The Other McCain

"One should either write ruthlessly what one believes to be the truth, or else shut up." — Arthur Koestler

Consumer Confidence Sags; Fed Wants More Stimulus; Gold Gains $38 an Ounce

Posted on | August 30, 2011 | 6 Comments

The relationship between these factors is not entirely coincidental:

Gold prices soared Tuesday as Chicago Federal Reserve Bank President Charles Evans called for further monetary easing. The rally continued in after-hours trading after the Fed’s latest minutes from the Federal Open Market Committee meeting in August showed a growing number of presidents calling for more stimulus.
Gold for December delivery surged $38.20 to settle at $1,829.80 an ounce at the Comex division of the New York Mercantile Exchange.

The FOMC report is online here. It’s worth noting that gold is still below the record price near $1,900 it set Aug. 22, but the talk of more “easing” (Fed-speak for deliberate inflation) suggests that predictions of gold prices reaching $2,500 within the next few months are not unrealistic. My point is that rising gold prices cannot be dismissed as a mere speculative “bubble” so long as inflation undermines the dollar, bad fiscal policy undermines treasuries, and gloomy economic prospects undermine stocks.

The stock market nowadays is kind of a perverse measurement, as the talk of more stimulus from the Fed was cited as the cause for Tuesday’s $20 gain in the Dow Jones Industrial Average. In other word (a) the economy sucks, so (b) the Fed will do more stimulus, which means (c) cheap money for major financial institutions, so (d) buy, buy, buy!

If such dubious Wall Street logic worries you, you’re not alone:

Confidence among U.S. consumers plunged to the lowest level in more than two years as Americans’ outlooks for employment and incomes soured.
The Conference Board’s index slumped to 44.5, the weakest since April 2009, from a revised 59.2 reading in July, figures from the New York-based research group showed today. It was the biggest point drop since October 2008. A separate report showed home prices declined for a ninth month.

Let me point out something curious: Even though unemployment is around 9%, it’s been more or less stable at that rate for the past year. If the unemployment rate is not getting worse, then why is consumer confidence trending downward?

Simple answer: Inflation.

People get a lingering sense of unease when inflation silently erodes their earnings, even if they don’t have any reason to fear losing their jobs. And the biggest single asset that most people own is their homes, the value of which has actually been declining all year long. So they’re paying higher prices for consumer goods and services, even while the value of their homes decline, and it is thus hardly surprising that consumer confidence is down.

Think about what all this means: The housing market in the tank, consumer confidence down, Fed officials calling for “QE3.” As I’ve said before, “None Dare Call It Stagflation” — i.e., a return to the economic swamp into which Keynesian policy led us in the 1970s. And if this analysis is correct, gold is actually a bargain at $1,830.

However, because I don’t want to accused of hyping a “bubble,” here’s a video in which Alix Jones of interviews market strategist Phil Streible, who is bearish on gold:

Streible may be right and I may be wrong. What do you think?


6 Responses to “Consumer Confidence Sags; Fed Wants More Stimulus; Gold Gains $38 an Ounce”

  1. Roxeanne de Luca
    August 31st, 2011 @ 12:15 am

    I bought my class ring when gold was about $300 an ounce.  (It’s solid gold.)  If we get QE3, I’m going to sell the thing and put it towards a Prius, because inflated currency means higher gas prices. 

  2. Anonymous
    August 31st, 2011 @ 1:30 am

    Well if The Won wants it, Boehner is going to give it to him…in the name of reaching across the isle of course.

  3. Mark Mattingly
    August 31st, 2011 @ 2:15 am

    Real unemployment is around 19% right now, so yeah, inflation is a very, very real threat too, but unemployment is really way higher than the official figures.   Once all the money that has been printed under “quantitative easing” gets into circulation velocity we’ll have hyperinflation sure enough.  It’s like the Sword of Damocles right now, just hanging there waiting for the thread to break.

  4. Anonymous
    August 31st, 2011 @ 2:46 am

    Did the Weimar Republic give up after Pearl Harbor?  Hell no!

  5. Adjoran
    August 31st, 2011 @ 3:45 am

    The reason inflation isn’t already bad after the first two “easings” – which basically amounted to the FRB buying US Treasury debt – is because it’s being hidden.  The money doesn’t make the sudden impact directly, because it doesn’t enter the system until the government actually spends the borrowed money over time.  Also, the rise in energy and food prices isn’t reflected in the CPI (because they are so volatile, but that is hardly a reason to hide their effect) as they aren’t included in the overall “basket” of products used to determine consumer inflation.

    This and the repeated nature of the act have stimulated investment bankers, mainly, who are buying equities with cheaper dollars, so market appreciation is illusory.  But it’s also enable the FRB to keep the interest rates down, helping the federal government immensely but only putting off the inevitable tightening to another day, when it will hurt worse.  It is hard to see this action as anything but an attempt to help Obama politically.  Bernanke knows darned well what is going on with the money supply.

  6. Anonymous
    August 31st, 2011 @ 7:44 am