Wage and CPI inflation, even core inflation, has surprised to the downside four consecutive months. If a recession hits, and that is just a matter of time, outright price deflation is likely.
Via email, Albert Edwards of Societe Generale discusses the subject in Global Strategy Weekly.
US core CPI and wage inflation have surprised on the downside for four successive months. Usually only two data points are sufficient for most of us to be able to draw a trend, but four data points surely provide clear evidence of the decisive re-emergence of a deflationary trend. At the very least this recent data is grounds for a dismissal of the argument that ‘end of cycle’ inflationary pressures might make a brief appearance before the long-term deflationary secular trend reasserts itself in the next downturn.
If inflationary pressures are indeed ebbing in the US economy, this begs the question that if the third-longest cycle in US history cannot produce a cyclical uplift in wages and prices, what on earth will happen in the next recession! Investors might give some thought to the fact that we are now just one recession away from Japanese-style outright deflation!
The US is not alone, however. The ever topical Gerard Minack shows in the chart above that although the number of OECD countries in absolute deflation at the core CPI level has receded, those undershooting a typical core CPI target of 2% are at an all-time high. This is quite amazing given where we are in the global economic cycle.
What’s That Mean for Gold?
Contrary to popular belief, gold is not an inflation hedge. We had inflation every step of the way from 1980 to 2000 with gold falling from $850 to $250 along the way.
To be more precise, we had disinflation, a falling, but positive rate of inflation as measured by the CPI. Those are conditions in which gold tends to perform miserably.
Gold tends to do well in deflation, stagflation, and times of credit stress. More importantly, gold does well when confidence in central banks is on the wane.
On June 24, I gave a presentation to the Venture Alliance group. Here are a few slides on gold from my presentation.
Faith in Central Banks
The second to last slide above is worth a detailed inspection. Here is the timeline.
- August 15, 1971: Nixon closed the gold redemption window. Gold was $43.15 per ounce.
- January 21, 1980: Gold closed at $850 an ounce. That was the market top for decades.
- March 1980: US inflation peaked at 14.8%. The Federal Reserve Board led by Paul Volcker raised the federal funds’ rate to a peak of 20% in June 1981. It was not the rate of hikes that directly led to the plunge in gold. Rather, the rate hikes convinced the public and the markets that the Fed had everything under control.
- August 11, 1987: Greenspan took over as Fed chair. The “Great Moderation” started. Disinflation and slowing falling interest rates were the norms. Greenspan was labeled the “Maestro”. Faith in central banks peaked under Greenspan.
- May 7, 1999: The Bank of England announced plans to dump gold for other assets. The price of gold was $282 per ounce. The advance notice of the sale drove the price down by 10% by the time of the first auction on July 6, 1999. With many traders shorting, gold reached a low of $252.80 on July 20. This is frequently called “Brown’s Bottom” after Gordon Brown, the UK Chancellor of the Exchequer.
- 2000-2007: The DotCom bubble burst and Greenspan slashed interest rates to a then record low. This was followed by a housing bubble, a housing bubble bust, and Greenspan leaving the Fed. Ben Bernanke took over. Bernanke slashed interest rates to nearly zero and kicked off three rounds of QE. Faith in central banks was again in question for most of this timeline.
- August 23, 2011: Gold peaked at $1923.70 with a European debt crisis underway, worries about Greece, and with the Fed involved in a series of QE actions.
- July 26, 2012: Mario Draghi gave his famous “Whatever it Takes” speech. “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” Faith in central banks was temporarily restored.
- November 22, 2015: Gold touched $1056. In the chart, I gave a December date. That timeframe is when faith in central banks hit a rebound peak.
- Present: A debate is on whether or not the Fed is behind or a head of the curve. Dissent at the Fed as to whether it should be hiking or cutting is widespread. Many economists advocate a higher range of inflation even though the Fed cannot get to 2% inflation. Asset bubbles are numerous and obvious to many observers, but not the Fed.
The price of gold closely follows faith in central banks. If you think faith in central banks will again come into widespread question, then add to your gold stash.
Deflation on Deck?
Is deflation on deck? Yes, asset deflation, a very destructive kind of deflation.
CPI deflation is not to be feared. More precisely, CPI deflation is a benefit. Falling prices increase purchasing power by definition and thus raise standards of living.
Yet, central banks (especially the Fed, ECB, Bank of Japan, and the People’s Bank of China) foolishly poured trillions of dollars into the economy an attempt to boost CPI inflation.
Instead of boosting the CPI, central banks created numerous asset bubbles. When asset bubbles burst, and they always do, bank loans based on inflated asset values come into question.
This is precisely what happened in the housing bubble, and it will happen again, perhaps not as severely globally, but it may be crippling in the EU.
Economic Challenge to Keynesians
Of all the widely believed but patently false economic beliefs is the absurd notion that falling consumer prices are bad for the economy and something must be done about them.
I have commented on this many times and have been vindicated not only by sound economic theory but also by actual historical examples.
- My article Deflation Bonanza! (And the Fool’s Mission to Stop It) has a good synopsis.
- My Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” has gone unanswered.
There is no answer because history and logic both show that concerns over consumer price deflation are seriously misplaced.
BIS Deflation Study
The BIS did a historical study and found routine deflation was not any problem at all.
“Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the study.
It’s asset bubble deflation that is damaging. When asset bubbles burst, debt deflation results.
Central banks’ seriously misguided attempts to defeat routine consumer price deflation is what fuels the destructive asset bubbles that eventually collapse.
For a discussion of the BIS study, please see Historical Perspective on CPI Deflations: How Damaging are They?
Meanwhile, economically illiterate writers bemoan deflation, as do most economists and central banks. The final irony in this ridiculous mix is central bank policies stimulate massive wealth inequality fueled by soaring stock prices.
Click here to view my entire Venture Alliance Presentation, 38 slides in all.
Mike “Mish” Shedlock
Great presentation. So you believe we are not far from the ledge?
Well done, Mish! I would add that in Prechter’s ‘Gold is money’ charts of the Dow adjusted by gold price, the US peaked in 2000, and is in a rather lengthy bear market rally that hasn’t approached the old highs.
that was interesting. I noticed that the charts show the “valuation” of everything basically following the same pattern. so my questions is, if assets, of all sorts go up, then gold did too, and if they go down, won’t gold go down too?
or are we looking at the value of usd going down, instead of things becoming more valuable?
are these charts really showing how valueless the dollar is becoming? I mean an ounce of gold stays one ounce. it’s just how many dollars does it take to buy one. so gold doesn’t really go up in value, it just takes more usd to buy an ounce, which to me means the value of a dollar is less value.
I would think an ounce of gold is a constant and the usd a variable.
“I would think an ounce of gold is a constant”
Yes, it remains 1 oz. 🙂
10/10 wrldy, you are learning!!!
Now: Define the relationship gravitational acceleration shares with mass, and whether density may effect the result due to any characteristic of propagation . You have 1 second to answer.
Aaaaahhhh 🙁 .
Next time maybe, but keep trying..and remember ” Gold comes from supernovas, dollars come from what they owe ya “.
We are all star vomit.
Very eloquent, however gold is unchanged since the ‘spewing event’, if you will pardon the undigested crudity of my reply, the rest of the ‘barf’ tends to metamorphose from its ‘puky origin’ into something more base, as you so admirably demonstrate, and much to the organic glee of biological process as we know it. For some peculiar reason though, the resulting creatures have a manic tendency that gravitates them towards the possession of gold, either because “pebbles are a crap present” or just maybe because it reminds them of the purity of their origin, no matter how putrid they may since have become.
You are one creepy individual.
The one second opportunity to answer and then not posting it to actually give me that one second?
I do say, I am impressed by his knowledge of 7th grade Earth Science and 10th grade Physics.
More along the lines of how you can’t post anything without him showing up to insult you. This time he was just exceptionally peculiar in his insult. Serious rage envy towards you. I picture him walking around saying “It rubs the lotion on its skin or else it gets the hose again.”
ROFLMAO.. With the pe’nis tuck!!!
…and you wanted more info on my CV. That would be very very very bad.
Honi soit qui mal y pense.
1 second is stating the obvious, as did wrld.
Glad that you both found a buddy, frees me.
… some of us are buying and holding gold for entirely different reasons. Not as a form of speculation, but entirely the opposite. In the words of the management consultant Andreas Acavalos, the decision to buy gold is not an investment. Instead, ‘It is a conscious decision to refrain from investing until an honest monetary regime makes rational calculation of relative asset prices possible.’
In and of itself, that sounds like a form of speculation. I do sincerely wish you luck with your holdings while you are waiting. I have owned significant quantities of gold on multiple occasions, it’s just been some time since I have. At the moment, I find base metals more attractive.
sounds crazy, but some now argue that QE was deflationary for the real economy and the end of QE will be inflationary.
I agree with much of your presentation. I also agree that deflation in things like food and clothing is a good thing, especially for the bottom 90%.
I’m not sure that asset bubbles will burst, and cause widespread economic disruption. There are so many asset classes that have been affected, and many of them are like a game of whack-a-mole, going up and down constantly, but never crashing. (gold, bitcoin, ethereum, art, cars, homes, stocks etc.).
I personally believe that gold would be higher if not for digital currencies. They are becoming an alternative to gold. So I am less certain about gold and it’s future role.
If you believe that these digital “currencies” are anything more than yet another vehicle to speculate in, in this final degenerate phase of our phony, corrupt monetary system (and the fallen society that embraces such things), and that they will have enduring value, then you are definitely “a man of the times”.
That is about as politely as I can put it.
Stuki Moi said:
Bitcoin has enabled plenty of Chinese to move money out of China. Something many of them would otherwise not have been able to. That’s hardly just speculation. Ditto for dope aficionados and people with ailments, having been able to buy drugs, prescription or otherwise, that they, absent Bitcoin, would not have been able to.
It definitely is a sad feature of life in our bottom of the barrel dystopia, that the only thing the average drone is able to recognize wrt Bitcoin, as with most else really, is speculation. Or “investment”, as the banksters tell them to call it. As if that somehow makes the activity any less useless. But heck, the same well indoctrinated drones can’t see further, even with regards to the roof they have, or don’t have, over their head, so what else can one expect? It’s what the progressives would call successful public education poolicies.
“We had inflation every step of the way from 1980 to 2000 with gold falling from $850 to $250 along the way.”
The $850 price was a 1/2 day event. Gold only had a few readings above $700. It’s more accurate to use a longer term moving average with something as volatile as gold.
The FRED chart in the article shows 3 equal peaks in 1980 with all of them just below $700.00, so that seems to be how they do their charts.
Monthly charts are monthly close values
Bobby Hill said:
This post is the insight for which I never leave this blog. Thanks for it.
Dunno, but all this brings to mind another “Presentation ” from “Da Man” a while back. Granted, it wasn’t jazzed up like a Power Point slide show, or anything. But all things considered, “Da Man” has so far kept the goblins at bay.
Mox Nix said:
“Of all the widely believed but patently false economic beliefs is the absurd notion that falling consumer prices are bad for the economy and something must be done about them.”
Perhaps those economists that believe this statement “falling consumer prices are bad for the economy” have a large home mortgage or Real Estate portfolio that would take a huge hit if they were to see deflation..
Stuki Moi said:
Or work for someone who does…… One way or the other, whatever their motivation, all they are doing is championing crass theft.
Yes, the whole point of taking on debt for something like a mortgage is betting that the dollars used to pay back the loan are going to be cheaper than the dollars at the time of purchase. Otherwise you’d just save money until deflation made it so cheap you might as well buy.
Stuki Moi said:
…..In the process solving the problem of over indebtedness. And the problem of lack of international cost competitiveness for industry.
While getting more house, for less money. Hence providing for more good quality middle class jobs, in actual value adding construction.
But of course also, and hence why the drones are being told this is somehow bad; resulting in you being less dependent on, and indentured to, the bankster, ambulance chaser and apparatchik classes.
If that was the price chart of any other asset you would call it a bubble. Gold is shiny and durable and people like it as jewelry.
You got it right Mish! People get what they want when they’re able to get it. NOBODY makes an inflation projection and [endlessly] forestalls gratification for a future lower price–NOBODY [ok, a very…VERY few do]. In fact, people already demonstrate that for the most part in their desire to voluntarily pay a price premium (interest) by buying on a credit card rather than waiting to pay less in the future via saving. That alone is enough logic to validate your side of the old “inflation is good” argument.
Well Mish you were certainly right, right from the beginning saying that beyond stabilizing the banking system, it should stand on its own. Later when the Fed slashed interest rates down to a quarter of a point and flooded the banking system with QE-1-2 and 3, I remember the great battles you and Peter Schiff had as he bought gold for his people as did many others since inflation was coming. Bernanke was trying to reinflate the housing market at first while the bankers were having a blast creating new leveraged financial products such as credit default swaps, collateralized loan obligations and other leveraged products later referred to by Warren Buffett as financial weapons of mass destruction. At the time you were saying to a deaf world the Fed had no idea what it was doing, that this was a credit event with no way of knowing where this liquidity would go at least at the beginning. I think is was extremely important that you, and only you at the time mentioned, since the whole world followed us with seductive money from keyboards to hold down the value of their currencies, you mentioned global wage arbitrage. For America this became a very disinflationary event as our trade deficit exploded with cheap foreign goods, as inflation began to blast off in our equity markets. Then Bernanke said that was what he was after all the time, to get the economy going with the wealth effect from his great bull market he smiled.Well all this worldwide debt in the greatest financial experiment in human history will have have a golden end to it I do believe. Going off the discipline of gold made this whole thing possible, so when things begin to collapse, you won’t be able I don’t think to buy your gold with bitcoins. Too much around to confiscate, so they’ll try to tax it, and at that point it will disappear!
Mish I spent a good deal of time on my post so will u at least read it as I’ll b anonymous
I was out for sunset
Your comments appreciated
Price deflation is good. Government deflation is better.
The two together is best.
No mention of bonds?
Treasuries a relatively safe haven. Junk corporates rate to get smashed
Many of us must be wondering if the reverse of 1980’s will happen. I/rates go up, bond vigilantes run amok, bond capital goes to gold…
“This is precisely what happened in the housing bubble, and it will happen again, perhaps not as severely globally, but it may be crippling in the EU.”
Given that this time it is everything bubble why do you feel it would not be as severe globally? In fact I thought it would be more severe because this time the belief in the central bankers is going to be severely tested when it pops…
On a relative basis – European banks are in far deeper trouble.
Bernanke bailed out US banks by paying interest on excess reserves.
Draghi made matters worse for banks by dropping yields negative – essentially charging them for reserves.
I really enjoy your site. Perhaps I am missing something. Your point about deflation being desirable is quite clear with one exception – my mortgage. Wouldn’t broad deflation essentially cause all debt payments to essentially increase?
Thanks for any comments.
Debt payments stay the same in nominal terms but they rise in real terms. If wages drop or you lose your job you are in trouble.
But this is precisely the problem of a Fed always seeking inflation and the asset bubbles they blow.
Mish, wouldn’t what you said happen exactly, if the FED had been trying to hold inflation to 5% since forever, and then started setting inflation to 1%, as happened after the dotcom?
The decreasing availability of assets (peak oil, for example) combined with fixed or increasing purchasing assets (m3, due to the FED efforts) and increasing population would force wages down, because in fact peoples’ purchasing power overall would have to decrease to match the reduced assets.
Robin Banks said:
If Carl Bass and Steve Keen are right and the Chinese credit bubble pops in the near future then the resulting crash will lead to a significant fall in the value of the yuan. This will cause global deflation when Chinese goods and services become even cheaper. The Chinese yield curve inverted so I think they are on the money, like they were in 2005/6.
I note the US yield curve is flattening with short term yields rising and 10 years stuck at 2.3%.I won’t be surprised to see it invert. When it costs more to borrow short term vs long term you have banking distress (see Northern Rock 2007/8 in the UK).
As for gold, the Russians aren’t accumulating 1600 tonnes of the stuff because they like the colo(u)r.
G A Sinclair said:
Total assets in the banking system in China are more than 4 times larger than in 2008 and in the Shadow Banking system it is some 20 times larger (approaching $25 trillion). This segment is unregulated. In the U S banking system we are up a net $1 trillion after printing $4 trillion and putting $2 trillion back to The Fed as excess reserves. Let’s see that is an increase in the US of less than $2 trillion while China increased $30 to $40 trillion. Now you get the reason for the concern; it is huge bucks. China’s debt to GDP is approaching 500% according to my calculations compared to around 300% for most naive analysts. Of the less than $250 trillion in global debt, China is near $50 Trillion and a lot of it is tied to their real estate. What could go wrong as they have millions of unoccupied apartments that are held as a store of value instead of for rental income?
As Jim Rogers would say, you peel well the apples, Mish, like an economist without an agenda. Masterful.
Having scuttled the Euro and the USD via the DXY plus the Yuan, all in order to erase Italy’s current debt while concealing capital flight from Club Med plus Belgium to D,NL, LUX and parts of CZ
with 60% of the US working pop holding only 3 months .household expenses, what about civil war
accompanied by migration left to Erdogan and the Middle East left to disciples of OBL…
WIith mutual funds and ETF’s at 30% leverage and 30 X turnover horrifying John Bobgle with 3 X
on his Index Fund; 100% on Hedge Funds the big question is where to buy gold with weak strucfures depending upon undercapitalized banks, e.g., Barclays, HSBC, etc. for recovering funds
while.banks close everywhere with their own scams: capital controls, etc. not to forget ,my
Chase colleague Philip. Bennet doing 25 years for causing the loss of Jim Rogers” clients funds which were merely transiting EDF. Man. Depositories mainly do no physical inventory. I found one whose books are audited by its owners whose name rhymes with the well known Canadian gold exploration company. Well known depositories charge ça 8% for selling gold coins you purchased
from them or change their main coin with a huge markup such that you take all the risk in a volatile market while they gouge you. Goldmoney staff did not impress with handling my questions, the founder having folllowed me on Chase’s training program. I had an inconclusive chat with him.
Mike Bravo said:
Yeah, energy might cheapen, owing to weak demand, so you can tank your car, but I doubt there will be any meaningful deflation for the average consumer, i.e. food and clothing are unlikely to get much cheaper (they didn’t during the GFC), though wage deflation continues to be a real threat if the arbitrage against third-world sources of labour continues..
FlyOver Country said:
Mish, you berate the accuracy of the CPI often on you site, this being an example I remember off hand
But then you use the CPI to support your argument when it starts trending in your favor to support a deflationary argument. So is the CPI a valid indicator or not?
In context, it is easy to know what I am talking about.
Real inflation is running rampant. Asset bubbles are proof.
Gold tracks confidence in Central banks and CPI inflation (disinflation)
Is that so hard?
If gold is so worthless why does Fort Knox still exist? Ignoring the nut jobs who think it’s all been removed and sold of course.
Shouldn’t the government liquidate the gold to help pay down the debt? And guarding all that specie isn’t free either. Or (really radical idea), let the American people exchange their FRNs for it and get it back into circulation. It still would sit in vaults since the FRNs are the cheaper currency, just not the government’s vaults.
The US gov’t would never sell gold to reduce the debt. Our debt is denominated in USD. We can just print USD and retire the debt. Something the FED has effectively been doing off and on for the past few years.
Gold. Gold. Gold. If we lose total confidence in our fiat currency and society totally breaks down a loaf of bread will be worth more than a bar of precious gold.
Stuki Moi said:
It won’t. Baking a breadloaf, is plenty easier than mining a bar of gold. Hence why gold has been chosen as money in preference to bread loaves, wherever both have existed.
In reality, if “we lose total confidence in our fiat currency and society totally breaks down,” we’ll all be much better off than we currently are.
bread is perishable. gold is static & unchanging.
even in pure anarchy, a few staples serve as money/currency: booze, cigarettes, coffee beans, jewels & PMs.
one must distinguish b/t that which can be preserved & traded, and that which must be consumed… all things can serve as ‘money’, but some commodities are 1000x better as currency than most of the others…
If you are starving you will trade your bar of gold for a loaf of bread. When the world is in chaos, it is food and guns that matter, not gold.
Ben Franklin said:
yet you just admitted that someone who has plenty of bread will trade it for gold so clearly its good to have along with those other things.
Would it be fair to say that a crash will ONLY start the day when the asset cannot be inflated any further. My point is this… say a house sells for $2million today, $3 million a month later and so on and on till a point at which there will be no buyers. It can be 10million or 20 million… No timeline either. Will the CBs be able to stop it this time say with a $10T QE program and what else they may come up with…
It will stop when attitudes change or when there is a bond market revolt
Gold does great relative to equities when the stock market crashes.
Ben Franklin said:
“The final irony in this ridiculous mix is central bank policies stimulate massive wealth inequality fueled by soaring stock prices.”
That is part of the goal.
Robert B. Eckhardt said:
“You shall not crucify mankind upon a cross of paper”
because they’ll do it themselves.