"Printing" too much gold

[TEC_1998]

I know there is a lot of concern about USD in circulation.

Just read some interesting research from a firm that has been very bullish on gold prices. They still are long term, but predict about $100 to $200 drop here.

Reason:
Miners will produce "print" 50 tons more than last year
Central bank buying will drop to 300 tons this year versus last of 440 tons.
Equals an excess of about 190 tons. India's jewelry buyers are less hungry because of high prices and taxes on gold imports.
Therefore predicting a price drop.

I know some on this board believe in money should be backed by metal. If gold price thesis above actually happens then a gold backed dollar would lose purchasing power. Whether a currency is backed by bonds or metal, what really matters is whether the supply exceeds the demand.

[Mr. Tempus]

Why would anyone worry about too much currency in circulation?

The rate at which it has been growing the last 5 years has been much slower than it rate it was fluctuating around in the decades prior.
Link

[TEC_1998]

Pretty much agree with you Mr. Tempus.
My reason for agreeing is based upon relative stability of dollar purchasing power. Loses about 2% per year which is the Fed target now. Fed has MASSIVELY increased it's balance sheet buying bonds and placing more currency in circulation. In theory, a policy that should result in inflation, but so far, not much inflation because everyone wants liquidity, example the "cash is king" thinking.

[Mr. Tempus]

Pretty much agree with you Mr. Tempus.
My reason for agreeing is based upon relative stability of dollar purchasing power. Loses about 2% per year which is the Fed target now. Fed has MASSIVELY increased it's balance sheet buying bonds and placing more currency in circulation. In theory, a policy that should result in inflation, but so far, not much inflation because everyone wants liquidity, example the "cash is king" thinking.

IDK that it should necessarily result in inflation for a few reasons:
1) The Fed now pays interest on excess reserves.
2) The Fed creates reserves which are an interest bearing asset and shouldn't be confused for cash necessarily.
3) Bank lending isn't constrained by the amount of reserves, it is constrained by credit worthy borrowers, capital requirements, amongst others. What the Fed can effect which matters is the price of those reserves.

I think I need to spend a lot more time thinking about this. I think your above analysis is very much like Keynes suggested with his liquidity preference theory which I think is a very good descriptor of what happened. I wonder how changes in banking the last couple decade though have changed the types of solutions needed.

[Cassandra Joe]

IDK that it should necessarily result in inflation for a few reasons:
1) The Fed now pays interest on excess reserves.
2) The Fed creates reserves which are an interest bearing asset and shouldn't be confused for cash necessarily.
3) Bank lending isn't constrained by the amount of reserves, it is constrained by credit worthy borrowers, capital requirements, amongst others. What the Fed can effect which matters is the price of those reserves.

I think I need to spend a lot more time thinking about this. I think your above analysis is very much like Keynes suggested with his liquidity preference theory which I think is a very good descriptor of what happened. I wonder how changes in banking the last couple decade though have changed the types of solutions needed.

You missed one.

Liquidity Trap / Zero Lower Bound

The U.S. Economy has dropped through the looking glass where the optimum Fed Rate to stimulate the economy is less than 0%. In effect, they have to PAY BANKS to lend money. Except Ben won't do that.

Since interest rates are so low, banks may as well just hold cash rather than borrow or buy bonds. Bond investors aren't making money, so they would normally go somewhere else to buy bonds.

But where do they go? Remember, Bond investors are looking for SAFE investments (otherwise they'd invest in stocks). The Euro is actually deflating. Chinese bonds, if you can buy them, might just be nationalized tomorrow so you can't get your money out. Just about every other country could declare bankruptcy, making their bonds worthless.

By default, the U.S. economy is the safest place to buy Treasuries. So bond investors are willing to accept lower interest rates. Those lower rates keep inflation low.

So instead, Ben B is doing stuff like buying 4-6% long-term debt and risky public assets like CDO's with short-term debt at less than 1% (Quantitative Easing).

Remember, not long after Bretton Woods, the American Dollar became the new Gold Standard. Looks like it'll stay that way.

[WreckedParty]

I know there is a lot of concern about USD in circulation.

Just read some interesting research from a firm that has been very bullish on gold prices. They still are long term, but predict about $100 to $200 drop here.

Reason:
Miners will produce "print" 50 tons more than last year
Central bank buying will drop to 300 tons this year versus last of 440 tons.
Equals an excess of about 190 tons. India's jewelry buyers are less hungry because of high prices and taxes on gold imports.
Therefore predicting a price drop.

I know some on this board believe in money should be backed by metal. If gold price thesis above actually happens then a gold backed dollar would lose purchasing power. Whether a currency is backed by bonds or metal, what really matters is whether the supply exceeds the demand.

If you look at history and economic logic, the reason that gold is highly volatile is because there are so many dollars in relation to gold. I havnt been keeping up with the market as much as many others but if the money were anchored to a metal, and absence inflation of fiduciary media, many prices would be gently dropping and paint a different picture than what we are accustomed to.

[WreckedParty]

You missed one.

Liquidity Trap / Zero Lower Bound

The U.S. Economy has dropped through the looking glass where the optimum Fed Rate to stimulate the economy is less than 0%. In effect, they have to PAY BANKS to lend money. Except Ben won't do that.

Since interest rates are so low, banks may as well just hold cash rather than borrow or buy bonds. Bond investors aren't making money, so they would normally go somewhere else to buy bonds.

But where do they go? Remember, Bond investors are looking for SAFE investments (otherwise they'd invest in stocks). The Euro is actually deflating. Chinese bonds, if you can buy them, might just be nationalized tomorrow so you can't get your money out. Just about every other country could declare bankruptcy, making their bonds worthless.

By default, the U.S. economy is the safest place to buy Treasuries. So bond investors are willing to accept lower interest rates. Those lower rates keep inflation low.

So instead, Ben B is doing stuff like buying 4-6% long-term debt and risky public assets like CDO's with short-term debt at less than 1% (Quantitative Easing).

Remember, not long after Bretton Woods, the American Dollar became the new Gold Standard. Looks like it'll stay that way.

Except keeping interest rates to near zero has been almost a pure exercise in propping up and it seems Ben is confident that he can keep them that way forever. After Bretton Woods, weve had a floating currency standard with different countries handling different fiat currencies as long as they can keep them afloat while blaming markets for every crash we experience. Looks to me like we are standing on a pedestal that wont last.

[Mr. Tempus]

If you look at history and economic logic, the reason that gold is highly volatile is because there are so many dollars in relation to gold.

Remind me what was inflation like post WWI? I believe estimates of prices increases place inflation around 20% during the GS. And gold prices fell massively through the 80's, are you suggesting the money supply fell at a similar rate?

[TEC_1998]

If you look at history and economic logic, the reason that gold is highly volatile is because there are so many dollars in relation to gold. I havnt been keeping up with the market as much as many others but if the money were anchored to a metal, and absence inflation of fiduciary media, many prices would be gently dropping and paint a different picture than what we are accustomed to.

I am just pointing out:
a. Many are very concerned that Fed Reserve "printing" money will cause inflation.
b. Many of these same parties suggest that gold backed money would prevent this inflation.
c. IF more mine production (50 tons), and less central bank buying (140 tons), and less India jewelry buying puts more gold on the market (printing more gold), and prices for gold drop.
d. THEN a gold secured dollar would lose value (inflation).

Gold is fiat money too, there is no magic bullet.

[TEC_1998]

Remind me what was inflation like post WWI? I believe estimates of prices increases place inflation around 20% during the GS. And gold prices fell massively through the 80's, are you suggesting the money supply fell at a similar rate?

WWI or WWII? No idea on WWI, but post WWII was in the 5% and 6% is what I hear. The original operation twist. The Fed pegged rates low so they could inflate war time debt levels back to a reasonable relationship to GDP.

Volker definitely chocked the money supply with sky high rates. Not sure he actually shrank the money in circulation, but he definitely cut bank lending (banks create money too, with loans) with sky high rates. You really had to want it bad to borrow at 12% or 15% or even higher. Big time recession, Reagan's first two years were not so fun. Gold got crushed of course. It doesn't pay interest, and if you own it on margin, fo getta bout it!

[TEC_1998]

IDK that it should necessarily result in inflation for a few reasons:
1) The Fed now pays interest on excess reserves.
2) The Fed creates reserves which are an interest bearing asset and shouldn't be confused for cash necessarily.
3) Bank lending isn't constrained by the amount of reserves, it is constrained by credit worthy borrowers, capital requirements, amongst others. What the Fed can effect which matters is the price of those reserves.

I think I need to spend a lot more time thinking about this. I think your above analysis is very much like Keynes suggested with his liquidity preference theory which I think is a very good descriptor of what happened. I wonder how changes in banking the last couple decade though have changed the types of solutions needed.

I think what you are getting at, is that the velocity of money has dropped like a ROCK. Doesn't matter how much money the Fed has put into bank balance sheets. Banks don't want to lend, and folks are reluctant to borrow. Changing gradually here for the better I believe. A little more lending, a little more borrowing. Not exactly setting the world on fire are we?

When velocity picks up, I wouldn't want to be in Ben's shoes. He's going to have to dance like Fred Astaire.

[WreckedParty]

Remind me what was inflation like post WWI? I believe estimates of prices increases place inflation around 20% during the GS. And gold prices fell massively through the 80's, are you suggesting the money supply fell at a similar rate?

Oh im not neccessarily saying that the money supply fell post WWI, actually if I recall correctly, the money supply was doubled during that era. If you have a central bank or banks that can just print fiduciary media at will, then you get that result. That is hardly what people who advocate the gold standard would point to. Might I suggest a little Rothbard for your curiosity?

[WreckedParty]

I think what you are getting at, is that the velocity of money has dropped like a ROCK. Doesn't matter how much money the Fed has put into bank balance sheets. Banks don't want to lend, and folks are reluctant to borrow. Changing gradually here for the better I believe. A little more lending, a little more borrowing. Not exactly setting the world on fire are we?

When velocity picks up, I wouldn't want to be in Ben's shoes. He's going to have to dance like Fred Astaire.

Actually this makes alot of sense. In order for there to be alot of inflation from all that injection, absent wage and price controls, the money has to actually get out there. In a sense the low amount of lending could be preventing something worse from happening.

[Mr. Tempus]

I think what you are getting at, is that the velocity of money has dropped like a ROCK. Doesn't matter how much money the Fed has put into bank balance sheets. Banks don't want to lend, and folks are reluctant to borrow. Changing gradually here for the better I believe. A little more lending, a little more borrowing. Not exactly setting the world on fire are we?

When velocity picks up, I wouldn't want to be in Ben's shoes. He's going to have to dance like Fred Astaire.

Not entirely what I'm getting at. The velocity of money did drop, but I'm not sure you got the mechanics right. The Fed has created a lot of reserves not money. It seems you are thinking that the Fed creates reserves, then banks lend out those reserves. This is how some econ textbooks still teach it and how many people perceive it, but it really has the causation backwards. Banks create loans first and then create deposits, then borrow reserves to meet reserve requirements. The Fed in the very short run targets a price on those reserves, so the Fed has to be willing at any time to supply banks with as many reserves as they want otherwise they can't control that price and risk creating a breakdown in the payment system.

What determines lending is a) how many credit worthy borrowers there are, b) whether or not banks can meet capital requirements and c) what the price of borrowing those reserves are.

The Fed meets every couple months to set the the price of those reserves(Fed Funds Rate), if it feels that banks are lending too much and there is risk of inflation it will set a new, higher target rate which banks have to pay to borrow for their lending. The higher that is, the less banks lend.

Hopefully that helps clarify, although probably not if you are like me.

[Mr. Tempus]

Oh im not neccessarily saying that the money supply fell post WWI, actually if I recall correctly, the money supply was doubled during that era. If you have a central bank or banks that can just print fiduciary media at will, then you get that result. That is hardly what people who advocate the gold standard would point to. Might I suggest a little Rothbard for your curiosity?

My understanding(and its been a while) is that in WWI we did everything we could to avoid entering to lend money to foreign countries and accumulate gold. We then suspended the gold standard ourselves* and printed a bunch of money to pay for adventures.....So inflation took place, in 1920ish they actually did contract the money supply temporarily to stop that inflation, which leads to Rothbard. Rothbard cherry picks his data as he uses the bottom of that very short contraction of the money supply as a starting point. Most of that new money creation that Rothbard claims happened went on within the first few months of that decade as it was simply reversing that contraction. That means for much of the decade there was little money creation.

As Scott Sumner said, if we use the price of gold as a proxy for inflation(which is common among internet austrians, although not really accepted as valid measure by actual economists) the annual inflation rate was 0%.

A good article on Rothbards account of the Depression can be found here.
http://marketmonetarist.com/2012/02/...writers-block/

*The biggest issue of a G.S. is what kind of G.S. are talking about? Unless it is gold coins, then we are having one where the gov't controls the dollar price of gold. If that is the case a government could print money and change the dollar price or suspend it altogether just like it did during WWI if it really wanted, thus I never understood why that is supposed to prevent governments from inflating. There seems to be much better alternatives.