World Economic Trend Analysis

Thursday, 10 February 2011

Dual Mandates, the Price of Gold, and Tinfoil Hats

As noted in Republicans Attack Dual Mandate, a group of Republicans want to remove the Fed�s employment mandate and have the Fed focus solely on keeping prices stable.

This got me thinking once again about dual or triple mandates, and also the price of gold.

Dual Mandate Silliness

The idea that the Fed can have dual or triple mandates is complete silliness. Triple mandate you ask? The Fed seems to have added supporting equity prices to its mandates.

Honey About Your Dual Mandate ...

Short Lesson About Mandates

The Fed can control at most one thing at once.
The Fed can control short-term interest rates but not long-term rates, the price of gold, or money supply.
The Fed could influence the price of gold but then would lose control of interest rates and money supply.
The Fed could target money supply growth but would then give up control of interest rates and the price of gold.
The Fed can make money available but it cannot control where the money goes, or if it goes anywhere at all.
The Fed certainly cannot force businesses to hire anyone.
Prices are set in the global economy. At best the Fed can influence prices (via interest rate policy)

The only thing the Fed can directly control is short-term interest rates or money supply (until there is a bond market revolt of course). Dual and triple mandates are complete nonsense.

Given the nature of the global economy, the Fed can only "act" to suppress the price of gold, it could not "control" it. Moreover, and as noted above, if the Fed were to act to suppress the price of gold, it would give up control and influence over other things.

Yet people believe the Fed and JP Morgan have conspired to suppress the price of gold for decades. To believe this could be done with any degree of success over long periods of time is nonsense.

In regards to commodity prices in general, China is currently at least a big as influence as the Fed. However, by raising interest rates sufficiently high, the Fed certainly can influence prices.

At the short-term rate of 0% (where policy is now) the Fed has effectively lost all control and influence over the price of gold. Moreover, the Fed has effectively ceded control over prices in general. The Fed foolishly wants prices rise (except food and energy - exactly the prices that have been rising).

Here are two competing theories to explain what has transpired recently.

Theory #1

The Fed is buying futures to support equity prices. It has done so for 10 years but no one at any trading desk anywhere can confirm. How this happens, and how the Fed keeps all those futures off its books is the best kept conspiracy secret in the world.
The Fed and JP Morgan are suppressing the price of gold and silver. How and why and for what purpose the Fed and JP Morgan would want to do this is subject to much debate. Details of the exact mechanism and who is involved is the second best kept secret in the world, but clues are hidden in 30 year old documents as well as commitment of traders (COT) reports.
The Fed will not let the market drop
The Fed is mysteriously all powerful even though it could not stop the S&P from plunging to 666 in the crash, nor could it stop gold from rising to 1400 from 250.
There is no contradiction between points 3 and 4 because this is a planned conspiracy from the outset so that JP Morgan and Goldman Sachs can rule the world.

Theory #2

The Fed's bubble blowing polices have created bubbles of increasing amplitude over the years.
The Fed kept real interest rates negative in the wake of the dot-com crash. This fueled the housing bubble, and the initial rise in gold.
Real interest rates went positive in the housing crash and the price of commodities and equities crashed.
The Fed flooded the markets with liquidity in 2009 and 2010 which once again fueled renewed speculation in financial assets and commodities lifting the stock market.
The price of gold has generally gone up with negative interest rates. However, nothing move up forever in a straight line, so there have been some corrections in price along the way.

If you believe theory number 1, please put on your tinfoil hat.

Current Fed policy is thus based on the hope prices stay low and companies start hiring. The hope regarding hiring is unfounded. Moreover, the Fed is once again ignoring asset bubbles in the making, in the equity and junk bond markets.

For more details and further discussion of asset bubbles, please see