Inflation has now made it onto the agenda at the top of global politics, after President Biden himself moved to calm jitters on Monday.
“Biden tries to allay fears that rising inflation will undercut US recovery,” [https://www.ft.com/content/a9e7450a-5ed3-4718-b71a-8a7f5d3148aa] ran the resultant headline on the same day in the Financial Times - the FT, it has to be said, not sounding totally confident that the President will succeed.
And the pink paper isn’t the only one.
Because if inflation is only now reaching the top of the agendas of the world’s politicians, it’s been right up there for markets for a long time now.
Yes, the lumber price has now fallen back after an unprecedented run. But that was just an outlier, a swallow before the storm.
Other asset prices have remained high, and although the markets are to-ing and fro-ing in response to the delta variant, those gyrations are taking place at a very high level overall. And the simple reason for that is that the long-established reign of cash as king looks finally to be drawing to a close.
It’s lasted a long time, to be sure - let’s say, to be generous, from the rise of the bills of exchange offered by Italian merchants in the Renaissance until now. And the reign could have carried on, were it not for a serious psychological weakness that’s long been evident in all but a very few of the world’s top politicians: an addiction to quantitative easing.
This addiction was already threatening at the turn of the millennium, but distractions like the dotcom boom and the rise of China warded off the danger temporarily. But with the onset of the global financial crisis, the addiction took hold and, as all addictions do, it looks like wreaking a whole lot of destruction.
In the old days, the world had only one place to run when inflation turned rampant: gold. Now, with the advent of bitcoin, and gold-based derivatives, there are many different ways to guard against the scourge of inflation. It’s largely for this reason that the price action in gold hasn’t been as marked as it would have been in other eras, and why, even as the world continues to debase cash and currency of all denominations, the upward move in gold is likely to be slower than bulls might like.
Will it test US$2,000 this year?
The Fed will do its level best to see that it won’t.
But the only way really to tame the inflation beast is to raise interest rates, and central banks have had a horror of doing that since at least 2008. After all, there are political implications too. High interest rates mean slower economic activity, and that’s something that President Biden will be keen to avoid at all costs. For the economy to stutter now, after all the talk of recovery, would be unthinkable, and might easily hand the White House back to the Republicans at the next election.
So, for all his tough talk about inflation, Biden would probably argue privately that it’s the lesser of two evils. And if that’s the calculation, then gold just might test US$2,000 again before too long.