David Stockman: Decades of Inflationary Finance Are Finally Coming Home to Roost…Jesse Felder: Gold May Be On The Cusp Of Another Major Bull Market

David Stockman on Why Decades of Inflationary Finance Are Finally Coming Home to Roost

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Eventually, the inflationary credit emitted by the Fed works its way through the global economy and comes home to roost in the form of reduced domestic output and rising prices. In this regard, there is no more powerful tell than the round trip of the PCE deflator for durable goods during the past 28 years.

As shown in the chart below, prices for durable goods, which are now mostly manufactured abroad, plunged continuously and by a staggering 40% between early 1995 and the Covid-Lockdown bottom in Q2 2020. There is no broad-scale deflationary gale quite like it in all of recorded history.

PCE Deflator for Durable Goods, 1995-2022

What caused it, of course, was a one-time arbitrage of labor and other local production costs on the massively expanded global supply chain enabled by modern technology.

Again, however, that wasn’t a wonder of capitalism alone. What drove the global supply chain deep into the interior of China and other ultra-low labor cost venues was the Fed’s lunatic inflation-targeting policies—originally de facto under Greenspan and then eventually (2012) official under Bernanke.

The truth is, when Mr. Deng declared that to be rich was glorious and opened China’s great export factories, sound money in the US would have resulted in a continuous deflation of the drastically swollen US cost and price level that had emerged from the Great Inflation of the 1970s.

Obviously, Alan Greenspan, the once and former champion of the gold standard, was having none of it. Had he permitted the nation’s swollen cost structure to deflate in order to keep domestic production competitive, he would not have been the toast of the town in Washington. He would have been vilified by the politicians because the indicated cure of soaring interest rates and shrinking domestic credit on the free market would have made financing the giant Federal deficits which emerged in the Reagan era well nigh impossible.

So Greenspan pretended to be the champion of sound money by taking credit for a phony gain he was pleased to call “disinflation”. The latter amounted to deliberately depreciating the purchasing power of savers and wage earners, but just not quite as rapidly as during the worst days before Volcker.

Needless to say, in a globalized economy inflationary money is quite the trickster. In the initial instance it led to the massive and relentless off-shorting of production, and the re-importing of the same goods produced abroad via the cheap labor being requisitioned from China’s vast interior rice paddies.

Inflation of the dollar came back as deflation of durable goods prices!

Jesse Felder: Why Gold May Be On The Cusp Of Another Major Bull Market

Last week, the Treasury Department revealed that the federal deficit hit $1.1 trillion in the first half of the fiscal year ending in March, $432 billion larger than the same period a year earlier. Moreover, most of this expansion came in the month of March, as spending rose 36% year-over-year (not in small part due to rapidly rising interest costs). Longer-term, there is a clear widening trend that began back in 2015 that appears to now have resumed after some pandemic-inspired gyrations. And, if history is any guide, this deteriorating fiscal trend should represent a structurally bearish influence for the dollar in the months and years to come.

Moreover, if history is any guide, the best protection against a deteriorating fiscal situation (mathematically guaranteed by rapidly growing social security and medicare spending) is gold. The last time the deficit reversed from a narrowing trend and began a major widening trend, back in the early-2000’s, it coincided with a major top in the dollar index which evolved into a major bear market for the greenback (inverted in the chart below) that lasted roughly a decade. This was one of the primary catalysts for a major bull market in the price of gold which rose from a low of $250 in 2001 to a high of nearly $2,000 a decade later.

Currently, investors have little to no interest in owning gold (which is a bullish contrarian sign in my book). As my friend Callum Thomas recently pointed out, assets in gold ETFs like GLD are a tiny fraction of those invested in equity ETFs like SPY. However, there’s a good chance that the deteriorating fiscal situation will over time light a fire under investor appetites for precious metals relative to financial assets, just as it did two decades ago. And that’s exactly the sort of thing that could power another major bull market for the precious metal.

 

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