American gold investment

Is Bernanke screwing the Tooth Fairy?

Following Bernanke’s announcement of QE3 yesterday, Jan Skoyles explains why the printing of money is damaging the pockets of ordinary people, and even the tooth fairy. But it will be good for those who have decided to buy gold online? With gold prices rising with other consumable goods, time will tell if central bankers and acting in grave folly…

Bernanke flushed the American economy down the toilet yesterday and along with it the hard-working citizens of the world’s most powerful country.

After Romney said he would remove Bernanke as Chairman of the Federal Reserve, Bernanke has gone all in for Obama who hasn’t been quite so specific about hiring and firing. No one should be too surprised that Bernanke is only thinking about saving his skin rather than the economy he will have to live in when he is eventually kicked off his post.

Data releases early in the day yesterday showed that Bernanke was missing his targets on both sides of his remit. Initial jobless claims came in at 382K, 12K more than expected and significantly up from the Fed. In regard to price stability, producer prices soared by 1.7% in August, up from 0.3% in July – not so stable after all.

Food was apparently the main cause of this spike, in the Bureau of Labor Statistics’ press release it was stated, ‘On an unadjusted basis, prices for finished goods climbed 2.0 per cent for the 12 months ended August 2012, the largest advance since a 2.8 per cent increase for the 12 months ended March 2012.’

But this doesn’t worry Bernanke because inflation is a ‘good thing’, hence why he felt encouraged to print yet more money, ignoring inflationary threats and focussing on getting the country back to work even though they won’t be able to afford to eat.

As we  have seen for the past few weeks and in the last 24 hours, the merest hint of further QE drives energy, commodity and food prices. This automatically increases the struggles of both the working and middle-classes.

The Tooth Fairy’s feeling the pinch

Whilst the FOMC, Monetary Policy Committee and other central banks’ cadres seem concerned there isn’t enough inflation, down the food chain there is certainly evidence of it.

Last week, Visa reported that the Tooth Fairy is now shelling out record amounts for kids’ baby teeth. The price of a milk tooth has gone up 15% in the last year alone. Now, basic economics tells me that unless a commodity is in short supply for one reason or another then the price should not rise at such a rate. I know nothing about children, but there seem to be just as many around as when I last checked and I’m fairly sure teeth still fall out, so what’s going on?

When I was small the most I received was £1, about $1.50. This was most likely spent on sweets (ironic?) –  of which I could get 100. Now, there is no chance of getting more than 20.

Parents, apparently under pressure from other parents (no one tells you the social pressures increase outside of the playground) are now giving their children more cash for teeth. This is quite possibly also because, let’s be honest, what will $1.50 buy you anyway? Inflation has taken away the ease of buying tat for tittle tattle prices. Thanks Bernanke. Thanks to QE and easy monetary policy, even the Tooth Fairy’s costs have gone up fast.

The Race to Debase continues

If the Tooth Fairy isn’t alone in feeling the pinch then houses all over the US and beyond will be struggling on all matters such as food and commodity prices. Whilst Bernanke rushes to impress his current boss, thereby boosting the boss’ election chances, how impressed will the voters be in the long run when they realise their buck isn’t worth anything?

It seems confidence in the dollar is already dwindling as we see in the gold price.

History shows that a permanent run-up in the gold price, as we have seen for the last decade, means the stewards of the economy are getting it wrong and that market participants are fully aware of it – suspicious of the on-going treatment of the currency and monetary system.

Confidence is the only thing which backs fiat money. Confidence in both the euro and US dollar are at a relatively low point.

As Bernanke confessed back in 2010, he doesn’t ‘fully understand the movements in the gold price.’ Well, maybe after this past month’s moves after every speech and announcement from a central bank he might be a little clearer on why the gold price behaves the way it does.

Whilst the collapse of any monetary system seems nigh-on impossible, if confidence in a currency falters and continues as it has been then the brink of collapse is getting close. If these countries were individuals they would all be bankrupt and no one would have any faith in them and would certainly not lend to them.

The inescapable focus on gold bullion

No one country will want to see another currency collapse and so they are likely to do whatever it takes in order to shore up the monetary system. However, it will get to the point where those same countries will be shoring up with the yellow metal having decided to buy gold bullion.

But before entire countries start losing faith in one another the citizens will take the lead. Whilst fiat currencies are still currencies which can be forced upon the citizens of their respective countries and trading partners, we are seeing a slow move to gold by private investors. Even if they are not yet moving to gold at a fast enough pace, they are moving out of the banking system at least.

A new report from the Federal Deposit Insurance Corp., released on Wednesday, shows that roughly 17 million adults in the US are outside of the banking system – i.e. they live without a current or savings account. An additional 51 million adults have one bank account but still use pawnshops, payday lenders or rent-to-own services, according to the report.

Whilst much of this may be down to the individuals’ financial situations – they may not earn enough or are unable to afford the fees – this shows that the both the banking and monetary system are ostracising those they are meant to serve. Making up those who have no money to be devalued are the 25.3 million Americans who are out of work or unable to find a full-time jobs. This is a situation which is likely to get worse as there are now 6.9 million fewer jobs today than there were in 2007.

Bernanke might be trying to boost levels of employment, but how long is that going to take with the assumption ofceteris parabus? According to Paul Ashworth at Capital Economics it will take two to three years of monthly asset purchases – more than a trillion over three years – in order to get unemployment down to 7% from the current 8.1%.

The race to debase shines more light on gold

There are so many other facts and figures which we could show you what a mess the US economy is in, but there is little need. The two areas where people feel it the most – employment and inflation, have just been made a whole lot worse from the already bad situation. But as Dr Ron Paul said yesterday, QE3 is just Bernanke’s way of saying ‘we don’t know what else to do except print cheap money.’ This has not worked before, and it will not work for the central bankers of today.

Now that Bernanke has firmly made his mark in US history as the man who ruined the US Dollar other countries will be racing for the same accolade. Japan is likely to react for fear that the falling dollar will strengthen their own valueless currency. China has already hinted this week that further debasement is on its way. Meanwhile who knows what will happen to the Euro.

The race to debase can only be good for gold, as we already know from history.

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About the Author

Jan SkoylesJan Skoyles is Head of Research at The Real Asset Company, a platform for secure and efficient gold investment. Jan first became interested in precious metals and sound money when she met Ned Naylor-Leyland whilst working alongside him in the summer of 2010. Jan then went on to write her undergraduate dissertation on the use of precious metals in the monetary system. After graduating from Aston University in 2011 Jan joined The Real Asset Co research desk. Her work and views are now featured on a range of media including BBC, Reuters, Wall Street Journal, Mail on Sunday, Forbes and The Telegraph. She has appeared on news channels including Russia Today to discuss the gold price and gold investing. You can keep up with Jan's commentary by subscribing to our RSS feed Gold Investment News.View all posts by Jan Skoyles