Gold

[quote author="CapitalismWorks" date=1225257677]Price inflation because of wages is "normal and desireable"? What about the dreaded wage-price spiral? First, I thought that was the death knell of an economy and the primary reason the 70's inflation was so horrible.



http://en.wikipedia.org/wiki/Price/wage_spiral



Second, Price inflation in never desireable if prices can simply remain stable. Modern thinking is that inflation is preferable to deflation, and seeking to maintain stable prices provides no margin for error in regards to slipping into deflation.



Please, if you are going to call me out as Wrong, help me out. I have never heard of the differentiation between normal and desireable inflation and bad inflation based on the driver of inflation (I have heard of normal low inflation and runaway bad inflation). If you have any links or support for this line of reasoning, please post a link.



Note we haven't discussed declining labor-productivity due to decreasing marginal benefit from outsourcing (see wage increases in China, etc.). This is a non-monetary source of inflation. Wages go up, but productivity remains constant (or at least fails to keep up with wage increases). Tell me again how that is good?!?</blockquote>
I can only assume that you failed to read the last two parts of your own link:

<blockquote>The first element of the price/wage spiral <strong>does not apply if markets are relatively competitive</strong>, while the second <strong>does not apply if workers lack labor unions or other sources of bargaining power</strong>. Thus, in the neoliberal era of the late 20th and early 21st centuries, <strong>when markets have become more competitive and unions have faded, the role of the price/wage spiral has shrunk</strong>.



The spiral is also weakened if labor productivity rises at a quick rate. <strong>Rising labor productivity (the amount workers produce per hour) compensates employers for higher wages costs while allowing employees to receive rising real wages, while allowing the company's margin to stay the same.</strong>

</blockquote>


I'm not going to discuss theory with you. We have a real life example that we can look at and it is unfolding around us. Right now we are witnessing massive asset deflation, paper billions being vaporized, and massive amounts of liquidity (money) being regularly injected into the financial system. The price deflation is offsetting the monetary inflation that would occur under 'normal' circumstances. There is no wage/price spiral because prices are dropping across the board to entice sales in the face of lowered demand. Markets aren't just competitive, they are cutting each other's throats to make sales. Productivity is the highest it has ever been at anytime since WW2. And when the deflation flattens out, you will see contraction of the money supply to prevent hyper inflation.



I can't provide you with links that specifically use my terms because I'm using pretty basic ones in order to explain a complicated subject. But I have explained why I think you are wrong, yet you haven't explained why you think you are right or even why you think I am wrong. All you have done is attack my terminology, tossed out some text-book phrases, and made declarative statements with no offers of proof. But you want to quibble over "good/bad" so tell me: how is it possible to have a growing economy that uses fiat currency without having some built-in level of inflation to account for the growth in both GDP and money supply and wouldn't a low, stable rate of inflation be considered relatively good in comparison to hyper-inflation or unstable rates of inflation?
 
Whelp I call bottom in gold, I'm back in as of this morning. I haven't been in since april (other than a few day trades) when I sold all my gold backed investments to invest in a mazdaspeed3, which strangely has outperformed gold. Consider this your contrarian indicator.
 
I actually read that very long article. It was very interesting, although I think some of his arguments are weak in places. I do agree with him that we will likely see a bout with price inflation once the economy comes out of recession. The FED has put a great deal of money into the economy, and once this starts moving around, look out.
 
[quote author="awgee" date=1225307561][quote author="IrvineRenter" date=1225277311][quote author="awgee" date=1225263110]Asset depreciation does not offset monetary inflation. Asset depreciation does not historically lead to a decrease in the money supply.



<a href="http://www.financialsense.com/editorials/petrov/2008/1024.html">inflation vs deflation</a></blockquote>


I actually read that very long article. It was very interesting, although I think some of his arguments are weak in places. I do agree with him that we will likely see a bout with price inflation once the economy comes out of recession. The FED has put a great deal of money into the economy, and once this starts moving around, look out.</blockquote>


I think that some folks are under the mistaken impression that a decrease in housing prices or a drop in the stock market is somehow deflationary or decreases the money supply. I think they are confusing asset depreciation with credit contraction. Credit contraction is indeed deflationary, but so far, I am unsure if this country has actually experienced credit contraction as opposed to a stop in credit expansion. Has anyone seen any credible numbers on overall credit?



The Federal Reserve has a history of inflating the money supply in response to asset depreciation and is currently following it's historical behavior. If you go back a page in this thread, I posted a couple of graphs relating to the increase in Fed money supply. I did not get much of a response, except from troj who wasn't impressed. To my simple way of thinking, the actual numbers pretty much squash any arguments one way or the other, weak or strong.</blockquote>
I do believe that consumer credit did contraction in the previous month. I can't tell you what all banks are doing, but I do know that we've slowed down our lending (along with decreasing leverage and increasing spreads) and some of our direct competitors have stopped lending all together. The FEDs may be pouring huge amounts money into banks and into the economy, but they won't be able to force banks to lend. The Banks are just gonna hoard the cash to reserve for future credit losses. Until credit begins to grow and the world stops deleveraging, we are going to be in an asset deflationary period.
 
Nude, my argument, if you will reread my initial comment was in regard to future inflation and the belief that the Fed will be relatively ineffective in tempering inflation when operating within the increasingly global framework. I made this argument in response to your rather glib statement regarding the ease of which the Fed will tame in inflation that would arise out of the current situation. I provided the recent example of oil as a demonstration of what happens when the increasing demand from EM countries comes into play. I believe this type of interaction with the EM bloc will continue, and more specifically result in an upward shift in wage costs globally (not because of productivity gains). Furthermore, that inflation caused by this wage increase would be outside the sphere of Fed control barring global coordination between central banks.



I posted a link from Wikipedia because (1) it was easy to find (2) provided a succint and relatively complete description. I think the fact that there are several counter-arguments undermining my claim should have demonstrated that I am seeking to find real answers, as opposed to winning an argument on the net.



If you feel I have attacked you based on semantics, it is only to clear up what I believe to be some glaring misconceptions you put forward regarding the nature of inflation. It appears to me, that you are unwilling ot unable to refute my claim the wage increases in the EM bloc will have a deleterious impact on the U.S. economy and the domestic inflation rates, nor are you able to refute my initial claim that the Fed's power to tame inflation will ebb in the face of increased globalization. Neither of these claims are novel in the least. In fact you will find a great deal of literature discussing this very topic that reaches the same conclusion.



Finally, I have asked several direct questions. Most notable are the two that go to the heart of your counter-argument (if indeed you have one). (1) What is the difference between good inflation and bad inflation? And (2) How are wage increases in China good for domestic inflation? Now you have answered neither of these questions, and offensively responded with a terse statment that can be paraphrased as, "Your questions are too basic for me to answer".



It's rather convenient that you now wish to avoid discussing theory with me, when you so casually tossed out your remarks regarding the Fed's power to tame inflation. That is theory. More importantly it is theory based on experience in the world of 30 years ago.



Additionally, you mentioned productivity is as high as it has ever been. That is true. However, it is essential for the continued management of inflation that productivity GROWTH keep pace with price increased in order to prevent inflation. As a mentioned in one of my posts, productivity growth over the past few years can be partially attributed to outsourcing to cheap labor. As the biggest pools of cheap labot (ahem China), begin to gain pricing power (ahem China outsourcing to Phillipines) the ability to extract ever increasing productivity gain begins to ebb. Ergo, higher inflation.
 
cap works - I avoid using Wikipedia for it's definitions of deflation and inflation. It uses the popular definitions for inflation and deflation, which may be useful for polite gloss over converstasions, but are confusing for intelligent discussions and downright contradictory. The perfect example would be how you and Nude cannot communicate on the same level because you are using the same words to describe different phenomena. I think even troj is confused because he keeps referring to asset deflation, as if calling asset depreciation asset deflation will change the effect of asset depreciation to deflation. It will not.



Inflation and deflation are, strictly speaking, monetary phenomena, and except in superficial discussion, should only be used to describe the increase or decrease in money supply.



Appreciation and depreciation are the increase or decrease in worth or maybe even value of an asset, and should not be confused with deflation or inflation.



Price increases or decreases are just that and are not inflation or deflation except for the general public and the MSM.



Dollar devaluation is just that and is not inflation. Price increase may be brought on by less supply, more demand, or dollar devaluation and in my mind it is important to distinguish the cause of a price increase or decrease.



And deleveraging, well, I know what it is, but truthfully I do not know how to define it. I best leave that one to Wikipedia for the time being. I do know that while deleveraging is not the same as deflation, deleveraging can and usually does cause credit contraction, which is a component of deflation.
 
When referring to inflation I am describing a decrease in purchasing power (either through price increases and/or currency devaluation). I am not sure I agree that inflation is only related to money supply. However, your framework is quite a bit more precise.
 
<em>"The idea that people can?t survive unless they can BORROW money is obscene and nothing less then modern day serfdom."</em> Ty Andros
 
[quote author="upperlowerclass" date=1225262791]Whelp I call bottom in gold, I'm back in as of this morning. I haven't been in since april (other than a few day trades) when I sold all my gold backed investments to invest in a mazdaspeed3, which strangely has outperformed gold. Consider this your contrarian indicator.</blockquote>


Lol everytime I buy a gold mining stock it goes up over 10% the next day and I sell it because I figure 10% in a day is to good a profit to pass up. Even tho it happened again I'm holding on this time for the long run. Here we go, somebody post a rocket with gold on it or something.
 
CW,



I think we are both looking at each other in the same way, or as you put it "Your questions are too basic for me to answer?. Rather than acknowledge what I have written in support of my point of view you have ignored it, instead focusing on semantics and a return to a "I'm right, you don't know what you are talking about" tone. Maybe awgee is right, in that we are allowing terminology to confuse the discussion. However, as we are both looking for real answers to real problems, I am going to attempt this once again.



Right now, the Fed and other banks are flooding the world with cheap credit and hard currency. In a otherwise stable environment this would result in price increases as borrowing increases and the relative value of currency decreases the real buying power represented by that currency. Hiowever, this environment is anything but stable. The prices of assets and commodities initially rose when these actions were first begun last year, but have since fallen due to a combination of a) deleveraging by people holding assets they are forced to sell and b) a decrease in demand for commodities and finished goods because institutions and individuals are hording cash (or have no access to further borrowing) for future hard times. From the first part of the the post that I was replying to initially, we seem to both be in agreement about this.



Eventually demand will equal supply, deleveraging will have been completed, and prices will once again stabilize. This is the point in which you posited that the Fed will be unable to restrain inflation based on wage increases. My take is that price and wage inflation would only be due to the remaining cheap credit and sea of currency currently in the market and reversing those policies by cutting back the supply of money and raising the Fed Funds rate would cut off the effect of excess money supply and cheap credit. Your position appears to be that the EM bloc suddenly rebounds so strongly that they once again return to the demand levels of two years ago, combining with increased Federal entitlement expenditures, causing price and wage increases that are beyond the Federal Reserve's ability to control. You then used oil as an example of that dynamic and claimed that we would not reduce the supply of money and that Volcker never reduced it either.



Here is where our conflict began. I showed that Volcker did, you ignored it. I also pointed out that supply and demand dictated commodity prices, not just inflation. Again, you ignored that. Instead you focused on my comment on monetary inflation and changed the subject to Chinese wage growth. Think about that before you chastise me for "Your questions are too basic for me to answer".



Getting back to your original point: You assume a return to year-ago demand levels, by the EM bloc, causing both product and commodity prices to rise uncontrollably. I think your assumption is wrong because the previous demand was fueled by consumer spending facilitated by cheap credit and inflated asset values. As cheap credit is unlikely to return in this decade, consumer demand will also be unlikely to return to recent levels. I believe the after effects of a global recession will be both falling wage levels and falling price levels until we reach a point of equilibrium that enables growth on a fundamental basis. If I am right, then the only source of price increases would be the monetary inflation that resulted from an increased money supply which can be avoided by my previously posted suggestion of future Fed action. So... what is the catalyst that kicks off your hypothetical price/wage increases?
 
Nude - How likely do you think it is that the Fed will reverse it's present course if the country is in the midst of a deep recession?
 
[quote author="awgee" date=1225335804]Nude - How likely do you think it is that the Fed will reverse it's present course if the country is in the midst of a deep recession?</blockquote>
ZERO CHANCE! If things stay the way they are, we'll be seeing a Fed funds rate at 0.25% before the end of 1Q09.
 
[quote author="awgee" date=1225335804]Nude - How likely do you think it is that the Fed will reverse it's present course if the country is in the midst of a deep recession?</blockquote>
That completely depends on how much spending the Federal government does. Remember, Benny fancies himself a student of all the failures of the Great Depression. Specifically, he thinks that the failure to intervene by the Central Banks after the markets crashed created the Great Depression. Well, he's acted and so have to other Central Banks. But that is only half of the story and he has repeatedly called on Congress to do something to stimulate the economy. If Obama wins and Congress acts on Bernanke's advice, we may see another massive investment in domestic programs that create jobs in repairing, rebuilding, or creating infrastructure. If that does occur, the resulting effect on unemployment might be enough to stabilize it which will in turn reduce (along with other Federal actions) the stress of the overall economy. If (big if, I know) we get to that point, I think Bernanke will be eager to reverse course once it become apparent that the slide has been arrested.



Whether that prolongs the recession or not is anybody's guess.
 
[quote author="Nude" date=1225338728][quote author="awgee" date=1225335804]Nude - How likely do you think it is that the Fed will reverse it's present course if the country is in the midst of a deep recession?</blockquote>
That completely depends on how much spending the Federal government does. Remember, Benny fancies himself a student of all the failures of the Great Depression. Specifically, he thinks that the failure to intervene by the Central Banks after the markets crashed created the Great Depression. Well, he's acted and so have to other Central Banks. But that is only half of the story and he has repeatedly called on Congress to do something to stimulate the economy. If Obama wins and Congress acts on Bernanke's advice, we may see another massive investment in domestic programs that create jobs in repairing, rebuilding, or creating infrastructure. If that does occur, the resulting effect on unemployment might be enough to stabilize it which will in turn reduce (along with other Federal actions) the stress of the overall economy. If (big if, I know) we get to that point, I think Bernanke will be eager to reverse course once it become apparent that the slide has been arrested.



Whether that prolongs the recession or not is anybody's guess.</blockquote>


The new deal was helping but it was not until lend lease and America entering the war did the depression disappear. I wish the government would have spent the 700 billion on infrastructure instead of the banks. Benny and Hank have really screwed the pooch on the backs of the US taxpayer and it will be a long time before this economy ever gets back on its feet. Unless we go to war, oh i forgot we are in 2 wars...We are hosed...
 
<a href="http://online.wsj.com/article/SB122542760242487481.html?mod=MKTW">http://online.wsj.com/article/SB122542760242487481.html?mod=MKTW</a>



<blockquote> The staggering unwind of leverage by hedge funds and other firms has resulted in sharp declines across a number of sectors and asset classes. Commodities have been especially hard hit, and gold stocks in particular have plunged since Sept. 1, performing much worse than the yellow metal itself.



Since Sept. 1, the price of gold has declined to $737.20 an ounce, down 11% from $829.30. But most gold miners have lost at least 35% of their value in that time, and some are down by more than 50%. Barrick Gold hit a 52-week high of $54.74 on March 14, but closed Thursday at $24.32 a share, a 56% drop. That is a result of pullbacks by various types of funds, forced into selling positions because of redemptions and losses.



Some would argue that the declines in the miners are overdone. After all, gold has held up better than most other commodities. The metal has fallen about 27% since hitting a high in March, while other commodities, including oil, platinum and copper, are down more than 50%.



"The reality is that gold has been sold like every other asset class to cover debt or margin calls and to preserve capital amidst a fearful and irrational market," wrote David Stein, analyst at Cormack Securities, in a note. "As a matter of fact, gold has outperformed most other asset classes over the past few months."



Gold's traditional role has been as the asset class of last resort -- that is, the one to buy when everyone flees other markets. But that has been modified as gold has become just another asset class, this one with appeal to investors hungry to take advantage of gold-focused exchange-traded funds. Now, however, that's reversing.



And the debate in coming months will be whether the economic environment sours to a point where gold continues to be sluggish, or not. The efforts by the world's central banks to reinflate the economies would seem to be a catalyst for demand, and potentially inflation, which augers for gains in gold.



However, economic demand has been slipping, and for the near-term, low global interest rates make the idea that gold will be a hedge against inflation seem unlikely.



"It doesn't appear that there is much upside for [individual] demand until late next year," said Kevin Flynn of Avalon Asset Management. "In addition, gold does best in inflationary environments (such as the 70s), and while we may see a pickup sometime in 2010, for now we're living in a deflationary world." </blockquote>
 
gold under $700 is a steal, IMO. as for the miners, no one is giving them credit for the fact that lower oil should mean much better margins.
 
Miners are such a great buy right now. So many are far under book value, have zero debt, cash reserves near their market cap values, and earnings better or equal to what they were before the 80% drops. I am up 50% since last tuesday buying and selling miners, and I'm still finding more of them.
 
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