In the 1970’s and early 80’s a process was initiated by the “Nixon” administration and experienced during the “Carter” years the emergence of an ‘anomaly’ termed “STAGFLATION”.
A termed coined by none other than Harry Schultz - whereby during tough periods of time, people focus their purchases on what they need and not on what they want because of high unemployment and rising costs.
So during these times the U.S economy was faced with soaring commodity prices while jobs were vanishing and interest rates were on a steep upward rise as the Federal Reserve attempted to halt the inflationary pressures that threatened everything within its sight.
With short-term interest rates reaching 19%, borrowing evaporated due to its high cost, causing business activity to stop to a near stand still.
Stagflation is what the 70’s was all about and it drove “GOLD” to its all time high of 887.50 (cash price) in 1980 and will in today’s U.S Dollar ‘relative’ value a whisker above $2000, ‘economically’ the ‘numbers’ seek $1650 as ‘equilibrium’ according to Mr. Sinclair.
Thus, “stagflation” is extremely friendly to Gold.
Stagflation is part of the normal aftermath of a period of excessive aggregate demand called ‘demand pull inflation’. If aggregate demand is exceptionally high, the economy may reach a short-term equilibrium above full employment known as an ‘inflationary gap’.
This will in turn put pressure on the labor market, usually for skilled labor, forcing wages higher. Rising wages is an extra burden or cost to business. Businesses, in turn raise the price of their goods and service to sustain profit levels causing ‘inflation’.
Higher prices cut into a consumer’s purchasing power, this is their disposable income, as well as net exports as domestic goods and services become over priced on the International market.
Eventually output falls but prices continue to rise while the economy is growing slowly or in a “recession”.
Stagflation is also typical on the ’supply side’ as a result of adverse shifts of ‘aggregate supply’. This is a situation where the fall in output coincides with acceleration in ‘inflation’.
This was one of the main reasons why the International economy was plagued by stagflation from the mid-1970’s to early 1980’s, a phenomena rearing its ugly head today.
Thus there are two elements to inflation: - “Monetary Inflation” which is an expansion of International liquidity in whatever form it takes and “Price Inflation” which is a product of monetary inflation.
Gold “bottoms” in monetary inflation and “accelerates” with higher rates in price inflation.
A slow down of demand and increased costs is negative to the U.S and history alludes to the fact commodities first appreciate in demand and the U.S Dollar depreciates and then continue the upward spiral in periods of “Stagflation”.
As business profits rollover US tax receipts drop and any modest drop in tax receipts will in effect severely increase the US Federal Budget Deficit.
An increase in the US Federal Budget will force the US Dollar to decline significantly because the hope for any ‘fundamental’ improvements is unfortunately dashed.
A decline below the USDX .80 level will result in a new high for “Gold” above the 732 (futures price) level causing Federal Debt Securities (bonds and treasury’s) to decline sharply and thus increasing interest rates.
Gold will rise sharply due to the inverse relationship with the U.S Dollar.
Therefore the future is ‘deflation’ in terms of ‘debt’, ‘inflation’ in terms of ‘liquidity’ and ‘stagflation’ in terms of ‘rising prices’ of goods and services.
Stagflation increases the cost of living as a recession refuses to reverse its downward spiral …
So what do we have to look forward to???
Booming commodity prices, much higher gold and silver prices, higher interest rates and oil prices as well as worldwide ‘food inflation’ and where food is a big percentage of ones budget higher food costs becomes a major problem.
Globally, it is expected higher food costs to be a continuing trend for many years.
So with a higher US inflation rate and a weak US Dollar and we are back to 1979-80 in terms of this “bull market” for “Gold” and “Stagflation” sown by the seed planted via the “made in Japan” Bernanke Electronic Money Printing Press as has been so eloquently explained so many times by Mr. Sinclair.
