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I'd agree with mattboy: many forces affect the price of 'things' (PMs, oil, labor, houses etc), but ultimately the core overriding influence is the money supply.

 

CBs have been flooding the system with 10-20% increased money per year (via overly cheap ineterest rates) for a decade or more. Therefore, money is now worth 2-3 time less than it was 10 years ago. Naturally, this must feed through into things going 'up in price' 2-3 fold. That increase in pricing of 'things' has been delayed because Asia took that extra money out of our Western economies in return for cheap priced goods. But the money didn't dissapear from the planet - and it is now revealing itself by increasing prices of many 'things' globally (most noteably oil at the present time)

 

On the matter of wage-price inflation spiral: first remember that UK salaries are just another 'thing' and so prices must go up. Politicians can try to delay that, but ultimately they'll fail. Against that reality, we can recognise the wage-price inflation spiral to be nothing more than the 'mechanism' for that wage increase, i.e., the main process by which the cost of good and wages tend to normalise to where they should be given the true current value of money. So sure, the 'wage-price inflation spiral' is real, but its a mechanism not a cause. If the government can reduce how well this mechanism works they will slow down the rate of change (i.e., reduce inflation), but they'll not ultimately stop wages getting to their fair value against goods, commodities, services, and money.

 

But stay focussed on the take home messages from all of this

- politicians are now running scared of the wage-price inflation spiral kicking in big-time

- gold will rocket as inflation rises, largely overwhelming any CBs manipulations

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Yes, but then why do prices and wages continue to increase after the money supply is constrained? Because expectations have been set and because the wage-price spiral continues to operate.

 

I think it's fair enough to point out that the fundamental cause is monetary inflation, but the actual mechanism through which it operates is also worth examining. We've had huge money supply growth in the past without a wage-price spiral. Why? Because globalisation kept the costs of goods low, and even though asset prices were rising sharply this didn't affect most people (other than via house prices), so wage demands weren't too strong. Now that inflation is feeding into everyday costs, wage demands will rise. The monetary inflation is the same, but the effects are different.

 

true - and you may well be right but I suspect all of these mechanisms may be at work. The wage demands I can see coming as a result of the price inflation - I am interested in how much the wage increases themselves feed back into the price inflation - ie just how well established this feedback mechanism is. We know the cause of the inflation we are seeing now is not wages (in the UK at least) - and the money has to come from somewhere.

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But stay focussed on the take home messages from all of this

- politicians are now running scared of the wage-price inflation spiral kicking in big-time

- gold will rocket as inflation rises, largely overwhelming any CBs manipulations

 

I wonder how much it would suit the politicians to blame a bit of this inflation on the greed of the workers pay 'demands' (the cheek of it!)

 

p.s. silver up over 2% on US open :) - I'll probably need to edit this with a 'famous last words' later !

 

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I'd agree with mattboy: many forces affect the price of 'things' (PMs, oil, labor, houses etc), but ultimately the core overriding influence is the money supply.

 

In a way that's just another way of saying what I said. An increase in money supply is always likely to increase prices of goods and labour, but it's worth understanding the mechanisms by which that does or doesn't happen. Politicians have duped themselves into thinking they have cured inflation when in fact they just found ways to brush it under the carpet, but now all the inflationary pressure is out there and kicking. I think that even though there is a lot of money being destroyed at the same time, this is going to lead to prolonged inflation, even if they get the money supply under control short term.

 

But I never like arguments that are too reductionist about inflation and insist that you should only look at the monetary inflation. There are other demand-side mechanisms which affect price inflation both short and long term. Population falls or economic decline can both cause demand for money to fall, meaning the price of money falls, meaning you get price inflation. Population growth or economic growth can do the opposite and cause price deflation. Both of these mechanisms can operate without the money supply changing.

 

That's why I think too narrow a focus on monetary inflation can be misleading, though to be sure the far worse crime over the last decade has been total disregard of the money supply issue by governments.

 

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I wonder how much it would suit the politicians to blame a bit of this inflation on the greed of the workers pay 'demands' (the cheek of it!)

 

Absolutely. They need to blame someone, so expect workers who want to maintain their real income to get it in the neck.

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I'd say that's disingenuous, and an attempt to assert that all inflation is monetary inflation.

Peter Schiff regularly asserts that all inflation is monetary inflation, kind of his theme really. Why is it disengenuous?

 

Now of course monetary inflation causes prices to rise.

 

No reason to suspect that all items should be effected equally.

 

But the evidence of the 1970s is that when costs rise, workers become far more militant about demanding pay rises. And also that this militancy persists even past the moment of maximum inflation in costs - the idea of 10% or whatever a year becomes normal, and people feel cheated if they don't get it - one reason the unions became a problem in the late 1970s. Then if the wages are pushed up, of course costs get pushed up.

 

You're reciting a myth. Costs are not the same as prices. While there is a feedback mechanism at work there, labour cost and price are not so tightly and inextricably linked that they must necessarily move in tandem (who isn't familiar with the word "outsourcing" nowadays). In the free market, like for like, cheaper products sell while more expensive ones don't (particularly during economic distress). There is a natural downward pressure on prices, and by extension wages. If there are ten companies producing a product, two hold wages down and eight don't, eight go bankrupt. If this wasn't the case, shareholders would just push the prices up to line their pockets regardless of cost necessities!

 

We have a global economy so some of the effects of this may be more muted than in the past, but even so it's only common sense that if prices rise for whatever reason, people become more motivated to ask for more money. Employers don't pay more for labour voluntarily, so higher money supply doesn't lead directly to wages rising, only via wage demands.

 

No-one said it did, the proposition is that higher wages are just a possible symptom of inflation caused by expansion of the money supply, as opposed to the cause of inflation.

 

We have been suffering massive inflation, but it has been largely confined to specific "speculative" assets, what has leaked into consumer goods has been largely offset by tech and labour efficiencies.

The massive "above inflation" payrises for the majority of workers have not been there.

The expansion of the money supply has.

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bump...in case it got lost up there... :rolleyes:

 

Wow, that and Australia losing a gas supply !!!

It's a good job central banks have plenty to sell, otherwise there would be a supply shortage :lol:

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Peter Schiff made an interesting point in one of his recent radiocasts - last weeks maybe. He questioned the wage-price spiral mechanism itself. His point being that inflation is the expansion of the money supply, prices go up as a result - wages are simply the price of labour. That we see wages and goods prices rise at the same time is no coincidence nor evidence of a wage-price spiral, just evidence of an increasing money supply.

I'd be curious to know what people think of that idea, and whether there is real evidence out there for the wage/price feedback mechanism - given that we know that inflation itself is simply an increase in the money supply.

The union thing Goldfinger touched on - I agree completely. People comment on the weakness of the unions now but we have had a couple of cushy decades. I wouldn't underestimate the UK population - when they see the need to get off their backsides they will (eventually).

matt

 

 

I am thinking the wildcard of globalization is going to play a central role in how this inflationary period pans out. I fear that rather than seeing the bogeyman of a real wage/price spiral this time round, we may only see nominal wage rises with real price increases and a real decline in the standard of living. :(Imported inflation.

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Interesting discussion here this morning and I agree with many of the points being made. What is clear to me from the various governement talking heads I have seen and heard over the last few days is that they really haven't grasped the basics of this situation and are planning to rely on old 'model' thinking to provide a generic solution to a unique problem. In other words they don't have a clue about the causes or effects of this crisis and therefore can't hope to be effective in fighting it.

 

The basic reality is that there is no more growth to be wrung out of the western economies and there hasn't been for the last decade or so. To return to normality and accept that fact means massive economic pain on an unprecedented scale, a cut in living standards not seen in many generations and the death of the credit market. Recovery of this situation is not possible, THERE IS NO GROWTH.

 

There are therefore only two possible avenues that governements will take, pump it up further or let it pop. There is no way they will ever let it pop without losing their positions of power, so they will either inflate away merrily and attempt to disguise it, or they will sit on their hands and hope it all just goes away. In the US I vote for the former, in the even more clueless UK I vote for the latter. That means a lot more inflation in both countries in my opinion.

 

As for wage inflation or the money supply getting through to Joe Six Pack, I've argued before that it doesn't matter and I still think that this is the case. Yes, inflation will move more quickly once more liquidity hits the hands of the western masses, but it won't stop inflation if it doesn't get through. The bulk of our price spirals will be generated by overseas markets or by big money players, neither of which will be affected by, or give two hoots about, the western populace.

 

Either way this ends very badly for us and stays very bad for a long, long time.

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Peter Schiff regularly asserts that all inflation is monetary inflation, kind of his theme really. Why is it disengenuous?

 

Maybe disingenuous isn't quite the right word, but I explained in the rest of the post why I think it can be a mistake to refuse to consider other issues such as population and economic growth. And also why it is important to study the mechanisms of transmission as well as the root sources of pressure.

 

You're reciting a myth. Costs are not the same as prices. While there is a feedback mechanism at work there, labour cost and price are not so tightly and inextricably linked that they must necessarily move in tandem (who isn't familiar with the word "outsourcing" nowadays).

 

Yes, I acknowledged that in the comment about globalisation and the way governments have failed to see how inflationary pressure has been diverted rather than abolished.

 

No-one said it did, the proposition is that higher wages are just a possible symptom of inflation caused by expansion of the money supply, as opposed to the cause of inflation.

 

We have been suffering massive inflation, but it has been largely confined to specific "speculative" assets, what has leaked into consumer goods has been largely offset by tech and labour efficiencies.

The massive "above inflation" payrises for the majority of workers have not been there.

The expansion of the money supply has.

 

I don't think we're really disagreeing actually, I'm just being a bit pedantic about terminology - I think we need to also be able to talk about price inflation and wage inflation and to analyze the link with monetary inflation - so I don't like it when people dismiss talk of price or wage inflation by saying "it's all just monetary inflation really". Monetary inflation is a cause, the major cause, but they are different phenomena that can be talked about separately.

 

The problem we face now is that inflationary pressure hasn't fed directly into the local market due to globalisation, so the money has gone into assets. The 'wage-price spiral' may or may not work in this situation but either way we are likely to end up with real wages falling as wages are unlikely to keep up with costs whatever happens.

 

 

 

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Interesting discussion here this morning and I agree with many of the points being made. What is clear to me from the various governement talking heads I have seen and heard over the last few days is that they really haven't grasped the basics of this situation and are planning to rely on old 'model' thinking to provide a generic solution to a unique problem. In other words they don't have a clue about the causes or effects of this crisis and therefore can't hope to be effective in fighting it.

 

Yes, the classic case of fighting tomorrows war with yesterdays battle plans.

 

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Seems to be a big tussle going on around the $887 mark, gold is jumping about all over the place. I think we're due a big move but I've no idea in which direction, so I'm staying out for the time being.

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I think the "wage-price inflation spiral" is a red herring used by dishonest (okay, in some cases ignorant) politicians to avoid admitting the real cause of inflation.

 

In a free market, labour is something to be purchased. There is no reason its price also may not go up, especially when more general inflation is going on.

 

Wage inflation in itself does not add to the money supply. If an employer pays more per hour, all else being the same, they have less pounds to spend on other things (reducing demand for those things and tending to reduce their price). Just like if they pay more per litre of diesel (if they need that), or more more per square metre of office space or whatever.

 

Now they want the workers to take the pain through lower living standards and the big businesses, politicians (government being one of the biggest "businesses" in many countries) and media will be screaming about the danger of increased wages "feeding" inflation.

 

Such a lie.

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I think the "wage-price inflation spiral" is a red herring used by dishonest (okay, in some cases ignorant) politicians to avoid admitting the real cause of inflation.

 

In a free market, labour is something to be purchased. There is no reason its price also may not go up, especially when more general inflation is going on.

 

Wage inflation in itself does not add to the money supply. If an employer pays more per hour, all else being the same, they have less pounds to spend on other things (reducing demand for those things and tending to reduce their price). Just like if they pay more per litre of diesel (if they need that), or more more per square metre of office space or whatever.

 

Now they want the workers to take the pain through lower living standards and the big businesses, politicians (government being one of the biggest "businesses" in many countries) and media will be screaming about the danger of increased wages "feeding" inflation.

 

Such a lie.

 

Actually thinking about it, that seems about right, especially in the context of todays relatively free labour market. I guess I was a bit off-beam earlier, as I was going off on a tangent.

 

There may be complicated mechanisms as to how inflations feed into particular price changes. But we don't have the union situation of the 1970s, and the globalised market breaks the direct feedback loop of wages into costs that we used to have in a more enclosed economy. So in this market there really isn't a wage-price spiral, or at least not in the same way. Rising costs will put pressure on wages, but as you say, it's a free market, so that's only part of the process.

 

So really they are using a folk memory of the 1970s to distract from the real problems, and also effectively trying to force through a cut in real incomes.

 

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Seems to be a big tussle going on around the $887 mark, gold is jumping about all over the place. I think we're due a big move but I've no idea in which direction, so I'm staying out for the time being.

Hi Marceau,

well, I'm seeing what could be the start of a parabolic up-move on the 1 day chart. what do you think?

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Hi Marceau,

well, I'm seeing what could be the start of a parabolic up-move on the 1 day chart. what do you think?

 

 

It looks well set up to rally straight up through $910 all the way to $950. But I see distinct danger here as well, gold has made lower highs on repeated attempts at $900-910 and we're right at the top of the power downtrend line which has been in place from the start of this correction. If we don't get through $894 today then I'm afraid we could be in for another $30 smackdown or worse.

 

Risk/reward is too high for me to trade at the moment, if I take a position it will be a small one at the $886 level.

 

Edit: Looks like gold just broke down. I wouldn't enter long today, the risk is too great.

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So really they are using a folk memory of the 1970s to distract from the real problems, and also effectively trying to force through a cut in real incomes.

Yes, they are poiliticians, i.e. liars (maybe a few are actually ignorant).

 

Governments trying to stop monetary inflation feeding into prices is ancient. The ancient Romans made laws trying to stop it. It didn't work then.

 

I've noticed you've mentioned the Black Death several times in the last week or so. A couple of weeks a go I mentioned this in some thread as a possible example of a rapid and dramatic change in monetary circumstances coming from a non-human cause (I haven't studied the subject properly but have heard that the cost of labour increased).

 

Elsewhere you seem to have suggested that the near-static money supply was a major problem. I do not see this. For the cost of labour to increase was perfectly natural and the free market doing what it's supposed to do. Under the circumstances I would guess that the price of housing would have dropped (same number of houses, fewer people) and maybe agricultural land too (same amount of land, fewer people, less food needed, fewer farmers, fewer labourers).

 

A free market would simply have led to a natural and appropriate readjustment of prices.

 

The rich landowner (with, say, a stash of silver coins), who survived the plague, would have found that he needed to pay more per day for labour, in effect making him feel poorer (I say feel poorer, because if demand for food dropped he may not have been able to sell the same quantities; but he may not have taken such a philisophical attitiude).

 

Bad luck for him.

 

Monetary anarchy rules! ;)

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Is it me or is there a pattern developing here?

 

Note the sell off in London followed by the sharp early rally in NY, sell off in NY, stable in Asia. The last 3 days have all been like this. It is something I'm tempted to trade!

 

goldoq1.gif

 

 

 

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I've noticed you've mentioned the Black Death several times in the last week or so. A couple of weeks a go I mentioned this in some thread as a possible example of a rapid and dramatic change in monetary circumstances coming from a non-human cause (I haven't studied the subject properly but have heard that the cost of labour increased).

 

There's two points about the Black Death inflation. Firstly it's just an example of how inflation (or deflation) can result from factors other than money supply fluctuation - you also have to consider supply and demand for goods and labour and demand for money. So it's a reminder that money supply isn't the be-all and end-all of inflation, even though it is very important.

 

Did the free market restore equilibrium? Well, yes and no. After the black death, real wages actually fell for a couple of decades - wages rose, but food prices etc rose more, and people were pretty unhappy about the perceived inflation and fall in living standards (once they found the time to stop worrying about the plague...) Then eventually cost of goods fell back and wages stuck due to ongoing labour shortages, so in the end real wages grew, but it took fifty years or so.

 

So there is a danger of civil unrest, hysterias, unnecessary poverty etc from this kind of inflation. In some respect though deflations can be more damaging, as people refuse to spend their money, expecting further falls in prices, which causes lingering economic stagnation - and that's where the equation of fixed money supply vs growing population or economic growth can be problematic.

 

There's no perfect solution to varying the money supply either, of course. No monetary system is perfect.

 

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There's two points about the Black Death inflation. Firstly it's just an example of how inflation (or deflation) can result from factors other than money supply fluctuation - you also have to consider supply and demand for goods and labour and demand for money. So it's a reminder that money supply isn't the be-all and end-all of inflation, even though it is very important.

 

Did the free market restore equilibrium? Well, yes and no. After the black death, real wages actually fell for a couple of decades - wages rose, but food prices etc rose more, and people were pretty unhappy about the perceived inflation and fall in living standards (once they found the time to stop worrying about the plague...) Then eventually cost of goods fell back and wages stuck due to ongoing labour shortages, so in the end real wages grew, but it took fifty years or so.

 

So there is a danger of civil unrest, hysterias, unnecessary poverty etc from this kind of inflation. In some respect though deflations can be more damaging, as people refuse to spend their money, expecting further falls in prices, which causes lingering economic stagnation - and that's where the equation of fixed money supply vs growing population or economic growth can be problematic.

 

There's no perfect solution to varying the money supply either, of course. No monetary system is perfect.

But what you've described is natural readjustment to changing circumstances. The disruption to the economy led to hardship, not the amount of silver per capita.

 

Using silver or gold coins as money, there is a way to steal from everybody: coin clipping, which, unsurprisingly, was a very serious offence (and, of course, the reason coins cane to be milled round the edge).

 

Another way is to reduce the percentage of precious metal in coins, which the ancient Roman governments did. These are human causes of inflation and amount to stealing from those who already hold coin, and especially those with a lot of coin as their savings.

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BV stats:

Jan 1st:

London New York Zurich

1,119.309 100.759 3,686.673

 

Update, Jan 17th:

London New York Zurich Dollars Euros Pounds

1,193.979 100.759 3,841.605 9,259,658.19 3,326,113.76 8,296,953.72

 

Jan 19th:

1,193.979 100.759 3,953.144 6,114,258.22 3,483,138.65 8,242,350.35

 

Jan 23rd:

1,231.226 100.759 4,025.662 13,800,959.78 3,853,177.40 7,832,031.98

 

Jan 25th:

1,231.226 100.759 4,329.463 7,327,180.47 3,924,654.15 7,009,863.09

 

Feb 8th:

1,305.945 100.759 4,501.463 6,951,230.00 3,892,929.64 6,811,793.14

 

March 31st:

1,492.919 125.763 5,208.692 8,172,452.99 4,130,662.05 7,980,284.95

 

April 11th:

London New York Zurich Dollars Euros Pounds

1,517.845 125.763 5,109.531 9,425,495.90 4,748,511.67 8,012,199.89

 

April 28th:

London New York Zurich Dollars Euros Pounds

1,604.920 125.763 5,309.789 7,701,088.23 2,913,938.08 7,941,712.42

 

May 9th:

London New York Zurich Dollars Euros Pounds

1,604.920 138.264 5,372.568 7,220,343.22 3,329,552.85 7,776,096.24

 

June 18th:

London New York Zurich Dollars Euros Pounds

1,754.442 138.263 5,647.962 7,951,632.60 3,126,505.00 5,920,794.81

 

so +150Kg in London, +280Kg in Zurich,

buying from the UK (GBP -2M)

 

ps- looks like my 1-day parabolic up-move was not to be!

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