Can The Central Banks Actually Generate Inflation?

Now that central banks are openly talking more aggressively about the need to gin up inflation, the question is why have they not been able to get to their targeted 2% that has arbitrarily been targeted over the last few years? Of course, the assumption that inflation is a good thing is a retarded Keynesian notion, but that’s beside the point. Can the Fed and other central banks actually generate inflation? The answer is an unequivocal “Yes” if you define inflation as the Austrians do. To the Austrians, inflation is simply an increase in the money supply, and we have had trillions of dollars of inflation by that metric. And while most of that inflation may have risen into the financial markets, it is also true that the government’s definition of inflation is way off the mark in terms of what the cost of living is for most average Americans. Health care, education costs, taxes, and housing costs are all manipulated to paint a false picture of dollar purchasing power. So there has been a huge amount of inflation, if you define it in terms of financial assets and in terms of the actual cost of average people staying alive.

But what about the Consumer Price Index as calculated by the U.S. Government? Is it possible we could see a major rise in the CPI similar to that which took place in the 1970s when your editor’s first mortgage was a 17.5% 30-year mortgage? Jim Rickards wrote a very insightful piece, https://www.zerohedge.com/markets/rickards-fast-track-no-inflation-runaway-inflation, noting that declining confidence in the central bank could very well lead to flow of money—out of financial assets and into commodities—that could start the financial ball rolling. And I note an article this week by Lee Adler, https://www.zerohedge.com/markets/fed-has-absorbed-90-treasury-issuance-september, in which he observes that an alarming 90% of the Treasury debt sold by the U.S. Government since September has been purchased by the Fed under Chairman Powell’s “Not QE” policy. The short-term danger of the Fed not issuing more and more money faster and faster, driving interest rates lower and lower, will be the death of confidence in the Fed and the U.S. dollar. As Alasdair Macleod has pointed out on my show in the past, if the world’s reserve currency goes negative, it will be “game over” for the dollar because all the world’s commodities are priced in dollars. Why would investors opt to hold dollars that charge you to own them when they could swap those dollars for gold, which pays a positive 2% or so or in any number of commodities, all of which have positive interest rate yields—also known in “Austrian speak” as time preference values.

An inflationary view dovetails perfectly with what Michael Oliver has been warning about, based on his momentum and structure work. He has been suggesting for the past couple of months now that the dollar is due for a major decline and the entire complex is showing signs of getting ready to break out to the upside. More specifically, in last weekend’s “360 Weekend Report,” Michael suggested that a key number to watch on the dollar index is 97.27 this month. A close below that number would indicate a likely move much lower. At the close of business this week, the dollar index closed at 97.17. Regarding commodities, Michael is watching the Bloomberg Commodity Index for what he expects will likely be a breakout to the upside. The key number there for an upside breakout is 79.41 by the end of this month and 78.91 during the first quarter of 2020. At the close of this week, the Bloomberg Commodity Index (BCOM) closed at 79.35. So if both the dollar and BCOM finish where they are now by the end of December, they will be at levels that suggest a likelihood of a start of a bear market for the dollar and a bull market for commodities.  A declining dollar would likely lead to rising commodity prices. Rising commodity prices would likely lead to rising levels of inflation, which would make it even more difficult for the U.S. to fund its enormous and rising deficit. If the Fed has to fund 90% of new borrowings by Uncle Sam, is there any doubt that a start of an enormous new money creation will be created, in which event this dynamic could really get out of hand, as Rickards suggests in the above-noted essay? 

Key market metrics shown at the top left on this page are not inconsistent with this inflationary vision, which is why I’m more bullish on a whole suite of metals as we head into 2020. I’m thinking gold-copper projects might start to look much more attractive as we ring in the New Year. And I’m hugely excited about a growing number of gold exploration projects as we near the end of 2019.