Archive for the ‘Inflation’ Category

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The Gold Price of Cotton.

In Currency,Inflation on 十月 16, 2011 by CQCA

From the Economist: “John Barrett, a cotton producer based in south Texas, explains that around March of last year most of the farmers he works with were happy to contract for that year’s crop at roughly 80 cents a pound. It was, historically speaking, a good price. Hardly anyone expected that, by harvest time, prices would have nearly doubled. In December cotton futures hit a nominal record of $1.59 a pound. The last time prices were so high was during the civil war and its aftermath.”

The Dollar price of cotton is at an all-time high, but the gold price of cotton is at an all-time low. Fiat currency and hard money are telling us completely different things. Both of them can buy the same thing, but one has seen constantly rising prices, and the other has seen constantly lowering prices.

In a market economy, lower prices should be the norm, not rising prices. Economies of scale and competition will bring prices down, and therefore increase the purchasing power of the common person. Instead, we have a fiat currency where the norm is for prices to rise every year. This is a monetary policy problem, not a market problem.

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Which Currencies are the Most Overvalued Against Gold?

In Currency,Inflation,Money Supply on 七月 15, 2011 by CQCA

Ever wonder what the price of gold would have to be if governments wanted to back up the full money supply? It is really only a simple matter of division, the hard part is finding the data.

The World Gold Council provides data on gold reserves by country. (Free registration is required to see their data.) I took the gold reserves of each country, and then matched them up with the data I used to calculate the money supply growth of most countries’ currencies between 2005 and 2010. I then used the current price of gold in each currency to calculate how much each currency would have to be devalued in order for that government to establish par between its money supply and gold reserve. The results are below.

The IMF issues SDRs, or Special Drawing Rights, which are magical receipts for something—no one is quite sure. The IMF has issued 182 billion SDRs, and has 90 million ounces of gold, which means the price at par would be about 2,000 SDRs per ounce. The current price in SDRs (.6343 SDRs to US$1) is about 995 SDRs per ounce. This means that the IMF would need to devalue the SDR by 50% in order to establish a par price.

Venezuela came in second because it recently devalued its currency by half against the U.S. Dollar.

The United States Dollar came in 24th place, at 95.3658% devaluation. Put another way, $100 in the future could possibly only buy $4.63 worth of goods today.

China came in 69th place, at 99.5262% devaluation. Put another way, 100 Yuan in the future could possibly only buy 0.47 Yuan worth of goods today.

Hong Kong is the biggest loser, at 99.9885% devaluation. Put another way, 1,000,000 HKD in the future could possibly only buy 115 HKD worth of goods today. I also wrote earlier about how the money supply of the Hong Kong Dollar has grown much faster than the U.S. Dollar’s, meaning the fixed price of 7.8 HKD to 1 USD over the last 14 years is nowhere near reality.

There are a few things that need to be said about these results. The first is this only considered gold. Most of these countries have foreign exchange (like Hong Kong), so if the U.S. Dollar were tied to gold, and other countries held U.S. Dollars, their “gold holdings” would increase, and therefore change the results.

Another problem is that gold has almost never been par to the entire money supply of a country. A full devaluation of this magnitude would indicate a complete collapse of humanity’s confidence in the monetary system. A much more likely scenario is that currency is completely devalued and we then go back to bartering chickens. Decades later we can start to rebuild the gold standard. Ever seen the movie Water World? If you watch it backwards, you will see that “water” is a metaphor for “inflated currency.”

The biggest problem, though, is that the data I used relies on the assumption that governments of the world are honest about their gold holdings. Ha.

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Chinese Inflation Hits 6.4%, Government Tells People Not to Buy Silver.

In Commentary,Inflation on 七月 11, 2011 by CQCA

China Daily reported that the Chinese CPI has reached 6.4%, the highest in three years.

If you had put money in the bank in June 2010 for one year, your interest rate would have been 2.25%. Since CPI is now at 6.4%, Chinese savers have actually lost wealth. Put in another way, real interest rates in China are about -4.15%.

Not surprisingly, yesterday CCTV had a special report on why silver is a bad investment.

Here is my favorite quote, courtesy of Google Translate: “Chun-Li Wang told reporters, silver in the first half of the test roller coaster price fluctuations, the company has gone through half of the ocean, half of the flame of the abyss. Chun-Li Wang analysis, investment in silver and gold investment are very different, because the value of silver is relatively low, ordinary working-class can afford, so people buy and invest more than an ordinary consumer, and this ability to judge people without investment , the public mental trend is very strong, difficult to resist collapse of the sense of risk. Because silver bullion this one, it touches the surface, this is the most popular working-class, the most common investors, some retired, he’s took a pension, he can, he can buy one, that working in Beijing, he can buy one, so we feel very much a danger that.

The original Chinese text is from iFeng Finance, and the television report can be seen on Diyi Shijian (starts at about 26:00 and ends when they start talking about sofas).

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Belarusian Ruble Devalued Overnight.

In Inflation on 五月 23, 2011 by CQCA

When Belarusians woke up on Monday, May 23rd, one U.S. Dollar bought 3,145.00 Rubles. The next morning, one U.S. Dollar bought 4,930.00 rubles. Within one day, the National Bank of the Republic of Belarus devalued its currency by 56.76%.

According to Telegraf, in February, 2011:

Belarusian banking system is working smoothly, and it is not planned to make any changes to its operation, including the ruble devaluation, in the near future. This was reported by Chairman of the National Bank of Belarus Petr Prokopovich to President of Belarus Alexander Lukashenko on February 22.

The IMF was involved with a monetary disaster? Who knew?

Other “experts” are cheering a central bank turning its entire citizenry destitute in one day:

  1. BBC: “What they’ve done today is a positive step,” says economist Alex Pivovarsky of the European Bank for Reconstruction and Development.

    He explains that Belarus has lost international competitiveness over recent years, not least because its government raised wages significantly last year in the run-up to elections.”

  2. WSJ: “A cheaper Belarussian ruble may make the country’s potash fertilizer exports more competitive, said Charlie Robertson, chief economist at Renaissance Capital.”

A sign of things to come?

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Historical CPI Rates Modeled Over Time.

In Inflation on 五月 22, 2011 by CQCA

The Federal Reserve has decided to keep an inflation target of 2.00% each year. Historically, according to the CPI, inflation has been 3.26% each year.

The green line shows the annualized rate of increase in the CPI since 1913. (The actual yearly CPI rate varied, but the green line shows the average and calculates it as though it were the yearly rate.) The red line represents what would have happened to the U.S. Dollar’s purchasing power if the Federal Reserve had targeted, and achieved, a 2.00% inflation figure. The Dollar would buy more than three times what it does today.

The blue line represents the purchasing power trend between 1870 and 1913, the year the Federal Reserve was created. At that time, the U.S. Dollar on average was actually increasing in value by .69% every year. If that trend had continued, the U.S. Dollar would buy 42 times what it does today. Imagine that.