My Inflation/Deflation Watch (IDW) Registers a Definitive New High at 160.38

I started my IDW on January 31, 2005, as a means of sensing whether the global stock, bond, and equity markets are inflating. As you can see from the chart above, except for the financial crisis in 2008-09, the system has been inflating. Over the past 11 years and 10 months, my IDW has risen 60.38%. Of course, we know from the Austrian economic school, inflation occurs by definition when the money supply increases, which is why I have included both commodities and stocks as well as U.S. Treasuries. While a 60.38% rise may seem like a lot, there can be no doubt that my IDW grossly underestimates inflation because it is a non-weighted index and we know that the dollar value of U.S. Treasuries has risen far more than the 38.37% price increase of the 30-year ETF, which is used as a proxy for U.S. Treasuries in my IDW. If you want a more truthful estimation of real inflation, you need look no further than the dramatic rise in the Fed’s monetary base, which is displayed on the following page.

The chart on your left displays the rise in the monetary base from August 1971 when Nixon removed gold from the international monetary system until September 2017. This measure of high-powered money grew from 69.8 billion to 3.885 trillion! That’s a 55.6-fold increase and it is a very accurate measure of “inflation” since the U.S. decided to uses its military might and global status to  force the world to accept intrinsically worthless dollars.

Since the inception of my IDW, it has risen by 60.38% to hit a new definitive high. But compared to the monetary base, it has a very long way to catch up to what is often called “high-powered money.” From January 31, 2005, when I began keeping track of my IDW, the Fed’s monetary base has grown from 806.16 billion to 3.885 trillion! That’s a gain of 475% and a rise of 7.9 times more than the gain registered by my IDW since Jan. 31, 2005. Again, let me reiterate that my IDW is not a weighted index. Most of that monetary base is in U.S. Treasuries, which is where the biggest amount of inflation resides. And since Treasury money can be leveraged up into the financial markets, it’s one of the main reasons why the equities, both domestic and international, are among the biggest gainers in my IDW. If you exclude the two monetary metals, the top three categories in my IDW are equities (Chinese, Indian, and the S&P 500).

Now here is why I think this discussion is so important. Not only has my IDW broken out to new highs, but as discussed on my radio show a few weeks back, Alasdair Macleod explained the dynamics of why a large chunk of that enormous high-powered money—the Federal Reserve’s monetary base—is likely to start to make its way into the real economy and start serious commodity price inflation. As Alasdair noted, as rates rise (which by the way are not within the Fed’s control) banks that hold Treasures begin to lose money on those positions. To avoid losing money, on their Treasury positions, so they sell Treasuries and use the proceeds to make loans. That stimulates demand in the real economy, which bids up prices. With rising prices, the Fed may want to restrict the money supply but if it does, it raises rates further thus leading to more losses on Treasuries and banks selling still more Treasuries to make more loans.  But that’s not all. As prices start to rise, monetary velocity begins to rise, meaning that the more rapidly money turns over, prices rise faster and faster, thus causing an endless feedback loop. This is why I’m beginning to worry about hyperinflation.  

Now you might argue, as I have in the past, that with so much debt in the system, we are likely to face deflation, as we started to with the 2008-to-2009 timeframe. But the entire establishment and for sure the upper echelons of our society, the 1% folks for example, which includes a large percentage of Congress, are hellbent on avoiding another such event. As such, I would suggest that all manner of money will be created to keep the equity market afloat. If it slips, look for direct funding of equities, which of course will mean that those of us who are average folks will continue to slip down through the middle class into poverty. Of course, at least a partial answer to that is to continue exchanging dollars into gold and silver. Those two metals have preserved wealth very well since January 31, 2005, as you can see from the breakdown of the components of my IDW. Applying Alasdair’s insights along with confirmation of moving market plate tectonics provided by Michael Oliver convinces me that in 2018, a whole suite of commodities will start to play catch-up with stocks and bonds. 2018 should be a very exciting year for this letter.

About Jay Taylor

Jay Taylor is editor of J Taylor's Gold, Energy & Tech Stocks newsletter. His interest in the role gold has played in U.S. monetary history led him to research gold and into analyzing and investing in junior gold shares. Currently he also hosts his own one-hour weekly radio show Turning Hard Times Into Good Times,” which features high profile guests who discuss leading economic issues of our day. The show also discusses investment opportunities primarily in the precious metals mining sector. He has been a guest on CNBC, Fox, Bloomberg and BNN and many mining conferences.