In my last post, I focused on the unusual dynamic between the inflation rate and gold prices in 2016. It’s fair to say that last year was a banner cycle for the Federal Reserve. The dollar gained in strength thanks to technical deflation, while the equity markets soared to record levels. The much anticipated economic crisis never occurred. In fact, quite the opposite, if you use the Dow Jones Industrial Average as a benchmark.
Yet despite the absence of a rising inflation rate and an economic crisis, gold prices saw their best growth rate in years. This was highly illogical sense the Federal Reserve signaled ahead of time their hawkish intent. Deflation of the dollar would ordinarily be bearish for gold prices — in fact, deflation is the number one killer of any commodity rally. But here we stood — a strong dollar, a strong Dow, and a strong bullion market. Something isn’t right here.
We have hit upon what economists would refer to as an impossibility — high supply and high demand. Economics, as in most intellectual disciplines, is a study of allocations. In other words, the glass can be half-full or half-empty, but it cannot be completely full and completely empty. Either we are in an economic crisis and we are applying a higher inflation rate to get us out of it, or we’re in an economic renaissance, and we’re using deflation to cool down supply.
This leads us to the only feasible conclusion, although one that is entirely unintuitive — we have already suffered the initial impact of the Second Great Depression.
On the surface level, it’s an absurd accusation. Most people would say there’s no discernible evidence of an economic crisis, let alone a Great Depression. People are out and about going to work, running errands, having fun.
But we’re also masters of self-delusion. We are led to believe anything that the mainstream media tells us. We do no investigative work of our own probably because a greater number of the population don’t have the cognizance to initiate such endeavors.
Either way, perception is arbitrary. We often see what we want to see. But the hard numbers don’t lie. Back in 2009, the “Ten-Year Breakeven Inflation Rate” provided by the Federal Reserve hit a then all-time low of 1.6%. This was perfectly understandable. We had just suffered what appeared to be a genuine Great Depression. Major financial institutions failed and had to be bailed out by the government. A record number of workers lost their jobs.
A senator named Barack Obama seized on this “opportunity” and promised to deliver hope and change for America. On paper, the scheme worked. People began to find employment — never mind where they actually worked, the important point for the Federal Reserve was that they’re now employed. More importantly, the inflation rate began to rise from the depths of perdition.
However, from 2013 to the end of 2016, the inflation rate collapsed, dropping to -8.6%. For last year, the average expected inflation rate was an absurdly low 1.57% — an all-time record! That really means that deflation was near all-time highs, and this is confirmed by the enormously robust dollar. And such extreme deflation means that we suffered the benchmark symptom of a Great Depression.
So why then did gold prices and equity markets rise last year? I believe that people truly do not understand the dynamics of what is occurring before their very eyes. There’s been much talk about “fake news.” Here’s the thing — the real fake news is flashing in the financial markets.
That being said, gold has intrinsic properties that are internationally recognized. So while the Federal Reserve may downplay its importance, gold prices will not be denied. Americans may not want it, but certainly, American insiders and citizens of other nations see the value of a true “word reserve currency.”