O Inflation, Inflation, wherefore art thou Inflation?

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Finanza Operativa di Finanza Operativa 19 Maggio 2015 | 13:00

di Walter Snyder, Swiss Financial Consulting

We know what inflation is and how to fight it by raising interest rates. The problem at present in the US, Europe and Japan is to create inflation as efforts to date have been ineffectual in bringing about a rise in prices. At the same time sovereign debt has never been higher so that a rise in interest rates could bring about government default in serving the debt if there is no inflation. That is a very dangerous situation and partially explains why the BIS is so intent on manipulating the gold price with the purpose of eliminating gold as an alternative currency to fiat paper and computer money. Goldman Sachs and JP Morgan have bought piles of silver lately, so one might think that when the crunch comes and fiat currency loses all credibility, silver-backed currency will come back into vogue. Mexico minted silver pesos recently in what seems to be an anticipation of what is to come.

So where has inflation been hiding? Lowering interest rates to fight the panic of 2008 has led to a new situation where central banks have no other possibility to spur economic growth than to type bigger and bigger numbers into computers. The Japanese show that QE does not produce inflation nor does it eliminate stagnation.

Theoretically a large supply of liquidity should result in higher prices as the value of the currency falls, all other factors being equal. This has not happened.

If one looks for what other factors could produce inflation, it is clear that wages for workers is not at the moment a deciding factor. There is pressure in China for higher wages, but then companies can easily move to other places in South East Asia. In the US wages have remained low, and also Germany has kept workers` pay relatively low.

Commodity prices have fallen due to a strong dollar and the sluggish global economy while at the moment there are no marked shortages in raw materials although that may change for some metals in the near future. The supply of oil has even increased thanks to fracking, and the price has accordingly fallen, further complicating the task of producing inflation instead of deflation.

Deflation is a real danger to the bond market if and when interest rates should rise in the US, Europe and Japan. The paper value of issued bonds will fall as interest rates rise, bringing about huge losses, at least on paper, all around the world. Creditors will suffer grievously for years and will lose out if they try to sell their rapidly depreciating assets. Smart investors will have long since got out of bonds into equities, real estate, commodities and precious metals like gold and silver.

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