“The European Central Bank's monetary policy will remain accommodative, ECB Vice President Vitor Constancio said [recently] noting that inflation in the euro zone is falling significantly,” reported Thomson Reuters. "Monetary policy is accommodative," Constancio said. "It will continue to be accommodative to respond to the present situation in which inflation is going down significantly."
Annual euro zone inflation fell to 1.7 percent in March, its lowest level since August 2010, spurred by a continued downward trend in energy prices. The ECB expects inflation to fall further to average 1.3 percent next year. The Economist recently editorialized: “Inflation hawks watch measures of inflation expectations for signs that money-printing central banks are weakening price stability. Central bankers study inflation expectations just as closely: if there is little evidence of rising expectations, they can argue that the inflation genie will stay safely corked. But expectations matter not just because they show how high people assume inflation will go. They also provide a window on how unsure people are about the future path of price rises. And increasing uncertainty can inflict damage of its own.
The Economist’s Free Exchange columnist wrote recently: “There are several ways of measuring inflation expectations. They suggest that people do not think there will be a surge in rich-world inflation. But they also reveal mounting levels of disagreement as to where inflation will end up. One method is to survey consumers about where they think prices will go. Britain is a natural place to look for ingrained expectations of high inflation: price rises have been above the Bank of England’s 2% target for 54 of the past 60 months. Yet surveys conducted by GfK NOP, a consultancy, show that median inflation expectations rose in 2008 but fell back when inflation dropped in 2009 (see left-hand chart). American surveys tell a similar story. Based on public polls, there seems little risk of a 1970s-style wage-price ratchet.
Forbes Editor-in-Chief Steve Forbes has taken a contrary view: “The Federal Reserve has already stated that its want to get inflation up to 2.5%. Put aside for the moment the impossibility of concocting a true price index – the Consumer Price Index, for example, allocates less than 1% of the cost of living to health insurance! Inflation, as John Maynard Keynes wrote nine decades ago, is a form of taxation – and, in this case, taxation without representation. Especially invidious is the fact that inflation hits lower-income earers disproportionately hard, as they spend a higher percentage of their income on fuel, electricity and other necessities.”
Coming soon to a store near you: more inflation. Financial journalists tend to like inaction. “Do something, do something” seems to do their motto.
The Economist’s Ryan Avent, writing recent on Bloomberg.com (he normally writes the Economist’s Free Exchange column), worried about the limited tools available to the Fed and suggested it was time for a new tool: inflation. After reviewing other options, Avent observed: “A better option would be for the Fed to rethink how much inflation it’s willing to accept. Allowing a bit more would bring down the “real,” or inflation-adjusted, interest rate -- a change that has the same stimulating effect as a lower target rate. An economy growing fast enough to generate rising inflation would be prepared for the moderating impact of rate increases sooner, ideally well before the next recession strikes. Perhaps most important, by accepting a period of inflation comfortably above the miserly 2 percent level, the Fed would create room for rates to top out at a level that provides more of a safety cushion above the zero lower bound. When the next recession struck, it would be prepared.”
To be fair to Avent, he added: “A burst of inflation isn’t without potential costs. Those who remember the 1970s and 1980s may worry that prices will spiral ever upward, sapping consumer purchasing power, eroding savings and contributing to economic stagnation. But these threats should be manageable if the Fed keeps inflation expectations under control by providing precise communication about its policy goals. It could change its official inflation target to, say, 3 percent or 4 percent. Or it could shift to a new goal altogether, such as stable growth in the cash value of national income -- an approach known as nominal gross domestic product targeting. This would allow for more flexibility while reassuring the public that policy wouldn’t run out of control.”
This seems to be the Japanese model. Damn the inflation torpedo! Full speed on the monetary printing presses! The new governor of the Bank of Japan, Haruhiko Kuroda, will be expected to follow that model or Prime Minister Shinzo Abe will not be pleased. The New York Times’ Hiroko Tabuchi reported: “With Mr. Kuroda at its helm, the bank could take much bolder steps to kick-start economic growth. Mr. Kuroda, 68, has for years publicly criticized the Bank of Japan, saying it has not gone far enough to fight deflation and has urged the bank to adopt inflation targets and expand an asset-buying program to pump more funds into the economy.”
But don’t expect anyone buying gas these days to praise a little inflation.
Just roll them printing presses.
Washington Post’s Neil Irwin wrote after the election, “To economists, inflation is the dog that didn't bite. Despite fears among commentators that the Federal Reserve's easy money policies would cause rising prices, the consumer price index rose only 2 percent over the last year, exactly what the Fed aims for. And investors are pricing in only 2.07 percent annual inflation on bond markets over the coming five years.
Don't tell that to voters. Some 37 percent named rising prices as the biggest economic problem, basically tied with the 38 percent who named unemployment. (The other options were taxes, with 14 percent, and housing, with 8 percent.)
Prices for gasoline and some other key commodities are up since Obama took office. But he began his term when those prices were artificially depressed by the global economic crisis. Since early 2011, gasoline prices have moved up and down within a range of about $3.20 to $4 a gallon, showing no discernible trend upward. The average national price of a gallon of gasoline was $3.46 on Wednesday, well below its peak of $4.13 on July 15, 2008.
Voters may be frustrated that the prices of goods have been rising (at a relatively low rate by historical standards), but wages haven't. In that case, their real complaint is that weak economic growth and high unemployment are keeping wages down.
QE1 and QE2 in 2008 and 2010 added about $2.3 trillion into the American economy. Sooner or later there will be a price to be paid for that flood of money.
Back in 1976, Lewis E. Lehrman wrote in Money in the Coming World Order: “Today, national economic policy making is largely concerned with the problems of unemployment and inflation. More precisely, it is their simultaneous combination in nearly all Western economies which preoccupies policy makers. As these problems grow worse, the stakes rise higher. We know that either severe unemployment or sustained inflation, let alone both together, can be expected to have the most serious consequences for liberal democracy.”
There is a solution – ironically one that many of the world’s central banks have been pursuing in a back-door way. Moneyweek reported back in June: “Data from the World Gold Council reveals that central banks, largely from the emerging markets, are diversifying their currency reserves by going back into the classic reserve: gold. It’s estimated that China bought around 490 tons of gold during 2011 – double the estimated 245 tons bought in 2010.”
In fact the central banks have little choice. The real return (after inflation) on even the most robust government bonds right now is negative. And that places central banks in a bind. They need to diversify their assets. And what better than gold – the money that is no one’s liability. Not only is gold the international currency of central banks, it’s also portable and it comes with no strings.
After its first season, Gold Rush became one of cable television’s most watched shows. The reality TV series followed a group of mostly out-of-work miners to a gold claim in Alaska as they risked everything in an attempt to strike it rich. This winter the second season debuted and proved as interesting as the first. From the mechanical challenges posed by aging equipment to the environmental difficulties of working in a new region—the Klondike—Todd Hoffman and his crew continue their pursuit of gold.
The Discovery Channel expanded its programming this season with another series on gold mining. This time, however, the search for gold takes place in the frigid waters of the Bering Sea off the coast of Nome, on the west coast of Alaska. At the beginning of each episode, one of the old-time miners delivers a simple message, saying, “Let me tell you about gold. Gold makes the world go ’round. But gold doesn’t come easy. Gold…it’s right out there…right under the water.”
Men—and a few women—from around the world descend on the tiny, isolated sea-front town each summer and the harsh realities of dredging the floor of the one of the world’s most ferocious seas begin to take shape. The dredging rigs themselves are at once ingenious and dangerous. Built from spare parts, each rig looks like a collection from the local junk yard rather than the sophisticated machinery it is, ably separating dense gold particles from the gravel and silt on the sea floor.
One also begins to appreciate the extreme costs of this endeavor—there are greenhorns aplenty who have poured their lifetime savings into their rigs, hoping to strike it rich. There are seasoned miners who know that every day of the short mining season—ninety days in length—make up one percent of their annual income. And, then there are the truly human costs. The families left thousands of miles away; hours spent in 45-degree waters operating the suction equipment that lifts the gold off the sea floor; and, the injuries that are a real inherent risk.
So, why for centuries have people set off to faraway places, often risking everything, to find gold? Why in the twenty-first century has the Discovery Channel invested in following these miners to the ends of the earth? Why are Americans tuning in on Friday nights to watch these shows, making them hits?
The answer is quite simple: gold has been recognized for millennia for its inherent value. Indeed, the Discovery Channel reports in Ten Surprising Facts about Gold that, “Historically, [gold’s] worth has been stable. From 1833 to 1918, for example, the price of gold never rose more than six cents from its initial price of $18.93 per ounce, and between 1933 and 1967 its price rose just 26 cents per ounce, despite dozens of inflationary crises and economic downturns.”
This stability over time is one of the attributes which makes gold an excellent monetary standard. Like the yardstick which retains its measure of 36 inches over time, gold (unlike the paper dollar) retains its value over long spans of time. Gold—that most stable and sound precious metal, universally recognized for its inherent value—is the monetary standard on which our country was built.
Brian Domitrovic called monetary reform “the unfinished business of the Reagan Revolution.” At a recent conference hosted by the Atlas Foundation, it was as though the Reagan Revolution was born again to finish the job at hand—restoring a gold-backed dollar. Scholars, businessmen, and journalists discussed the economic and political history of sound money. Moderated by Jimmy Kemp, son of the late great Jack Kemp, panelists included Lewis E. Lehrman, Judy Shelton, and Steve Forbes. It was, of course, early during the Reagan years that Kemp-Roth tax cuts were executed unleashing one of the greatest periods of economic growth during the last century. And, it was President Reagan who established the United States Gold Commission on which Mr. Lehrman served.
The room was packed—more than 160 people gathered to hear this historic panel and many stayed long afterwards to continue questioning the panelists. Mr. Lehrman opened the discussion briefly surveying American economic history from the Industrial Revolution to the present day, tying our latest financial disorder to the modern reserve currency role of the dollar. The solution? Establish convertibility of the dollar to gold once again. Neatly laid out in a five step plan, Mr. Lehrman’s plan is compelling and offers a serious solution to the endless alternating cycles of inflation and deflation.
Dr. Shelton reminded us that it was Congressman Kemp who so clearly articulated the idea of the dollar in saying that “the dollar should be so honest, so sound, so trustworthy, so good, so predictable, so lasting in value that it’s as good as gold.” In her slim volume titled, A Guide to Sound Money, Dr. Shelton establishes ten core principles of sound money. Her newly released book, Fixing the Dollar Now: Why US Money Lost Its Integrity and How We Can Restore It, Shelton extends the principles laid out in her earlier volume and establishes a plan for gold-backed bonds as an intermediate step in returning to a gold-backed dollar.
Steve Forbes, businessman, entrepreneur, and former presidential candidate, offered the likely political rhetoric with which a rising GOP presidential candidate might persuade the nation to move forward to gold. Likening monetary policy to a well-run car, Forbes argued that if there is too little or too much money (fuel) in circulation, then the economy (car) stalls. However, if there is just the right amount, the economy (car) hums along, moving forward. The amount of money cannot be determined by a single central authority but rather by the people engaged in economic activity. With a gold-backed dollar, America may well have the chance to grow and prosper once again.
In closing, Dr. Shelton pointed out that it was Alan Greenspan, appointed as the Federal Reserve Chairman by President Reagan, who wrote in 1966 that, “Deficit spending is simply a scheme for the ‘hidden’ confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.”