Are We Facing Epic Inflation, Horrific Real Interest, and Brutal Gold Price Explosion?

*Inflation can explode and real interests fall further with the crisis.
But in the short and middle term, also deflation is possible.
Central banks will make whatever it takes to generate inflation.
Gold investment is a classic inflation hedge, the gold price may explode.
Gold price surged already, silver and platinum can follow.

The title of this post may appear exaggerated, but it is realistic. We live in extraordinary times and that will cause exceptional changes in economic conditions and asset prices. Let’s see the three elements in the headline. Is the coronavirus-crisis causing an epic inflation pressure? Should we expect a horrific negative real interest? And are we facing a further brutal gold price jump?

1st Part: Is the Coronavirus-Crisis Causing Epic Inflation?

The inflation (Consumer Price Index, CPI) was historically low or moderate in the last years, in most countries of the globe. The coronavirus crisis – which can be the largest depression of the last 100 or more years – can change that. How?

Inflation is when prices of products and services are surging on average. The price of a typical consumer’s goods and services basket is increasing. “John Doe”, the regular consumer, receives less for his same money. Let’s see what causes inflation.

The Main Causes of Inflation

1. Demand-Pull Inflation

It occurs when consumer demand for goods and services increases so much that it surpasses supply. There can be various reasons for it, “over-expansion of the money supply” is one of them. That expansion, “easing” is happening today. The US Federal Reserve and other national banks are trying to rescue economies with more money supply.

2. Cost-Push Inflation

This can happen through higher wages, currency devaluation, elevated taxes. But also “natural disasters create temporary cost-push inflation by damaging production facilities” – wrote The Balance. We can surely consider the epidemic as a natural disaster, where a significant part of the production has already been lost. (Sources: The Balance, EconomicsHelp)

Factors That Lessen Inflation

But some elements in this crisis work against higher inflation. Demand is falling for many reasons. Many people are losing their jobs and their income. Others are reducing their consumption to be prepared for harder times. Many others need not spend much in the quarantine. Companies in trouble may sell their products at lower prices, price wars can be more intense.

*Chart 1: Continued jobless claims (insured unemployment) in the USA. Gray columns show recessions. (Back to 1967. The last data as of April 2020 is 11,976,000.00.) (Source: Macrotrends.net)

You may also remember that central banks are “easing” for more than a decade already. They are often cutting interest rates, buying bonds and pumping money into the economies. Since the last crisis in 2008-2009 approximately. But these easing measures didn’t cause considerable inflation since then. Rather, the main success for them was that inflation did not sink even deeper.

Good Inflation and Bad Deflation

High inflation, like 6-10 percent or more p. a. is harmful in the economy. Or at least a bad sign of illness, like a fever. At the same time, some moderate inflation, 2-4 percent a year, is acknowledged as healthy by most economists. But deflation – negative inflation, falling prices – is a nightmare of the central banks and governments, and for all of us. It can last very long and has a hard, devastating effect. A kind of death spiral can start: the lower the prices, the deeper the crisis. More and more companies are in trouble and selling goods even lower, or going bankrupt. (You can read more about it on Investopedia)

We mentioned that the “expansion of the money supply”, central banks printing money at a sped-up pace, is inflationary. But central banks have other measures ready, like sterilization. That means, they can retire earlier emitted money from the circulation, from our economy. So they can milder the inflationary effect of the money oversupply. But history teaches us something important. Once the genie (djinn) of inflation has been let out of the magic lamp, it is very difficult to push it back there. Inflation is often very difficult to milder. There were many examples in the 70s, 80s, 90s.

The Incredible Turn in Economic Policy

Policymakers know the danger of deflation, so they will make everything, “whatever it takes” to stop a similar process. They will try to cure the crisis with inflation. With even more central bank easing. They began that already. But the measures taken before may prove insufficient. Nobody will consume more in the quarantine because interests are lower. Or because central banks are buying shares on the stock exchanges.

Now, and that is a huge shift in economic policy, a new powerful force, the governments must intervene. (The “fiscal policy”.) They will also spend trillions of dollars. That means thousands of billions or millions of millions of dollars. US-president Donald Trump already sent a check of $1,200 for most people in his country. He is putting money directly into the pocket of citizens. The era of “helicopter money” is here. Governments are donating money to the people, just to consume. (As if scattered from a helicopter among the people.)

Hyperinflation: Zimbabwe, 50 trillion dollars, 2009 ()

There Are Much More Points to Consider. This Post Continues On: Agelessfinance.com

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Disclaimer 1

I’m not a certified financial advisor nor a certified financial analyst, accountant nor lawyer. The contents on my site and in my posts are for informational and entertainment purposes and reflecting my collection of data, ideas, opinions. Please, make your proper research or consult your advisors before making any investment or financial or legal decisions.

Disclaimer 2

I have open positions in silver (long), platinum (long), global energy stocks (long) and crude oil (short) at the time of writing.

(Cover photo: Pixabay.com.)