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Gold, Silver, and Japan

Another deflationary impulse hit the global economies. Japan announced shocking news. After several decades of no economic growth, the Japanese government has piled up massive debt. They desperately need to get their economy going and just announced a desperate plan. After the Bank of Japan (their Federal Reserve) copied our grand growth experiment of flooding the economy with vast quantities of newly created money (QE), they are going all in. While our Federal Reserve tapered money creation, Japan is boosting their efforts to the equivalent of three times that of our Federal Reserve. Moreover, the Bank of Japan will be indirectly investing in the stock market (governments creating cash to buy stock … what next?). Of course, the Japanese yen crashed on this news.

So what does this mean for the U.S. economy? In a word: deflation. A cheaper yen means they will try to undercut their Chinese, American, and German competition and export more. They are debasing their currency to steal business from other nations. Competing economies will be forced to retaliate by cheapening their currencies. In a currency war, when everyone tries to fix their slow economy problems at each other’s expense, everybody loses. Currency debasement leads to the inevitability of instability and/or eventual inflation.

Therefore, for now, there is worldwide deflation. The price of gold and silver, which traditionally hedges against inflation and instability, has stagnated. However, in a world of currency debasement or, in other words stuffing the world with more and more currency from nowhere, precious metals are the last stable currency. Governments cannot create gold. Citizens of developing economies know this. That is why they are buying gold and silver at record rates. Even some of the foreign central banks are buying gold and building their gold reserves.

In the past, gold has held its value. Currencies run by desperate governments have not.