Ben Bernanke, otherwise known as Helicopter Ben today states that he is puzzled by the continued climb of gold.
“I don’t fully understand movements in the gold price,” Mr. Bernanke admitted.
What Mr. Bernanke does not seem to recognize is the extraordinary inflation pressures already in the system. The fact that asset prices are being artificially held up is price fixing and is accomplished through inflation. Gold is not reflecting immediate price inflation so much as mid to long term inflation concerns. Simply put, gold is recognizing the effects of quantitative easing on the monetary base. The Federal Reserve and central planners generally have no ability to think long term as a pool of collective consumers without coercion otherwise known as a free market do. It is debatable if manipulation of gold prices by central banks occurs or to what extent. It is definite that bailouts to preferred corporations and banks constitute economic fascism and inflate the asset value of the company receiving the infusion. This is turn coerces investors into preferred asset classes of the political class, mainly the paper equities of the otherwise failing institutions. This misallocation of capital only prolongs the misery and delays the day of reckoning. An economy can not be endlessly built on a pyramid of debt and be driven mainly by consumption. There is a point that consumers leave the game, even if employed. Households have to budget and plan; governments seem to believe they do not. Bernanke in his narrow Keynesian economic view thinks the only measure and indicators of inflation are bond yields or the manipulated CPI numbers.
Bernanke fails to see the ill effects of excessive money printing. It is generally assumed that countries with a reserve currency status or “printing press” cannot and will not default. It is also assumed that a country in such a position will avoid hyperinflation. None of these beliefs are verifiable and the concept of Stagflation refutes many of the Keynesian claims. The less obvious, but still highly destructive effect of excessive money printing is the misallocation of society’s resources. The money coming off the printing presses is in effect distributed by a political process to buy votes and to benefit powerful lobbies. This perverts free market forces and dilutes the capacity of truly productive entities to earn, keep and allocate capital. Short term, the money printing causes a boost in demand and appears to lift the economy, but long-term, the distortions it causes reduce the total output of goods and services, as capital is shunted away from productive entities towards waste and unmerited consumption. This creates an irreversible self-reinforcing downward spiral because the fact that it has worked in the short-term leads to even more money printing, and the spiral steepens. Investors and the common citizen generally understand this and also understand that any time there is more of something, the less the value. This is true in any commodity including the currency of a nation. People and thereby markets seem to understand the basics that escape the government and the Ivory Tower elite.
Western economies and Japan entered this spiral in the 1990’s and it has been steepening over the past fifteen years or so. The increased turbulence and instability we are witnessing is merely the manifestation of a path that is unsustainable, and the reality that reversing it, even if it were possible, cannot be popular or painless. Until the debt is purged from the system a real economy can not emerge. Asset deflation in the short term is an inevitability but disinflation is not. When asset prices can no longer be held up, the debt is liquidated from the system and people begin spending again all this newly created money through bookkeeping entry will pick up velocity and the fears of 1970s style or worse inflation will likely come to fruition. The question is not what asset classes are going to collapse during the needed period of deleveraging, that answer is all of them. The real question is what asset classes have the best fundamentals long term and going forward especially when high inflation does hit. The government simply can not print more gold, open up enough mines and expand the supply enough (this goes with any precious metal) to compensate for the demand due to a flight to safety when deleveraging is realized. Let us hope a Great Depression style gold grab is not the order of business in this scenario. Generally commodities are the first to truly recover from a deflationary depression and physical assets hold their value better than paper. If Ben Bernanke can not even consider pressures such as these on the price of gold he was not fit for confirmation to a second term as Fed Chairman.
By Jon Hilsenrath
Federal Reserve Chairman Ben Bernanke says he’s a bit puzzled by surging gold prices. The 30% rally from a year ago, on top of gains in previous years, might be interpreted as a loud signal from markets that big inflation pressures are building in the U.S. Gold is seen by many investors as a hedge against inflation risk.
- Bloomberg News
In this case, it might instead be a risk against risk broadly. Mr. Bernanke notes that the inflation signal isn’t confirmed by movements in other asset classes. Yields on Treasury bonds tend to rise when investors worry about inflation, but those yields have been falling recently. Inflation expectations as measured in Treasury Inflation Protected Securities (TIPS) markets remain low. And other commodity prices are falling. Gold is breaking records, but copper prices are down 17% so far this year.
“I don’t fully understand movements in the gold price,” Mr. Bernanke admitted. But he suggested it might be another example of investors fleeing risky assets and flocking to assets that are perceived as less risky, not only Treasury bonds, but also ones like gold.