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Price Inflation on the Horizon

November 4, 2009 by  

Price Inflation on the Horizon

As we noted last time in Gold Defying Expectations…and Gravity, we’ve seen gold and U.S. stocks marching in lockstep, in perfect opposition to the moves of the dollar.

So why does a weaker dollar translate to strength in gold and equities? Because, on balance, a weaker dollar is a lubricant for a U.S. economy saddled with debt and low growth. It eats away at debts; it helps boost trade, and generally makes for a more ebullient economic environment.

But I believe that one of the primary reasons behind this relationship has escaped most analysts. Namely, the fact that economic growth will help burst open the dam holding back enormous U.S. bank reserves.

Investors are watching closely for any signs of an economic recovery because such a recovery could unlock the U.S. credit market… and unleash a flood of liquidity that—so far—remains safely dammed.

U.S. bank excess reserves have skyrocketed to truly unprecedented levels. (Essentially, excess bank reserves are reserves on deposit with the Fed over and above what the bank needs to meet its reserve requirements.)

Now, these reserves don’t impact the money supply—as long as they aren’t loaned out by the banks and thereby put into commerce. And these funds by and large have not yet been put into commerce, and therefore have had no effect on the supply of money or the prices of goods and services.

That may not last for long, however, as economic growth in the U.S. would, eventually, lead banks that are now risk-averse to begin lending. This, in turn, could quickly burst the dam holding back the enormous excess reserves of the U.S. banking system.

Some argue that the Fed’s newly gained power to pay interest on banks’ reserves will forestall any unwanted increase in lending. In practice, however, this will have little effect, unless the Fed is willing to pay interest at rates far above the Fed funds target rate.

As Frank Shostak, chief economist of M.F. Global, notes, “We… suggest that paying interest on bank reserves is not going to stop banks from expanding credit… After all, there are always opportunities to lend money at much higher interest rates than the federal-funds rate.

“We can thus conclude that the massive increase in banks’ excess reserves is a potential threat for an explosive credit creation some time in the future. Contrary to popular thinking, we suggest that the new setup, which gives the Fed total freedom to pump money, can only destabilize the financial system and the economy.”

Of course, this isn’t the last word. Only time will tell how we exit the precarious monetary situation that the crisis, and the Fed’s response to it, have created.

But those who argue that the Fed will be able to mop up the massive liquidity they’ve poured onto the economy ignore the fact that this institution, and governments in general, have never been able to escape from a monetary expansion without significant inflationary after-effects.

And because the Fed is now treading new ground in many ways, they cannot rely on past experiences to clearly guide them.

If we pull back from the economic intricacies and simply look at the big picture, does it seem remotely feasible that the U.S. and the world can employ such monetary and debt expansion without considerable inflationary consequences?

While I have many reasons to be doubtful that we’ll see 70s-era price inflation as measured by the consumer price index (CPI), I am absolutely confident that we will see price inflation in commodities and other assets.

And that will be good news for investors in gold and resource stocks.

Fed Admits Hiding Gold Swap Arrangements
Our friends at the Gold Anti-Trust Action Committee (GATA) have scored another huge coup. In response to a freedom-of-information (FOI) request, the Fed has essentially admitted that it has gold swap agreements with foreign banks that it doesn’t want publically acknowledged.

GATA had requested from the Fed any information or correspondence on gold swaps, which are transactions in which monetary gold is temporarily exchanged between central banks or between central banks and bullion banks.

But GATA’s request was denied, and the organization’s appeal was answered by a Sept. 17 letter from Federal Reserve Board member Kevin M. Warsh, who was formerly a member of the President’s Working Group on Financial Markets.

Warsh wrote that, “In connection with your appeal, I have confirmed that the information withheld under Exemption 4 consists of confidential commercial or financial information relating to the operations of the Federal Reserve Banks that was obtained within the meaning of Exemption 4. This includes information relating to swap arrangements with foreign banks on behalf of the Federal Reserve System and is not the type of information that is customarily disclosed to the public. This information was properly withheld from you.”

As GATA secretary and cofounder Chris Powell notes, “The disclosure contradicts denials provided by the Fed to GATA in 2001 and suggests that the Fed is indeed very much involved in the surreptitious international central bank manipulation of the gold price particularly and the currency markets generally.”

GATA has the right to further appeal through the legal system, and plans to do exactly that. A federal lawsuit will be quite expensive, but well worth it for gold investors who need market transparency to unlock gold’s true value in today’s uncertain world.

As you may know, I’ve never been a big believer in day-to-day manipulation of the gold market by the “powers that be.” But I do believe that governments have and are acting over the long term to keep gold in chains. They’ve done it before, both covertly and openly. And they currently manipulate every other investment market. So why wouldn’t they also do it in gold, the very measuring gauge of their performance?

So I urge all serious gold and resource stock investors to help GATA out. It’s not just their cause—it’s a cause for all of us. GATA is recognized by the U.S. Internal Revenue Service (IRS) as a nonprofit educational and civil rights organization and contributions to it are federally tax-exempt in the United States.

Just as important, you can help by bringing this issue to the attention of news organizations and other investors. With the U.S. dollar at a crucial turning point, and with the International Monetary Fund (IMF) and other official organs needing to keep the gold price suppressed, it has never been more important to make the gold market open, transparent and honest again. To learn more about GATA, this issue and how to donate, visit

—Brien Lundin

Brien Lundin

is the editor and publisher of Gold Newsletter, a publication that has ranked among the world's leading precious metals and resource stock advisories since 1971. To learn more about Gold Newsletter, visit Mr. Lundin is also the host of the famed New Orleans Investment Conference, the world's oldest and most respected gold investment event. To learn more, visit

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  • DaveH

    Excellent article Brien. Thank you.
    I would like to add to your statement – “And that will be good news for investors in gold and resource stocks”. And it will be bad news for holders of large cash accounts.
    It is amazing to me that the agency chartered to create our money can operate in secrecy. It’s time the people raise some hell to stop that secrecy.

  • s c

    Dave H, the Fed does very little ‘out in the open.’ It’s not that kind of an organization. NEVER forget that the Fed is a PRIVATE CORPORATION. Isn’t it curious that the legions of compassionate yahoos who HATE corporations don’t have anything to say about the Fed? Can you say HYPOCRISY and UTTER IGNORANCE?
    According to one of my better info sources, the Fed’s reliance on fractional reserve banking is responsible for ALL of the financial disasters in the US in the past 50 years. Ask an ultraliberal about that topic. Don’t be surprised if you get a blank stare or proof that economics has a very low priority on their priority list. So much for compassion and the REAL value of public education, eh?

  • Richard Pawley

    Gold is simply money, and money is only good for what you can buy with it. In a collapsed economy you may be able to spend gold on things you really need but who can guarantee that such things will be available? Now I have no doubt that gold will go up another six hundred or but with only a 30 day supply of food in the world at the present time can anyone ignore having a good supply of food in their pantry or cupboard. I would still recommend gold for any excess money you have (not a problem I have) but as I did in my latest book I recommend non-perishable food even more. The same month last spring that I submitted my manuscript to the publisher I purchased a case of canned dried banana chips. Since then the value of the dollar has dropped 12-13% and guess what, those banana chips now cost 12-13% more. I could also quote other things that are going up as fast as the dollar goes down, things I actually use. Anything imported will HAVE to go up as the dollar drops in value and although I don’t have the current figures when I advised those who read my first book three years ago to buy gold when it was $600 it was 57% of all we used. How can prices on everything NOT GO UP? Sure there is competition and price cutting (so called deflation) but if someone sells you a $100,000 house for $700,000 and it goes way down the talking heads will say, “we have deflation”. Well, I could say “Hogwash” but I will say that that house was not worth $700,000 to begin with. I saw it and I would not have given $150,000 for it. Those things that were to high to begin with are going down, and those that are in scarce supply, gold, food, oil, will continue to go up. Houses may someday too, but not any time soon. All financial bubbles pop and until food reaches the price of a loaf of bread for a days wage it has not reached it’s top. My advice buy some non-perishable food that you will really eat and begin to think like the pioneers did 150 years ago. They had to keep enough food to last the winter as there were no supermarkets. I can remember when there were no shopping malls as a kid and when the first one was built in Columbia, SC. My mom tells me that she remembers when there were no supermarkets. Those under 45 have only the barest knowledge of how it was and could be again. I know that 95% of the population cannot believe that anything that drastic could ever happen here, that we could go backward as an advanced society or that “The Last Days of The Late Great United States” could ever be a possibility. C’est la vie! Or I guess these days it’s “Asi es la vida!” I will tell you this. We are going to have a hundred years of change in the next decade and some of it is not going to be good. Get ready for the ride of your life and for those who are believers, don’t be frightened, God is in charge and He is going to shake out a lot of the corruption that is going on, one way or another.

    • bbstacker

      The Yin and the Yang of it…my family seems to be “in the dark”, while my wife’s family is on full alert. All reasonably smart people, conservative across the board on both sides, but have a conversation that involves something as deep as the subject we’re on, and those on my side glaze right over. I’m working as hard as I can to prep, and ignore the complacency around me. Sounds like all of you are too. It’s good to know you’re out there. :)

  • Richard Pawley

    PS. After 20 years of study I am convinced you can count on more than 200% inflation. May God bless America! No one else is going to do so!

    • DaveH

      Once it starts anything is possible. It depends entirely on how our government and the federal reserve react. With the recent elections, I am hopeful, but I won’t hold my breath.



    • s c

      DaveB, as far as our government is concerned, quality education is not a priority. Public education in the US (in most cases) is a smoke-and-mirrors disaster.
      Over the years, many topics have been watered-down or eliminated from public school classrooms. US history is not important. The Constitution is not important. Economics is not important. Ridding the system of incompetent teachers and administrators is not important.
      This does not excuse parents, but it does amount to an indictment of those who ‘run’ the system. It has been a tremendous WASTE of money, time and resources.
      Unless or until quality education becomes important in the US, homeschool your kids, and help SOLVE the problem.

      • s c

        Those who wield power in the US do NOT want the American people to know much about the Fed. Secrecy has been its best ally. A weak-spined Congress has made the American economy a ticking time bomb.
        Most bankers know very little about the Fed. Most universities do not teach in-depth courses about the Fed. In effect, a private corporation that is utterly indifferent to the plight of the American people [the Fed] is responsible for most of our economic problems (it ‘re-distributes’ our wealth).
        The Founding Fathers were very concerned that later generations would become apathetic about central banking systems. Treasonous elected officials at the highest levels of government will never be held accountable for their acts.
        The Fed amounts to an economic death by a slow poison. Now, do you understand why we’re not supposed to know much about the Fed?

      • http://donthaveone Beberoni

        I would also add, as far as public education goes, that I never learned anything past 7th grade in school that ever helped me in life to succeed. You tell me what good 12 years of English does for one, unless your going to be an english teacher. So what if I know an adverb from a pronoun from an adjective from a verb. Its not going to get me a job. So why did I have to take 12 years of social studies/geography/history? Sure its nice that I can sit there and make myself feel smart in front of todays teenagers and tell them the capital of every state, and things like that, but bragging rights only get you so far. And math? Once I got past Algebra 3 & 4, unless your going to be a chemist or physicist, not a lot there to help in life. Now, if I had a say so, there would be at least the last 8 years of school teaching carpentry, metal shop, electricity, masonry, automotive mechanics, engineering. Out of 12 years of school, we are allowed 6 weeks of shop classes. Why not prepare students for things other than to be a teacher? Like I said, I never learned a lick in school to help me suceed in life past the 7th grade, and I got straight A’s in school. Nowadays, sure, they got computers, I would hope they are teaching kids how to run excel and word perfect and other things, but who knows. I just know it was a waste of time for me, and many others, and we knew it. Now we werent disruptive in class or disrespectful in there or nothing like that, just bored to death. I think school should be a whole lot more. Prepare kids for their futures, and teach them something that they can be in life, as not that many grow up to be the school teacher.

        • s c

          Beberoni, my words are not a personal attack against you. We don’t need millions of people who hold terminal degrees (doctorates) in English. We need people with common sense who want to communicate and get it right the first time. When people let themselves be indifferent about the English language, it produces ultraliberals, socialists, communists, fascists, NWO wackos, unconfirmed czars and a congress full of social rejects (and losers in the white house).
          Rarely do I meet an ultraliberal who can THINK or REASON or CARRY ON AN INTELLIGENT CONVERSATION without resorting to predictable crap that only an ultraliberal can worship.
          America is the ONLY major industrial country in the world where its major language is treated like a red-headed stepchild. Washington is living proof that English is extremely important. How else can we understand HOW or WHY America elected world-class losers like fdr, carter, clinton or comrade obama?

  • oldbill

    We have gold and large cash accounts. Who knows what will happen in the next few years?

  • pete

    “Manipulation and the powers that be?” – better believe it! The great manipulators of the world have got so clever that they have screwed themselves now as well!
    Sadly they will have to go play with one another for soon all the pawns will be gone – that should be a laugh of note! Well back to my backyard veggie patch – hey you know I can feed the whole neighbourhood! Suppose the Feds will want that as well! Let them try!
    We ain’t seen nothing yet – have we had enough of the bs yet? Very soon the ………will hit the fan!

  • David Hall

    Yeah! THE WISDOM OF THE WORLD, ain’t it really funny, might as well,
    laugh, the crying is over. AMERICA, THE BEAUTIFUL! OWNED BY AN ANTI-
    Green paper and gold ain’t going to save us. A MASTER OWNS ITS’ SLAVES!

    • http://donthaveone Beberoni

      And in the end, all that glitters, silver and gold, will be left behind for someone else to enjoy, so dont lay up your treasures on the earth. Myself, if I have a roof over my head and food in my stomach, Im blessed. The rest of you can chase after this pipe dream of tons of cash and gold, but in reality, no one needs it. I dont.

  • Robert

    As Washington spends trillions and trillions, the Treasury prints and prints. As is the truth about a sponge and water, at some point the sponge cannot absorb any more water. Same for the dollar. At some point the world cannot absorb any more dollars. Then what? The dollar goes bust and looses it’s liquidity value. These are very dangerous times my friends. Unless Washington gets a grip and starts behaving rationally, our dollar wont be worth much in the very near future. And it’s not a democrat or republican or conservative or independent political issue. It’s all their doing and they had better start acting responsible on everything. If they don’t, then we can look at all of them and say, “You destroyed me, my family and my friends. Now get the hell out of our country and crawl back under the rock you came from. And take your family and friends with you, they’re not welcomed either.”

    • David Hall

      Robert, buddy, dream-on! That’s the Government intent, to bankrupt and
      colapse our good ole U.S. dollar. Folks better have their shot-gun houses paid for and be OUT-OF-DEBT, because it’s COMING!

  • http://none Jackie

    I read the article on gold in part, but I was wondering what Market it was listed on and under what ticker.

    Manitoba, Canada has just discovered gold, and the explorers are there to dig it out.

  • hunter

    Why is the stock market up when economic fundamentals are so bad? Can you say 401k? Also where are the billions of the bailout funds given out invested in? Job producing investments? No. Where are the billions of the bail out not yet dispersed? All in the stock market Thats where. The Dow, is the barometer of how the country is doing for these simple minded twits at the fed and the WH. They belive we would fall for that false reading the Dow number gives off. Now for the 401k, why would large companies give up their company managed retirement funds that make billions to offer 401k’s? Simple, because thay know that shortly the market will crash below 2500. Its like the laws congress passed a few years ago on bankrupcy. What a coincidence only several months later, the biggest foreclosure on homes, loss of jobs etc. And now the indebeted has no where to turn. GEEZE, why don’t we just start the debtors prison back up. Wake up and smell the coffee world. Invest in canned goods, ammunition, firearms, etc. Make preparations for our country has been hi jacked.

  • Stingray SFO (Oath Keeper)

    Massive inflation isn’t coming soon, IT’S ALREADY HERE AND GROWING RAPIDLY!
    Since August my cost for groceries has increased monthly by almost $200.00.
    In June my electric service was increased by 35%.
    In July my water bill basic rate was increased by 20%.
    In July my basic phone land line costs topped $70.00 and we don’t make International calls, and no more than two or three long distance calls of 20 minutes or less.
    In September my property taxes were increased by 98%!
    Just last week I got my homeowner’s insurance statement, DOUBLED! When I called Allstate about it, I was told to expect my auto insirance to double as well!
    We’ve been forced to make cutbacks in everything we do, from groceries to insurance. We can’t cutback on taxes, they’ll just keep on rising.
    Being on Social Security Retirement, our income is fixed, far below the poverty level, and our only hope to at least keep up a little was with the annual COLA increases. Now those are gone, for the next two years at least!
    What galls me the most, is that every time we make another cutback, it’s immediately offset by some other increase! We cancelled the basic phone service and were able to get on lifeline, which reduced our phone bill by almost $58.00. THE VERY NEXT DAY we got the property tax increase notice raising our tax $689.00 to $1,871.00!
    We’ve eliminated some grocery items reducing our monthly food costs by $110.00, only to have monthly utility costs increase by $92.00!
    We increased our homeowners insurance deductible to $2,000 back in May saving us $28.00 monthly, only to see our gas prices skyrocket here by $56.00 monthly! In August we got the well on our property checked out and activated. Only $118.00 in repairs needed, was told that if the pump was bad, it would cost $480.00 to replace it. We breathed a sigh of relief when it worked and promptly had the water company turn off their service, for which they removed the meter. Just last week, the pump gave up! We had to have the ENTIRE system replaced! Cost? $1,488.00! Up by over $1,000.00! The water company quoted $1,500.00 to re-install a meter and rejoin the cooperative! We’ve replaced the well system, hoping it will last the rest of our lives.
    Is hyper-inflation around the corner? NO, IT’S ALREADY HERE!

  • http://None Violet

    about inflation-our daughter and famly live in Zimbabwe(missionaries)
    It is a lovely countryas far as the landscape,trees grow wild with different colered flowers,etc,
    But in 7 years it went from a financilaly secure country
    to a high inflation one,caused by printing money with no security,just as Obama is doing
    The President, Robert Mugabe,was last years#1 hated dictatorHe and his minister of banking caused their inflation to run in 7 years time so high that just before it collapsed ,our daughter was paying
    $1 trillion for 1 egg!
    Steve Forbes has said this is what will happen here.
    Pay your bills,only make necessary purchased.
    Lay in canned and dry food,-like nuts,raisins,prunes,there are lots of dried fruit and veggies that will save over the counter medicine.
    also paper products,and store lots of water.for drinking,washing flushing,if your electricis shut down.
    it would be good to have some form of protection- like guns and ammunition just in case some one having no food, knows you have some.
    lay ahead baby diapers ,even adults,in case you can`t wash
    Get next size clothes if you have children in case stores are empty
    It would also be good to buy towels blankets, case you have no powerand long underwear and snow suits for all
    We don`t know about cap and trade,what that would do.
    Someone mentioned growing food,that would e great.,especially if the plot is surrounded by big bushes or trees,so others don`t know.
    I didn`t cover everything
    But it`s a start


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