The inflation game & gold

Posted | 27/01/2015 / Views | 3302
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We speak often of the all time record levels of debt in the system today, far greater than even before the debt triggered GFC.  So how do governments get rid of the debt?  There are essentially 3 options – 1. Pay it off through higher taxes and less spending (see here why this won’t happen); 2. Default on it (as Greece is now looking to do but with obvious global consequences if one of the ‘big boys’ do); or the central bank’s favourite – inflate it away.  The theory is higher inflation while the nominal value of debt is unchanged, means the real value of the debt falls, making it easier to pay back over time.  The counter argument is that when forced on the broader public, the rich benefit from rising equities markets etc but the poor end up having to borrow more to survive, ironically increasing debt.  Inflation targeting is why they keep printing money and holding interest rates near (or below) zero to try and stimulate inflation.  As we reported Friday, the Eurozone has now entered the quantitative easing game to the tune of around EUR1 trillion (and decreased their rates to just 0.05%) in an effort to stave off deflation and the Eurozone entering a triple dip recession.  Apart from the debt issue, deflation is feared as it is a spiralling trap of less spending, meaning less growth, meaning less jobs, meaning less spending and so on.  Banking giant Societe Generale have come out saying to start such a program 6 years after the GFC will simply not work.  To have the desired effect (2% inflation) they would need to print EUR2-3trillion not a “mere EUR1 trillion” (honestly, that is a quote….).  This would mean they would need to buy shares as well as there aren’t enough bonds.  Sound familiar?  Yep, just like the failed Japanese program.  The sad fact is this all just increases the debt burden, enriches the 1%, and ultimately doesn’t work.  Last week Oxfam released a study that showed post this unprecedented global stimulus program, by next year the richest 1% will own more than the remaining 99%.  That is simply not sustainable.  Gold benefits 3 ways.  1. Demand rises as a safe haven from this scheme collapsing, 2. QE drives down currencies against the USD and hence increases gold price, and 3. The lack of yield becomes irrelevant as the real interest rate is at or below zero anyway.