Thursday 20 December 2012

Almost everyone is wrong

The euro is the state of the art, in currency systems.

The ECB and their euro touch the non-monetary real world at just two points:

  1. The HICP index
  2. Gold

The first they can only watch passively, the second they can actively intervene in the market for.

The ECB have one mandate and one mandate only:

  1. Price stability

This means inflation will not be left to run unchecked. It also means deflation absolutely will not be allowed to unfold.

In a past age of mega-leverage, where general prices naturally felt the pressure to rise, the only thing the Central Banks could do to act against that tendancy was to intervene in the market for gold and suppress it's price, hoping that this would be noticed in other markets and put a brake on the rises within those also.

In an age of deleveraging today, where prices naturally would fall as the deflationists rightly determine, but where the Central Banks positively will not allow general prices to fall without taking some action to prevent it … what else can they do but actively support gold and hope the other markets, which they can only passively monitor, take their cues from this signal and see their own falls arrested?

This is why silverbugs don't understand how silver will underperform gold. They are scared about inflation still, despite the clear evidence the world has turned and they are focused on the wrong bogeyman.

The deflationists are absolutely right. Except for assuming it will simply be allowed to play out. It won't.

So to summarize my point: almost everyone is wrong. Just as it should be, right?

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