The market for honesty: Gold at $10,000

"To those who think inflation is not a problem SocGen’s deep-thinking strategist Dylan Grice has two charts for you:




And what connects the first with the second is the fundamentally dishonest practice of printing money.
From Grice’s latest Popular Delusions note:

By issuing bonds to itself the government seems to have miraculously raised revenue without burdening anyone else. This is probably why the mechanism is universally adopted throughout the world’s financial system. Yet free money does not, and cannot, exist. Since there can be no such thing as a government, or anyone else for that matter, raising revenue ‚at no cost‛ simple logic tells us that someone, somewhere has to pay.

But who?

This is where the subtle dishonesty resides, because the answer is that no-one knows. If the money printing creates inflation in the product market, the consumers in that product market will pay. If the money printing creates inflation in asset markets, the purchaser of the more elevated asset price pays. Of course, if the printed money ends up in asset markets even less is known about who ultimately pays for the government’s ‘free lunch’, because in this case the money printing sets off its own dynamic via the perpetual Ponzi machine that is the global financial system. The ‘free lunch’ providers will be the late entrants into whatever asset-bubble or investment fad the money printing inflates.

The point is we can’t know who will pay, only that someone will pay. Thus the government has raised revenues without even knowing upon whom the burden falls, let alone telling them. Compare this to raising explicit ‘honest’ taxes, which are at least transparent. We know who levied the sales tax or the income tax, when it was levied, when it is payable, and how much has to be paid. The burden of this money printing, in contrast, seeps silently into the economy, falling indiscriminately but indubitably on unseen, unknowing victims.

The economic hardships this clandestine tax operation imposes are real and keenly felt, says Grice.

Thus, during great inflations, societies turn on themselves with each faction blaming another for its malaise: the third century inflation crisis in ancient Rome coincided with Diocletian’s infamous persecution of the Christians; the medieval European debasements coincided with surging witchcraft trials; the extreme Central European hyperinflations following WW1 saw whole societies blaming their Jewish communities. More recently, the aftermath of the historically modest asset inflations in the tech market and the US real estate market have seen society turn on ‚fat-cat CEOs‛ and ‚greedy bankers‛ respectively.

And we’re kidding ourselves if we think this isn’t happening right now.
There is inflation only most can’t see it and economists can’t be bothered to look:

By now, some of you might feel this all to be irrelevant. Surely, you might be thinking, the plain fact is that there is no inflation. I disagree. To see why, think about what inflation is in the light of the above thinking. I know economists define it as changes in the price of a basket of consumer goods, the CPI. But why should that be the definitive measure, given that it’s only one of the many possible destinations in money’s Brownian journey from the printing presses? Why ignore other destinations, such as asset markets? Isn’t asset price inflation (or bubbles as they are more commonly known) more distortionary and economically inefficient than product price inflation?

I believe economists focus so firmly on product prices in their analysis of inflation not because of any judgment over the relative importance of one type of inflation over the other, but simply because CPI-type measures of inflation are easier to see.

Whereas they should be looking elsewhere. Towards Charts 1 and Chart 2. Grice argues that demand for honest currency in an inflationary world is why the Swiss franc has risen so sharply and why the SNB is prepared to tolerate an “unlimited” debasement of the Swissy. It also why gold is arguably cheap.

That demand has overwhelmed the Swiss. But their actions merely narrow the universe of honest destinations for flight capital with which gold has historically competed. For gold has no export sector, no pop-economists to be swayed by, and no populists to pander to. Gold might be a mere lump of dense, useless shiny metal, but it’s one which crackpot central bankers can’t print. Indeed, benchmarked against the printing of The Ben Bernake, the price of gold at which the US dollar would be fully gold-backed is now $10,000.

You might think such a ‘price target’ is far-fetched (and I might agree with you). But bear in mind that the last time honesty was perceived to be so scarce – in the 1970s gold mania – the dollar was over-backed by gold (see chart below). If it happened then, why not again?

The price of honesty: Gold at $10,000."

at http://ftalphaville.ft.com/blog/2011/09/14/677216/the-market-for-honesty-gold-at-10000/