The CPI Lag in Disguise


Here’s another reader’s original and inspired perspective on the short term effects of consumer price inflation and how it differs from the inflation in speculative finance. This latter type of inflation will ultimately break the system and the currency. 

Reader Dan pointed out:

“Regardless of the fluctuations in paper currency values, (which are basically measured against the value of gold), precious metals tend to retain their value in the long run as determined by their calculated exchange rates for goods and services. 

This value usually lags behind the constant changes in the purchasing power of paper currencies, which are caused by inflation and deflation.  For example, if the price of gold drops by 20% in 1 month, the converse result is generally a 20% increase in the value of the dollar”.  

(Jeff: Actually, in today’s world, the day to day and/or month to month relationship between the dollar and precious metals is not strong, even though the media is quick to point out the occasional correlation.).

“However, the price of bread or the price of a doctor visit won't immediately go down by 20%.  The extended effects of such a change could take several months, and due to the relative nature of exchange within a given country, prices for goods and services generally change only as they are directly affected by price fluctuations in commodities”.

(Jeff: Or business decisions in a ‘trickle down-like’ effect. 

We’ve seen the pressure to pass along commodity prices to consumers as a public issue over the year from major food producers and retailers. 

They’ve been careful to change packaging sizes - or use certain items as loss leaders - retaining margins on other product lines. 

Oil producers, by contrast (as I mentioned in another piece) and ironically, given their general public scrutiny, immediately slashed costs (job cuts) as oil prices began falling as early as the Fall of 2014).

“Bottom line, the rich man's ultimate wealth only changes with the lag in price changes of goods and services as a result of fluctuation of currency values.  Given enough time at a stationary currency value, one's ultimate net worth in precious metals will remain constant”.  

I think Dan is right on in terms of the frogs in the pot type of inflation. 

Doug Noland summarized it best when he stated recently: 

"For almost six years now, I have argued that the key issue is policy-induced market distortions and attendant financial Bubbles (as opposed to consumer price inflation). 

The history of monetary inflations is that once commenced they become almost impossible to end. This era’s policy experiment with manipulating securities market inflation makes certain that policy exits will be even more unbearable. Most regrettably, it’s reached a point where a global securities bear market will have devastating consequences – on markets, on economies and geopolitics. 

So central banks keep pumping and distorting markets – and market operators continue playing the game". 

To paraphrase:

Central banks have effectively promised markets perpetual stability, liquidity and price continuity. 

The resulting leverage, hedging and speculative flows will ensure an ugly day of reckoning with market illiquidity and dislocation. 

Ultimately, a bear market in securities will create a freeze in liquidity that reaches down far enough to call for even more extraordinary policy measures.

All the “money” printing inflates the scope of this “crowded trade” of speculative finance now hopelessly destabilizing global markets and economies.

The central banks can't create that type of inflation, certainly not by flooding the system with cheap money that's not being lent to the consumer. 

They can only create the type of inflation that is driven by currency weakness.

The questions are twofold: at what stage will we see massive rise in CPI - even in real terms versus whether instead we will experience a currency collapse caused by widespread derivatives.

Consumer inflation arrives in the end sure enough, but by then it's too late for the currency. 

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