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Robert Fitzwilson continues:


The elusive goal of getting employment, housing and the gross domestic product back on track still evades the central banks, despite throwing everything but the kitchen sink at the problem.  That is, almost everything.  A consensus appears to be building that the central banks are now focused on what is referred to as nominal GDP. 


Nominal means making the calculation before taking into account the effect of prices on the ‘real’ value of the economic activity.  We believe that there are structural and resource-related constraints to growing the economy.  Therefore, the easiest way to generate nominal GDP in our view would be to let prices rise....


Continue reading the Robert Fitzwilson piece below...  




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“Allowing prices to rise even on a becalmed economy would seem to achieve the desired result of an increasing GDP whether it was real or not.  Despite the logic of doing so, it is not happening.  The U.S. Federal Reserve, for example, is still sticking to their estimate of 2% over the next ten years.  While this is a highly unlikely scenario, why would they dig in their heels on something that is contrary to their own stated objective of raising nominal GDP?


Our conclusion is that rising prices would also completely overwhelm the deficit.  In normal times, the level of interest rates has included both real and inflation components.  Rising prices would bias interest rates to the upside.  Given the current circumstances, rates cannot be allowed to rise under any circumstances.  The incremental debt service would make even today’s barely credible budget projections go up in flames.


Dan Norcini contributed a critical insight when he said that we are witnessing price controls via computer algorithms.  Instead of doing what would be consistent with a goal of rising nominal GDP, the central banks are pursuing an iron-fisted approach of price moderation.  There can be only one reason, a greater fear of rising interest rates.


Targeting higher nominal GDP will not be possible when there are impediments to real growth and a bias against rising prices.  Prices and interest rates will eventually escape their constraints.  A rational approach would be to allow both to gradually do so.  However, the rise in rates would prove to be catastrophic, not to the economy, but to the public sector finances.  That is why it has not yet happened.


For these and many other reasons, we believe that gold, oil and silver remain very attractive forms of wealth protection.”


© 2012 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.


Eric King

KingWorldNews.com

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