As we look upon yet more turmoil in financial markets, the debates about outcomes of inflation and deflation still rage. We are not necessarily wedded to either of these, taking the view that only policy responses from the financial authorities will reveal what lies ahead. It seems most market participants wait with baited breathe to see how different policy responses in different jurisdictions will play out. In very general terms it appears the Fed is still more liquidity happy and ideologically aligned to stimulus and the Europeans (although often contradictory in their lack of consistency) are less keen on the printing press, with the Germans still haunted by memories of Weimar hyperinflation.
Whilst we as staunch Austrians would prefer less liquidity provision and more allowance for markets to naturally self-correct and deleverage, we are not encouraged by many of the authorities (maybe the Swedes and Norwegians are closest to getting it right though). We suspect that as markets try to self-correct, the authorities generally will be forced to print more and more; it is the easiest course for them to take and the typically all too human option. Our thoughts returned to this issue as we were treated to the pre-release of a very thought provoking film called the 'Four Horsemen' last Tuesday. This film is certainly worth watching when it is officially released and our thanks to Ross and Megan Ashcroft for the kind invite.
Nonetheless, here we are and we face a European banking system nearly 3 times more leveraged than the US banks, and surely bereft of any remaining equity. As such we look once more at how inflationary and deflationary outcomes might affect precious metal investors.
Inflation and perhaps hyperinflation.
An inflationary, and possibly hyperinflationary, scenario is naturally an outcome we are lead to by desperate authorities becoming locked into the printing press as a policy response. We believe Bernanke is pretty much backed down this road now, as should he try to flip-flop back to austerity as a new response his previous raison d’etre would be completely undermined and his legitimacy busted. We believe this month’s announcement by the world’s leading central banks to act collectively to provide essentially unlimited liquidity to the financial system is further consolidation towards this collective policy response. We continue to urge investor cynicism with the inflation figures reported by the authorities who…
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