Gold prices rose 1.5% on Tuesday, a day after posting the biggest one-day percentage fall in 2-1/2 years, as U.S. Treasury yields fell on worries over global growth and renewed concerns over global trade.
Remember, it’s “inflate or die.”
Neither in Europe nor in America is dying very popular.
In the U.S., Bloomberg is on the case:
Gold is trading near a six-year high as central banks globally turn dovish, and simmering geopolitical and trade tensions boost demand for havens. Adding momentum to Wednesday’s upswing were the brace of nominations from Donald Trump to the Fed’s board, with candidates Christopher Waller and Judy Shelton likely to support the president’s call for lower interest rates.
President Trump is “trying to shift the balance on the FOMC to super dove,” said Stephen Innes at Vanguard Markets Pte, referring to the rate-setting Federal Open Market Committee.
And in the Old World, IMF chair Christine Lagarde, French by birth, Deep State by profession, inflation “dove” by convenience, alumna of the Holton-Arms School for girls in Bethesda, Maryland — along with Christine Blasey Ford — is taking over at the European Central Bank.
Let’s return to the dots we have been connecting this week …
Inflation is what happens when new money is added to the system. And in today’s phony-baloney system, new money is created when people borrow. But sometimes, debtors resist — especially when they’re already drowning in it.
Here is Madame Lagarde explaining how to force their heads underwater; pay them to borrow more:
If we had not had those negative rates, we would be in a much worse place today, with inflation probably lower than where it is, with growth probably lower than where we have it. […] It was a good thing to actually implement those negative rates under the current circumstances.
Lagarde is also on record as saying that negative interest rates “improve confidence and financial conditions in the euro area, which will further aid the recovery.”
Yes, it is a wacky world.
But let’s see if we can make sense of it.
From the end of the Napoleonic Wars up until 1971, if you wanted more money, you had to earn it … or steal it.
Then, the U.S. introduced a new form of money — Federal Reserve Notes. These were not tied to gold, which meant that they were not connected to the real world of limited time and resources.
Before then, because there was only so much time, resources and know-how available to earn money, earnings were limited, which meant that savings were limited … as was debt.
Real money kept track of the connections between past and future, borrower and lender, consumer and supplier. It guided people, as if by an invisible hand, to reduce waste and increase output.
It was in the early 1970s, too, that the idea of “stimulating” an economy began to take hold, first among progressives, later among conservatives. Before then, it wasn’t possible to do much stimulating; the money wasn’t available.
But the unlimited, fake money opened the gates to bedlam. Soon, there were nut-jobs on every corner … and lunatics running the central banks.
Who else would believe you could “stimulate” a real economy with fake money? Who else would believe that he would know what interest rate an economy of 330 million people needs? Who else would be gullible enough to think that negative interest rates were a good idea?
Rise and Fall
Stimulus can take many different sizes and disguises. But take off the false mustache and you always find inflation.
Fake money — and the power to “print” it — is the only tool the feds have. Inevitably and invariably, they find it politically useful to add to the available money supply.
This usually produces a short-term boom as consumers, businesses and investors mistake the new money for real wealth. New autos drive off the lots. Politicians get re-elected.
If the “stimulus” is added to the financial sector, there is a boom in stocks and bonds. If it is added to the consumer sector, wages and consumer prices rise.
But every boom built on inflation ends in a bust. Debts need to be repaid. Rising prices nullify the effects of the additional money. And inflated asset prices need to be corrected.
The bust may be delayed, denied and disguised. But it can’t be stopped. And the greater the inflation — whether in asset prices or consumer prices — the greater the pain when it dies.
More Down Than Up
The rise-and-fall pattern is not completely symmetrical, however. There’s always more down than up.
Inflation “works” in the short run by providing fraudulent information. Prices go up, and people think there is more real demand. This leads to overproducing, overspending and overextending. These mistakes cost time and money.
And when the music stops and the hullaballoo is over, almost everyone has been chastised. Investors have been punished by crashing prices. Consumers are unable to pay their debts. Businesses go broke.
But as the dust settles … gold is the last man standing.
• This article was originally published by Bonner & Partners. You can learn more about Bill and Bill Bonner’s Diary right here.