Thursday, September 21st, 2017 MST

When did lower prices become the enemy?

Around the world, central banks have joined in fighting a common enemy: lower prices.  But, when did lower prices become the enemy?

Aren’t we all enticed to visit car dealerships every holiday?  And, how about lower prices for mattresses and those Wednesday newspaper ads for supermarket food specials?

Obviously, everyone, except central bankers and Paul Krugman, enjoy lower prices.

Somewhere in the past ten years or so, fear of deflation (lower prices as the Establishment defines deflation) emerged as the scourge of the economy.  The theory seems to be that if the public comes to expect lower prices, it will put off purchases, hoping for still lower prices.  This, according to neo-Keynesian thinking, will cause economies to grind to a halt.  Some even talk of another worldwide Great Depression because of deflation.

In a San Francisco University Club speech last month, Fed Chair Janet Yellen said:

“I think the predominant risk is that inflation will be too low, not too high, over the next several years. I take 2 percent as a reasonable benchmark for the rate of inflation that is most compatible with the Fed’s dual mandate of price stability and maximum employment. This is also the figure that a majority of FOMC members cited as their long-run forecast for inflation. . . “

The Federal Reserve, the European Central Bank and the Bank of Japan are the most prominent proponents of a manufactured 2 percent inflation.  How 2 percent became the goal is not clear, but it seems to be a rate of inflation that central bankers believe that the public can live with and a rate that will entice savers to cease to be savers and become spenders.

How is 2 percent inflation to be achieved?  With quantitative easing and no interest rate increases by the Fed.

Gold and silver prices will benefit from quantitative easing programs and continued low interest rates.  Both are up in euros and yen, and metals prices seem to have put in bottoms against the dollar.

As noted in an earlier post, now may be the time to move from stocks to the metals, from high-valued investments to low-valued investments.

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