Was Gold a hedge against inflation? When? For how long?

Recent research has begun to cast some doubt upon the inflation Hedge capacity of gold. When you think of it, the inflation experience over the last 40 years, since gold began to float freely, has been very mixed. In the 1970s we were concerned in relation to inflation, perhaps even fears of hyperinflation; not the talk is of deflation or disinflation.  So was gold a hedge against inflation? Is it now?

Helicopters, Money and Mines…

I have been thinking a lot about helicopters lately. Mostly this is down to the regular reminders to Santy not to forget to bring a helicopter, with doors that open and close and a winch to rescue boats.. Partially its down to the increasing debate that is taking place on helicopter money, which is not something you give to Fisher Price…

7 things we know about gold…

So, one major area of my research is on gold. Here is an update on where that research is at. Click here for the downloadable versions or look at my SSRN page

Europe’s InDeflation problems

The FT has today weighed in with the argument that there is a danger of deflation in the Eurozone. And there is. We are at low and declining rates of inflation.  Deflation is for a whole bunch of reasons more scary than (mild) inflation. The IMF have warned against it. Olivier Blanchard the IMF chief economist notes that for countries experiencing deflation

“On the one hand it would certainly improve their competitiveness and help exports but on the other hand it would increase the real interest rate and the real value of debt and so reduce domestic demand.”

And he concludes that the second effect will dominate.

However, it is quite possible to have the phenomena of “indeflation” – where certain sectors or regions or both experience inflation while others experience deflation.

The common measure for inflation in Europe is the HICP – harmonized index of consumer prices, published monthly by Eurostat. Below are some tables showing number of months we have seen falling prices, (measured on a moving average 12m rate of change) over the last 6 years (actually last 73 months). Look at where deflation has been happening and when. The weights of the sectors vary – but a general trend is food then housing then transport.

So for inflation as a whole we see not a huge problem…apart from Ireland where in 1 month in 3 we have seen overall consumer prices fall, and this has now reversed. Mind you Greece seems to be falling into deflation , quelle surprise

So, some tables. Feel free to interpret.

	All-items HICP
	Since  1/08	Since 1/13
EU (de jure)	0	0
Euro Area (de jure)	0	0
Belgium	3	0
Bulgaria	0	0
Czech Republic	0	0
Denmark	0	0
Germany	0	0
Estonia	5	0
Ireland	21	0
Greece	6	6
Spain	4	0
France	0	0
Croatia	0	0
Italy	0	0
Cyprus	0	0
Latvia	10	0
Lithuania	0	0
Luxembourg	2	0
Hungary	0	0
Malta	0	0
Netherlands	0	0
Austria	0	0
Poland	0	0
Portugal	10	0
Romania	0	0
Slovenia	0	0
Slovakia	0	0
Finland	0	0
Sweden	1	0
United Kingdom	0	0

When we dig a little deeper however this pattern masks a lot of variation. Take Food and drink for example. With the notable exception of Ireland almost  no deflation in drinks prices and that some time ago. Similarly in food – no recent deflation.  As food transport and household are the things people spend most money on if we do not see deflation here people will not feel that there is deflation, and where it matters to them there wont be.

	Food and non-alcoholic beverages			Alcoholic beverages, tobacco and narcotics
	Since  1/08	Since 1/13		Since  1/08	Since 1/13
EU (de jure)	4	0		0	0
Euro Area (de jure)	10	0		0	0
Belgium	0	0		0	0
Bulgaria	14	0		5	0
Czech Republic	14	0		0	0
Denmark	12	0		0	0
Germany	12	0		0	0
Estonia	13	0		0	0
Ireland	22	0		17	0
Greece	7	0		0	0
Spain	16	0		0	0
France	6	0		0	0
Croatia	12	0		0	0
Italy	0	0		0	0
Cyprus	3	0		1	0
Latvia	13	0		0	0
Lithuania	11	0		0	0
Luxembourg	0	0		0	0
Hungary	0	0		0	0
Malta	0	0		0	0
Netherlands	10	0		0	0
Austria	10	0		0	0
Poland	0	0		0	0
Portugal	17	0		0	0
Romania	0	0		0	0
Slovenia	6	0		0	0
Slovakia	15	0		0	0
Finland	14	0		0	0
Sweden	0	0		0	0
United Kingdom	0	0		0	0

Clothing and footwear by comparison has been hammered – and bear in mind that a lot of these come now from outside the EU.  The union, it seems, should be on the plane to Prague or Warsaw or better yet coming here for their spring collections.. A pattern emerges in clothing and footware, where we have peripheral countries in persistent deflation. That bodes ill for the high street drapers in every Irish or Czech or Portugese small town. Housing remains mostly inflationary.

	Clothing and footwear			Housing, water, electricity, gas and other fuels
	Since  1/08	Since 1/13		Since  1/08	Since 1/13
EU (de jure)	30	0		0	0
Euro Area (de jure)	0	0		6	0
Belgium	0	0		17	6
Bulgaria	20	9		6	2
Czech Republic	73	13		0	0
Denmark	24	0		0	0
Germany	0	0		8	0
Estonia	0	0		9	0
Ireland	73	13		19	0
Greece	14	0		9	0
Spain	14	0		0	0
France	6	0		1	0
Croatia	50	13		0	0
Italy	6	0		9	0
Cyprus	59	13		15	5
Latvia	48	12		13	2
Lithuania	58	0		0	0
Luxembourg	9	0		10	0
Hungary	11	3		7	7
Malta	40	3		2	0
Netherlands	30	0		13	0
Austria	0	0		0	0
Poland	73	13		0	0
Portugal	54	13		0	0
Romania	0	0		0	0
Slovenia	41	4		7	0
Slovakia	20	0		7	0
Finland	6	6		0	0
Sweden	9	1		0	0
United Kingdom	40	2		3	0

In household furniture and white goods Ireland stands alone – persistent deep rooted deflation. Not only will the drapers be gone bust but the small electrical retailer and the local homestore will follow. The future of Irish white goods retail is, horrific as it may seem, Harvey Norman… Greece seems set to follow tipping into deflation in this area in the last year.

	Furnishings, household goods etc			Miscellaneous goods and services
	Since  1/08	Since 1/13		Since  1/08	Since 1/13
EU (de jure)	0	0		0	0
Euro Area (de jure)	0	0		0	0
Belgium	0	0		0	0
Bulgaria	24	1		0	0
Czech Republic	56	13		0	0
Denmark	2	2		1	1
Germany	0	0		3	3
Estonia	13	0		0	0
Ireland	73	13		9	2
Greece	20	13		13	13
Spain	0	0		0	0
France	0	0		0	0
Croatia	4	0		0	0
Italy	0	0		0	0
Cyprus	16	13		0	0
Latvia	49	13		17	0
Lithuania	22	0		0	0
Luxembourg	0	0		0	0
Hungary	5	0		0	0
Malta	0	0		0	0
Netherlands	0	0		0	0
Austria	0	0		0	0
Poland	0	0		0	0
Portugal	16	13		6	6
Romania	0	0		0	0
Slovenia	12	12		0	0
Slovakia	39	1		0	0
Finland	0	0		0	0
Sweden	31	13		0	0
United Kingdom	0	0		0	0

What can one say about communications, except what on earth is going on in Cyprus and Romania?

	Transport			Communications
	Since  1/08	Since 1/13		Since  1/08	Since 1/13
EU (de jure)	8	0		63	13
Euro Area (de jure)	10	0		73	13
Belgium	15	3		61	13
Bulgaria	14	4		72	13
Czech Republic	21	5		72	13
Denmark	14	5		50	13
Germany	12	2		70	13
Estonia	17	6		54	13
Ireland	19	5		17	13
Greece	13	6		48	13
Spain	12	0		61	13
France	10	0		62	13
Croatia	17	4		73	13
Italy	10	0		65	13
Cyprus	14	0		2	0
Latvia	17	8		73	13
Lithuania	11	3		73	13
Luxembourg	15	3		59	13
Hungary	8	3		22	0
Malta	21	3		51	13
Netherlands	9	0		40	9
Austria	14	2		41	4
Poland	14	5		54	10
Portugal	19	5		40	0
Romania	0	0		7	3
Slovenia	13	0		44	13
Slovakia	28	4		16	1
Finland	12	0		63	13
Sweden	10	5		73	13
United Kingdom	2	0		21	0

Having had a torrid time, suffering the longest run of deflation in their sector in Europe, Irish restauranteurs have now begun to recoup with price rises.  It is startling that in the face of a massive slump in disposable income we have not seen until recently deflation in Greece in this area and in culture etc

	Recreation and culture			Restaurants and hotels
	Since  1/08	Since 1/13		Since  1/08	Since 1/13
EU (de jure)	8	0		0	0
Euro Area (de jure)	11	0		0	0
Belgium	10	0		0	0
Bulgaria	34	13		0	0
Czech Republic	37	0		0	0
Denmark	15	1		0	0
Germany	3	0		0	0
Estonia	11	0		15	0
Ireland	47	9		33	0
Greece	23	13		9	9
Spain	41	0		0	0
France	63	6		0	0
Croatia	12	0		10	5
Italy	0	0		0	0
Cyprus	13	4		0	0
Latvia	32	4		21	0
Lithuania	26	0		15	0
Luxembourg	0	0		0	0
Hungary	0	0		0	0
Malta	44	0		5	4
Netherlands	34	0		0	0
Austria	0	0		0	0
Poland	26	0		0	0
Portugal	21	0		0	0
Romania	0	0		0	0
Slovenia	24	7		16	0
Slovakia	8	0		0	0
Finland	12	1		2	0
Sweden	48	13		0	0
United Kingdom	26	0		0	0

Finally in education and health Greece and Spain lead the pack. Despite the constant refrain that Irish healthcare costs are skyhigh the sector is resistant to change. Greece continues its slip into deflation

	Education			Health
	Since  1/08	Since 1/13		Since  1/08	Since 1/13
EU (de jure)	0	0		0	0
Euro Area (de jure)	0	0		2	2
Belgium	3	0		33	0
Bulgaria	0	0		6	6
Czech Republic	0	0		9	0
Denmark	0	0		6	0
Germany	40	5		9	9
Estonia	3	3		5	2
Ireland	5	0		0	0
Greece	30	13		21	13
Spain	0	0		47	0
France	0	0		6	6
Croatia	32	5		0	0
Italy	0	0		0	0
Cyprus	3	3		10	10
Latvia	25	13		21	0
Lithuania	0	0		0	0
Luxembourg	0	0		15	0
Hungary	8	0		8	0
Malta	0	0		0	0
Netherlands	0	0		11	0
Austria	25	0		0	0
Poland	0	0		0	0
Portugal	0	0		30	8
Romania	0	0		14	0
Slovenia	0	0		10	10
Slovakia	0	0		0	0
Finland	0	0		2	0
Sweden	0	0		12	0
United Kingdom	0	0		0	0

Who really knows the rate of inflation (hint – not government) ?

Much talk around Europe is on the worries of inflation or deflation. Part of the problem in assessing this is that inflation statistics are stale. They are collected on the basis of representative baskets of goods and are published with a delay. For Ireland the basket of goods was updated in 2007 and then again in 2012. Basket composition issues can lead to changes in the apparent inflation rate.

Wouldn’t it be nice if we had realtime inflation? Where we could see, on a day to day basis, inflation and deflation in key sectors? Well, we can, IF we pay. A company collects these data, for a vast number of countries and for a large amount of sectors. Ireland is included. In fact, in 2009 the originator of this gave a talk at a conference in Ireland.

But we don’t know. State Street in the IFSC know. They are partners with the company. But written responses from the government are clear : the Irish state does not collect nor does it purchase these data. Why is that?

Bundes-boobery

One of the first ever pieces of non academic work which I wrote was, shortly after leaving the central bank of Ireland in 1992, to suggest that we should consider ditching the then Irish punt and adopting the then Deutsche Mark. The arguments revolved around a (in retrospect astonishing naive) view that doing so would bind our political system to behave.
At the time, and for a long time thereafter, I was a great admirer of the Deutsche Bundesbank. Throughout decades they kept the flame of a stable German currency burning, soothing the population with folk memories of the hyperinflation et seq of the 1930s. Alas, it’s no longer possible to admire the Bundesbank, at least for me. one of the things we know from behavioural economics is that success rather than breeding success can breed overconfidence. Recent events and speeches from the BuBa make me wonder if their thought processes have ossified to the extent that what was then a sensible economic policy, strong stable money, has now ossified into theological rigidity.
The most recent bundesboobery comes from board member Andreas Dombret. Reported on Bloomberg he states “Putting too much weight on short-term, demand-side risks misjudges the root cause of the current crisis, namely a profound loss of confidence in markets,” and goes on to caution about the desire to loosen monetary policy and slack off austerity.
This is almost 100%wrong, and that such frank nonsense can be spouted from a senior policy maker makes one shudder. There are massive issues in the euro, and they are problems of imbalances. Peripheral counties are not regions of Germany, but independent democratic states. Faced with depression era indicators of unemployment, and in some cases economic collapse states are being urged to cut their way out of a debt hole. The market confidence or lack of same in Greece, Spain etc is not the problem. It is the symptom of national debt levels that are either unsustainable (Greece), at the brink of sustainability (Ireland) or unsustainable absent some massive growth spurt (Italy, Spain, Portugal). The solutions are bifold: debt reduction and growth stimulation. The firmer can come from write offs and restructuring (markets have a conniption, but get over it), inflation (the BuBa/ECB has a conniption), or growth. This comes from the reduction of state and private debt levels to a level that will allow consumer/business confidence and the diversion of monies from savings/debt repayment to investment and consumption and from structural reform.
To confuse rational market skepticism on the ability or willingness of the core (read, Germany) to allow inflation or write offs, combined with the slooow reforms in many peripheral countries coupled with broken banking systems (caused by core, read german, desires to see no bank fail) is to demonstrate myopia. To smugly suggest Spain with 24% unemployment or Ireland, drowning in zombie bank debt,mor the shattered remnants of the Greek economy must carry all the burden of adjustment is frankly nuts.