDP, which is worrying. Figure 2 shows this. It is based on 1993. After the Big Bang in the mid-1980s, the financialization of banks will begin to affect the relationship between bank loans and GDP.
Research on the true relationship between money, credit, and the economy strongly suggests that price inflation shocks are still at an early stage. These factors are expected to lead to a general unexpected decline in the purchasing power of the US dollar. We have further noted that major central banks have adopted similar monetary policies, which will have similar consequences.
Interest rates must rise, and the dollar and pound interest rates must rise sufficiently to stabilize these currencies if they do not collapse completely. But at this critical moment, we are more concerned about the impact of legal currency on the value of financial assets, rather than the ultimate future of legal currency.
The yield of fixed-rate Treasury bonds will rise sharply, which means that prices will fall. Higher interest rates and bond yields will in turn hurt the value of stocks. In view of the existence of bubbles in the value of financial assets, we can expect a substantial depreciation of risky assets.
The monetary countermeasures of central banks will try to prevent the market from falling sharply for three reasons: Central banks have promised to finance government deficits, and rising government bond yields hinder this goal. They believe that active financial markets are essential to maintaining the public’s economic outlook. Their confidence is crucial; they are keenly aware that falling asset prices are likely to trigger banks to accelerate the liquidation of collateral, a theory put forward by Irving Fisher after the Great Depression in the 1930s.
Once risky assets break down, gold may be able to withstand risks
Figure 3 shows the relationship between the US dollar gold price and the US M3 money supply. The gray line shows the difference between the two. The gold price currently displayed is 42% lower than the price at the time of the Lehman crisis.
In general, the acceleration of monetary expansion can be expected to lead to an increase in the price of gold. Although M3 has grown substantially in the past 18 months, gold has been left behind. Because only when people have the highest and sustained confidence in asset values and currency prospects, the current financial asset bubble and interest rates will remain in the zero range. In other words, when there is a financial bubble, gold can be regarded as an anti-bubble, so it will inevitably become obsolete.
After the Lehman crisis broke out, the price of gold rose to $1,925 per ounce, amid growing concerns about the global banking system. Compared with the trajectory of M3, when the premium of gold was 40%, we can now say that the possibility of discounting currency inflation is too great without an uncontrollable financial crisis. Today, its discount rate is 42%, which shows that optimism about the fiat currency system is similar to but opposite to 2011.
Once the financial asset bubble bursts due to rising interest rates, it will be beyond the control of the Federal Reserve. At the same time, the large discount to the relative growth rate makes gold seem unusually undervalued. In the face of such risks, the only reliable way to completely isolate yourself from it is to invest in physical gold that has no counterparty risk.
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