If it looks like a duck and walks/quack/flies etc. like a duck, it is a duck! I have been one of the few out there who sell gold and speak of deflation. It’s easy to talk about all the money printing the Fed does and cry inflation, but one has to see the price action and look at the bigger issue that many economists miss in their analysis of monetary policy; credit, and the unwinding of years of excess that is deflationary. Many have simply missed the credit contraction that has been occurring and how this is and has been affecting all commodities.

M2 and Monetary Inflation

If we only looked at M2 Money Stock and nothing else then yes, we see inflation in the money supply as seen in the chart below.

Velocity of Money

But despite all of this money printing by the Fed, how is it we aren’t seeing inflation rear its ugly head? How is it the Fed is not reaching its 2% inflation goals? The answer can be found in the Money Velocity chart below.

Velocity of Money – The rate at which money is exchanged from one transaction to another, and how much a unit of currency is used in a given period of time. Velocity of money is usually measured as a ratio of GNP to a country’s total supply of money.

Credit Contraction Japan Versus U.S.

The following is an excerpt from my book Buy Gold and Silver Safely written in September 2010.

But there’s a conflict of sorts here. While the Fed will continue to try and stimulate the economy, thus creating inflation, it is being dwarfed by the credit contraction that is occurring. In a sense, we are seeing monetary inflation within a larger credit contraction deflation.

The chart I showed from Ned Davis Research of Total Credit Market Debt as a % of GDP in Chapter 4 of my book then showed just the beginning of the credit contraction. Just before release of my book I wrote a 2 part article comparing the U.S. to Japan and what might come next.

Is the U.S. Following in Japan’s Deflationary Footsteps? (technical issues with charts at present but the verbiage is still apropos). In that article I said the following;

Without businesses and individuals borrowing, the Japanese government has had to step up to the plate in an effort to keep the economy from collapsing further. The result has been Japan has a Debt to GDP ratio of 200%. While the U.S. continues to slide down the hill of deflation, investors are worried the government adding of trillions more debt will eventually cause inflation and possibly hyperinflation. While at some point this is likely, I believe it to be a ways off. For now, we are clearly in a deflationary environment with the Fed’s monetary inflation doing little to stop the credit contraction excesses of the last few decades.

In fact, all the Fed QE did was help the banks get their balance sheets in order, the same thing the ECB is trying to do today with the coming January deadline for capitalization requirements set to be implemented (European banks aren’t doing so well because of this, and neither is the Euro).

Flash forward to 2014 and the Ned Davis Research chart of Credit Market Debt as a % of GDP is still contracting. How much more do we expect it to contract? Can you not see the deflationary aspect to this?

Deflation Everywhere

The European Central Bank (ECB) recently cut rates in an attempt to ward of deflation. Central Banks of the world aren’t in your best interest but that of those they need to keep their system alive and well. Deflation in and of itself is not a bad thing as it weeds out what should be weeded out of the system; bad banks and bad businesses. Instead we have a Fed that talks as if they are in control by saying they will raise rates when in fact the economy is not ready for such action yet.

U.S. Housing starts fell 14.4% in August. The Philly Fed manufacturing index fell to 3-month low. Are these signs of a healthy economy or is the Fed trying to just talk about dreams of one with their mention of higher rates being on the table?

As the Credit Market continues to contract, lets look at what’s going on with most every commodity including gold and silver of late. While bounces always come, and we just got over a bounce in many commodities where everyone thought the bottom was in, I have stuck with my deflationary outlook because of this chart above. The charts below are quite clear, no matter what one may be paying for things at the grocery store or elsewhere.

 Conclusion

What silver is showing us is that it is acting like an industrial metal more than a monetary metal as it recently broke its 2013 lows. Gold however is maintaining a price level above its 2013 low in the low to mid $1,190 level and is a level I expect to be broken at some point. Not what owners of gold want to hear, but that much closer to when I will be writing my all in article that my indicators tell me timing wise to write.