Federal Reserve

Lots of People Are Mistrusting Your Pretty Paper, Ben

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The guy responsible for making as much paper money as he pleases wonders why some investors are beginning to think that might not be a stable system in the long term:

Federal Reserve Chairman Ben Bernanke says he's a bit puzzled by surging gold prices. The 30% rally from a year ago, on top of gains in previous years, might be interpreted as a loud signal from markets that big inflation pressures are building in the U.S. Gold is seen by many investors as a hedge against inflation risk.

Those still into Treasury bonds don't seem panicked yet; Bernanke notes that more conventional measures of inflation expectations like treasury bond yields haven't been rising. And copper is down. Gold is likely being bought by those to whom lending money to the government at all seems like a bad deal these days, and who remember that gold has been a historically more conventionally useful money metal than copper.

We might also just be witnessing a traditional lemming-like bubble rush to the thing that seems to be rising in value lately. I hope that's true, because if the people driving up the price of gold are right about inflation expectations, things will get ugly.

The latest bad food inflation news:

Food inflation will accelerate to a 5 percent annual rate by December and average as much as 4 percent in 2010, topping government forecasts as meat and dairy costs jump, said William Lapp, a food and agricultural economist…..

The U.S. Department of Agriculture reported April 23 that retail-food prices will rise 2.5 percent to 3.5 percent this year, after dropping 0.5 percent last year.

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  1. Bernanke notes that more conventional measures of inflation expectations like treasury bond yields haven’t been rising.

    This is probably because:

    (1) The dollar is still considered the least worst currency, and so catches the safe haven flows. Being the least worst doesn’t mean you aren’t in pretty bad shape, though.

    (2) To a lesser extent, rigging the treasury auctions.

    And copper is down.

    Copper has never been an inflation hedge. Indeed, it is called “Dr. Copper” because it is considered an excellent economic indicator.

    We might also just be witnessing a traditional lemming-like bubble rush to the thing that seems to be rising in value lately.

    There’s definitely some of that.

    1. I thought Dr. Pepper was an inflation hedge. Man that explains why I’m so broke.

  2. MAKE SELECTION AND INSERT PAYMENT. THIS MACHINE ACCEPTS ONE THOUSAND AND FIVE THOUSAND DOLLAR BILLS.

  3. Food inflation will accelerate to a 5 percent annual rate by December

    Damn that Bush BP.

  4. Gold, shmold. Check this puppy out.

    1. Thank you for showing me a picture of what will buy me a loaf of bread in a few years.

      1. You’re welcome. But please don’t forget to keep the bill in mint condition.

      2. You might want to look here for what you’ll need to buy bread — if things go all tits up as much as the goldbugs levels predict.

        1. I’ve already stocked up on those items in the event of the zombie apocalypse/alien invasion/typical friday night.

          1. Maj. T.J. “King” Kong: Survival kit contents check. In them you’ll find: one .45 caliber automatic; two boxes of ammunition; four days concentrated emergency raisons; one drug issue containing: antibiotics, morphine, vitamin pills, pep pills, sleeping pills, tranquilizer pills; one miniature combination Russian phrase book and bible; one hundred dollars in rubles; one hundred dollars in gold; nine packs of chewing gum; one issue of prophylactics; three lipsticks; three pair a nylon stockings. Shoot, a fellah could have a pretty good weekend in Vegas with all that stuff.

            1. one hundred dollars in gold

              So a gold fleck?

    2. That’s one flashy new bill. In five years, it’ll cost more to create than it will be worth.

  5. if the people driving up the price of gold are right about inflation expectations, things will get ugly.

    They only have to be not 100% wrong for things to get super-ugly. Right is full Zimbabwe. And historically, even peak gold buyers are only short-term wrong.

    But I wouldn’t buy it now. Cannonballs made of it don’t fly straight.

  6. I was traveling to Moscow on a regular basis in the mid-90s when they had their spell of hyper-inflation. The Ruble was dropping about 10% against the Dollar every month or so.

    They eventually dropped three zeros off the currency to turn a 5,000 Ruble note into a 5 Ruble note (about a buck). I stil have a few of the old single-digit notes (1 Ruble = 1/5,000th of a dollar) tucked away as a curiosity.

  7. The good news is that Ben is making me look like a genius: no savings and lots of debt that will be made worthless by hyper-inflation.

  8. Federal Reserve Chairman Ben Bernanke says he’s a bit puzzled by surging gold prices.

    Bernanke’s perpetually puzzled because he hasn’t figured out that monetarist/Keynesian bullshit is in fact bullshit.

  9. This is my take on the likely (though not certain) course of things.

    The economy will continue to bottom-bounce through 2010. This doesn’t preclude another bear rally this year.

    The repeal of the Bush tax cuts, the resumption of the housing market decline, a big Euro debt crisis, a big Mideast blowup (hell, take your pick) in 2011 will hammer home a new double dip.

    There will be no “stimulation” tools left to mask the double dip.

    Tax revenues will crash. Again. The deficit will skyrocket. Again. This time, interest rates will follow, as will quantitative easing and inflation.

    1. There will probably be a post-election bounce in the stock market this year, but obviously weak fundamentals in our economy won’t have changed.

      Every big new thing the federal government is doing is introducing new and greater uncertainty into the business climate, which makes things even worse and precludes recovery.

  10. It really inspires all kinds of confidence that such a man in such a position of power doesn’t understand gold’s rise.

    1. Oh, I think he understands it perfectly well. He just can’t admit that he does.

  11. Bernanke is under the delusion that only wing-nut Americans buy gold.

  12. How much gold do you own, Dr. Bernanke?

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