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Steve Saville: Gold and Saving

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October 14, 2009 – Comments (1)

Inflation (monetary inflation) is the selected course of action. Always has been, always will be when it comes to the Government, Fed and Treasury. Prices of many asset classes have fallen and will continue to fall, and this in and of itself is *NOT* deflationary. But the Fed (and analysts like Krugman) continue to pepetuate the myth that price deflation = deflation ... which is WRONG! These "deflationary" events are deflation scares in which the Fed is given free reign to drop rates to 0% and monetize debt like there is no tomorrow, due to popular (and intentional) misconception about deflation and thus public acceptance of these polices.

So, binv, asset prices are falling. Why do I care about the academic distinction between monetary inflation / deflation and price inflation / deflation?

Because monetary inflation or deflation beget vastly different long term consequences!

It is cause and effect. Monetary inflation not only enters into the economy unevenly but also changes the structure of the economy. Non-productive enterprises are propped up (especially government spending). But the biggest difference will be the price of real goods, such as commodities and especially gold, will reflect their real costs (inflation adjusted). 

Many take this argument to support the theory that inflation will help stocks, as a general asset class, to maintain their levels. The only thing inflation will do will be to help stock from falling as far as they otherwise would. Please read this post for my explanation as to why: binve's Long Term View

Even in an inflationary environment, there are several asset classes that will continue to fall due to poor fundamentals. This is a demand issue and is not necessarily deflationary.

But there is one asset class that will maintain purchasing power through this period of massive inflation: Gold.

Notice my wording. Maintain Purchasing Power. Gold is *NOT* going to the moon! Anybody who thinks that does not realize what gold is. If gold goes to the moon, it is because the dollar goes down the the Earth's core. It _maintains_ purchasing power.

Gold is about holding value. Gold does not pay dividends, gold does not multiply, gold does not make the world go round. Gold holds value. That’s it. So gold is not a way to get rich. Let’s be very clear about this point. Gold is a way to be NOT POOR. Like I said, it holds value.

So if it goes to $5000/oz, it means that the economic toilet paper we call the US Dollar has been ravaged / devalued by the polices of the US Government, the Treasury, and the Federal Reserve. And you can now buy that much less with the Dollar. 

The problem is debt. 

And as Saville is pointing out, the fact that the population is becoming wise to this is a natural and not at all unforeseeable consequence. Savings is increasing. And yes, for many people, that means into gold too.

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Gold and Saving - http://news.goldseek.com/SpeculativeInvestor/1255429572.php
by Steve Saville

October 13, 2009
 
It is very likely that two ultra-long-term trends reversed direction over the past two years, the first being the expansion of private-sector credit in the US and the second being the contraction of the US savings rate. The trend reversals are, of course, inter-related, in that the new trends towards less debt and more savings are being driven by economic hardship in the present and the revelation that the economic future will not be as rosy as previously thought.

As discussed at length in many TSI commentaries, the problems that have emerged over the past two years were not created over the past two years. They were, instead, the natural and inevitable consequences of the monetary inflation that occurred during the first half of the decade. To put it another way, the problems arose during the inflation-fueled boom, but only became visible to most people after the amount of new money entering the economy became insufficient to sustain the boom. Illusions have since been shattered and people have been forced to come to terms with a very different financial future to the one they were counting on just two years ago.

The increasing desire to save and the reduced desire to take-on debt should have led to a period of deflation, but governments and central banks decided that deflation would not be permitted. They decided, instead, to prevent the natural corrective process from running its course and to tackle the problems caused by the combination of monetary inflation and government meddling with even more monetary inflation and government meddling. It is idiocy on a phenomenal scale, but it is not surprising. Since establishing the TSI web site 10 years ago we have consistently maintained that after the private sector credit expansion came to an end, the public sector would 'step up to the plate' and create, via government borrowing/spending and central bank monetisation, whatever amount of new money was needed to perpetuate the inflation. Unfortunately, it looks like we are going to be proven right.

Monetary inflation causes problems regardless of whether the new money is being borrowed into existence by private operators or by the government, but the problems will potentially become apparent to the average observer earlier if the government does the bulk of the borrowing. This is because government borrowing, and the associated spending/investing, will rarely be motivated by economic merit, meaning that the effects of monetary inflation stemming from government borrowing are less likely to be masked by productivity improvements than would be the case if the private sector were borrowing most of the new money into existence. In simple terms, government-driven monetary inflation is more likely to boost the general price level -- creating what most people think of as "inflation" -- than the private-sector-driven variety.

So, we should reasonably expect more monetary inflation over the years ahead and for this extra money to have a greater effect on the cost of living than the money added to the economy during the 1990s and the first seven years of the 2000s. At the same time, it is likely that the desire to save will continue to grow. In fact, the more the government and the central bank intervene in an effort to stimulate the public's borrowing and spending, the greater the desire to save will likely become. This is because the interventions will create uncertainty and deplete existing savings. We therefore appear to be heading towards a situation where the public wants to increase its savings while the government makes it crystal clear that anyone who saves in terms of the official currency will be punished.

This is where the "law of unintended consequences", a law that seems to involve itself with almost all of the government's plans to 'help' the economy, shifts to centre-stage. People now have a rational and irrepressible desire to increase their savings, but the government is promising to depreciate the official currency and has demonstrated that it is capable of fulfilling this promise. People are therefore prompted to save in terms of something else, the most obvious "something else" being gold. In other words, one of the consequences of policies designed to discourage saving won't actually be less saving; it will be less saving in terms of the official currency and more saving in terms of gold, leading to a much higher gold value in currency terms and relative to most other commodities.

1 Comments – Post Your Own

#1) On October 14, 2009 at 9:23 AM, russiangambit (29.42) wrote:

>Many take this argument to support the theory that inflation will help stocks, as a general asset class, to maintain their levels.

It is wishful thinking, of course. Take Brazil, nobody wanted their stocks when they had high inflation. After they got inflation under control and the real economy started growing, Brazil become hot. Inflation destroys prosperity, not the other way around. I sound like a broken record, but people simply don't listen.

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