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Gold Glitters As the Federal Reserve Loses Control

Precious Metals Can Offer Purchasing Power Stability in Unstable Financial Times. 

U.S. economic activity and financial-system stability face increasingly negative turmoil in the months and year ahead, exacerbated by the U.S. Government having lost control of its fiscal policies, at the same time the U.S. Central Bank—the Federal Reserve—has lost control of its monetary system and interest rate policies.  

Under such unstable circumstances, individual and private investors still have the ability to protect the purchasing power of their assets by holding precious metals. Not surprisingly, gold and silver prices recently have moved to multiple-year highs. A potential factor exacerbating these circumstances going forward, independent of long-range Federal Government and Federal Reserve fiscal- and monetary-policy malfeasance and not otherwise considered here, is the developing risk of coronavirus pandemic. 


Still, as this article goes to bed in the last week of February 2020, the U.S. popular press and Wall Street are hyping a “booming” U.S. economy, with a 50-year low unemployment rate, along with a “booming” stock market. At the same time, the U.S. Federal Reserve boasts that its policies have established an economic environment of “sustainable moderate growth.”  

Indeed major U.S. stock indices recently have been holding at historically high levels, just off all-time highs as we go to press. Consider, though, that some of the underlying “booming” economic indicators in recent months have not been so booming. For example fourth-quarter 2019 Real Retail Sales (the industry’s usual make-or-break Holiday Shopping Season) contracted quarter-to-quarter by 0.6% (-0.6%), as seen usually in recessions. January 2020 Industrial Production was on early track for a first-quarter 2020 contraction, having declined year-to-year in fourth-quarter 2019. For the full year 2019, series such as Residential Construction, Manufacturing and New Orders for Durable Goods actually contracted against the prior full-year 2018 activity.

Most recently, the Cass Freight Index®, which I consider to be the most reliable indicator of domestic freight activity, and a basic indicator of the broad economy in the United States and Canada, declined year-to-year by 9.4% (-9.4%) in January 2020. That followed annual declines of 7.9% (-7.9%) in December 2019 and 3.3% (-3.3%) in November 2019, completing 14 consecutive months of negative annual change. That pattern of severe annual deterioration last was seen at the 2007/2008 onset of the Great Recession. There are no signs here of booming or sustainable-moderate economic growth. 


Other than for recent prior readings between 3.56% in October 2019 and 3.50% in December 2019 (a true 50-year low), the January 2020 headline U.3 unemployment rate of 3.58% was at its lowest level in 50 years. While such is great headline news, it would be more meaningful if the U.S. government had not redefined its broader unemployment measures in 1994 to eliminate accounting for the long-term (more-than-a-year) discouraged or displaced workers. That 1994 unemployment re-definition timing coincided with implementation of the North American Free Trade Agreement (NAFTA), which promised to displace, and did displace, a number of U.S. workers who simply disappeared from the formal U.S. unemployment accounting measures.

At that time I undertook to estimate the broad unemployment picture as though it had continued without redefinition, and have continued to do so to date on my website. The difference today is that counting the long-term discouraged and displaced workers in the broadest unemployment measure (ShadowStats), as it had been before 1994, generates a January 2020 unemployment rate of 22.0%, versus the government’s headline broadest U.6 of 6.88% (only counts discouraged workers who have not been discouraged for more than one year), and the headline U.3 rate of 3.58% (excludes all discouraged workers and anyone who has not actively looked for work in the last 30 days). Nonetheless, related Labor Market Stress measures, such as the Employment/Population Ratio and Participation Rate, tend to reflect an economy in recession, as opposed to full employment. The stress measures are more consistent with the ShadowStats unemployment number and a deepening recession, than the 50-year-low headline U.6 unemployment of 3.6% and an economic boom.

Headline 2019 U.3 CPI-U Annual 2019 Inflation of 2.1% Reflected Heavy Reporting Gimmicks, 2019 Headline Annual Inflation Was 9.5% Net of Government Redefinitions. Also discussed and detailed on the website, I have adjusted current U.S. headline inflation for the government’s redefinitions since the early 1980s, which specifically were aimed at reducing headline inflation, so as to reduce Cost of Living Adjustments for those on Social Security or U.S. Government Pensions (in an effort to reduce the Federal Budget Deficit). As noted in the headline, the official 2019 CPI inflation of 2.1%, was 9.5% net of the gimmicks. This concept is introduced here because those gimmicks also mask Modern Monetary Theory inflation effects. Shown in the accompanying graph, artificially depressed headline CPI masks the inflationary impact/U.S. dollar debasement with the headline CPI, versus the ShadowStats Alternate CPI and the Gold Price. Where the gold price effectively has held even against the traditional, non–gimmicked inflation, such means that over time, increases in that price of gold effectively have offset the lost purchasing power of the U.S. dollar under the effective MMT in U.S. Government and Federal Reserve financial operations.  

Effective Modern Monetary Theory (MMT) Does Not Work as Advertised; It Accelerates Actual Inflation and Currency Debasement Against Gold. Previously discussed in Executive Global1, despite formal comments in opposition to formal MMT by the U.S. Treasury Secretary and Federal Reserve Chairman, expansion of the Fed’s balance sheet and U.S. government federal deficit in recent years, without any offsetting constraints, have been effective MMT.

Impact of Unfettered U.S. Federal Spending, Federal Deficit Expansion and Federal Reserve Balance Sheet Expansion Has Been to Explode Gold Prices, to Debase the U.S. Dollar. The U.S. government can and does mask its reporting of actual annual inflation, having done so specifically since the early 1980s, with a variety of reporting gimmicks. regularly has tracked and estimated what headline inflation would be today, net of those reporting gimmicks (see the ShadowStats Alternate Inflation Charts and the ShadowStats Commentary on Inflation Measurement. In particular, consider the ShadowStats alternate inflation, as plotted here, along with the headline CPI inflation and gold prices over time.


The accompanying graph plots historic gold prices since 1665 in New Amsterdam to date, showing the relative price of gold against headline inflation, and what inflation otherwise would have been without formal redefinitions by the U.S. government to cut cost-of-living adjustments for Social Security recipients, for example. Where holding gold covers actual inflation over time, it remains an extraordinarily valuable option, should anyone’s circumstance be caught up in an MMT or current mainstream “no inflation” economic euphoria. Expanded detail of the MMT fiasco will follow in a subsequent column.

With such as background, today remains a good time to look to preserve the long-range purchasing power of one’s wealth and assets with physical holdings of gold and silver.  EG

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