Inflation or Deflation?

My previous post mentioned a debt load of $200 trillion for the entire globe, as against a global GDP of $60 trillion a year.   Here are some more figures:

“M2 money stock has soared from about $8.4 trillion in July 2009 to $11.4 trillion now. In one year alone, from July 2013 it soared from $10.7 trillion to the present $11.4 trillion. So, there has been a vast growth of the money supply but there has been no rampant inflation. Real wages haven’t gone up enough to provide consumers with sufficient spending power to cause inflation; in fact, real wages may have declined from the 2007 level.”

It appears that there has actually been some deflation because there seems to be plenty of money on hand: $2 trillion in assets held by US companies that are not being invested.

Another voice from the trenches with numbers:

“This “inflation is coming, inflation is coming” crowd is the same one that predicted major doom-and-gloom when President Bill Clinton raised taxes in 1993. They still have to admit they were terribly wrong about that one despite the U.S. going through its only two-term recession-free presidency, as well as being the one that created the most jobs since WWII. What they did instead was, they simply subsumed President Clinton’s economic record under President Reagan’s, even though President George H.W. Bush served a term in between!

Mr. Krugman’s right, in that, many conservatives have been so worried about the Fed’s post-Great Recession monetary policy “debasing the dollar” that they have been promoting investments in gold for the past five years. It’s not been a pleasant experience, since gold prices peaked over $1800/ounce in May 2011 and have since tumbled to a little over $1300/ounce in July 2014.

But we have had an economic expansion, albeit modest, for over five years now and as job growth picks up steam, as it has in the first half of this year – inflation will start creeping in, especially if personal incomes also start to rise. At which point of time, the inflation addicts will surely say, “See, told you so” even though they had been crying wolf about it for over five years!”

So the price of gold has peaked and there has been a lot of selling to bring the price down to $1300 an ounce.  Remember 2001?  The price of gold was about $300 an ounce then.  The price peaked over $600 an ounce in 1980, then fell to $300-400 in the 1980s and ’90s before bottoming out at around $280 in 1999.  Actually, the price gradually increased throughout the 2000 decade before peaking at $1900 an ounce in 2011; in 2013, the price began to collapse and has bottomed out around $1200 in December 2013 before rebounding a bit to $1300 now.  The drop from peak to trough was an almost 1/3 loss in value, surely a serious crash.

What happened to gold during the global economic meltdown?  The price rose from $650 in January 2007 to a peak of $1000 in March-April 2008.  It dipped to $800 in January 2009 before peaking again over $1200 in December 2009.

What do these gyrations in the price of gold mean?  Well, the price goes up when people buy, and the usual reason for buying is a hedge against difficult economic times– although that reason hasn’t withstood practical testing.  We could argue that the bull market was caused by doomsday predictions and was limited by the number of people who had the fear and how much they had to spend.  The market appears to have peaked, and naturally dropped back a bit, almost a boom and bust like the price of housing in the last decade.

A final comment:

“While the M2 money stock has increased on the order of 37% from 2009 (about $8.4 trillion in 2009 to about $11.4 trillion), the velocity of the M2 supply has been decreasing steadily. As late as 2006, the money velocity ratio (basically the number of times a dollar is used to buy something that is included in GDP) was 2.0. It is presently 1.5, an historic low, and appears to be continuing to decline. With money not “turning over” in the economy, it seems to me that we are unlikely to see significant and sustained economic growth – or inflation. It is difficult for me to understand how investment professionals can overlook this and be surprised at the lack of inflation, but then again I’m not an economist and don’t possess the deep and profound understanding of economics that Mssrs Kudlow and Santelli do.

The question that I can’t seem to find an answer to is: If the load of currency printed by the Fed and injected into the economy isn’t turning over, where is it going? It can’t all be to bank reserves, which indeed are high, but it has to be somewhere. I would think that there has to be some relationship of this low velocity/high reserve situation to our present lackluster economy. It also appears to me that the inflation that isn’t occurring should be our primary concern.”

Despite the increase in money supply, there seems to be little inflation because wages have not risen and spending has not risen.  There is hidden inflation in the cost of food, among other things.  There is definitely inflation at the grocery store but it is partially hidden by smaller portion sizes and decreasing quality of goods.  The increase in food prices is likely due to population pressure but it seems to be impossible to accurately measure.