I started off with the desire to put together a metric of money which allows me to compare sound money with fiat money. My approach to this was to look at what happens in how fiat money was created.
And then we had QE. And guess what? The level of fiat-money quantity is now over 60% above that long-term trend line. Now, if we stand back unemotionally and look at that chart, we would say that this is monetary hyperinflation.
Here we have this situation now where the Central Bank, the Fed, is having to produce money to finance the government deficit. It’s having to produce money to keep interest rates down so that the banks don't have balance-sheet problems. And if it slows down in that production of money, and even if it doesn't increase the rate of the production of that money, then our world is going to come to a rather nasty halt.
It looks like not only are we in a debt trap, but we are in a hyperinflationary trap, potentially. We need someone who is really quite strong and understands these things to be able to stand on the system and say, no more!
So my question to you, Chris, is, can anyone do that? Do you think Janet Yellen will do that?
One of the things that's interesting in this, which I think is a dynamic that is going to play out over the next few months, is, here we are expanding a quantity of money hugely. But at the same time, what we're not seeing is the prices of raw materials, of things like that really reflecting that expansion of money. Now, there is always a time lag between the two effects. But actually we are seeing this effect on certain things, and in a way in which one would expect. That is that asset prices, particularly things like property, are beginning to rise.
What FMQ Indicates for Gold
The one thing which I think is being triggered is gold. We had a good rise today. We had about a $40 rise. Now I think that this is something quite significant, really, for a number of reasons, but if I go back to my FMQ (fiat money quantity), if I adjust the price of gold from just before Lehman Brothers went under, I think I'm right in saying that in July 2008, the price of gold at the close of that month was $918/ounce.
Now, if you adjust that price by the extra fiat money quantity that is now in circulation, gold has actually gone down, in real terms if you like, by about 30%. Put another way, if the price of gold was to match in real terms that $918 level, it would today be about $1,860. So we have this extraordinary thing where gold, for whatever reason, has become extremely undervalued compared to where it was before Lehman Brothers went under. Now this is important, because before Lehman Brothers went under, not many people actually understood systemic risk. So the price of gold did not really include the weighting for systemic risk.
The other thing I would say is that since then, with our FMQ having taken off, there is a substantial hyperinflation risk that is going to affect prices somewhere down the line. And yet, gold is trading at a discount of 30% to where it was before all of this happened, so it is horribly mispriced.
Click the play button below to listen to Chris Martenson's interview with Alasdair Macleod 45m:56s):