We’ve been talking a lot about rising prices. The CPI has come in hotter than expected every month this year. We’re paying more to buy less.

We see the impacts of inflation on price tags, but sometimes it squeezes us more subtlety. It’s known as “shrinkflation.”

Rising prices don’t just hit consumers. In fact, they impact producers first. As the cost of materials, labor and equipment goes up, companies feel the pinch. Eventually, they pass those costs on to their customers. A lot of companies have been doing this of late. Chipotle is just one example.

But raising prices is bad for business, so sometimes, companies find other ways to cut costs. They shrink packages, or simply put less stuff in the same size box. Consumers rail against this practice, but economist Doug French suggests their anger may be directed in the wrong place. Perhaps they should blame the Fed.

The following article by Doug French was originally published at the Mises Wire. The opinions expressed are those of the author and don’t necessarily reflect those of Peter Schiff or SchiffGold.

A term has been coined for product sellers who shrink their packages, and thus, the amount of product in those packages, keeping the package price the same: shrinkflation. Anyone with a bit of good sense or economics training knows this is another form of price inflation, caused by what used to be the dictionary meaning of inflation; an increase in the supply of money.

For example, while the average American behind continues to widen, toilet paper has narrowed. A friend’s mother busted out a ruler to confirm her theory. Last year John Hebbe of Fairfax, Virginia, provided photographic proof to the Washington Post: an old roll was 4.5 inches wide, a new roll, 3.75 inches. Of course, the new rolls are fatter, for now, causing annoyance with homeowners with toilet paper dispensers with the roller too close to the wall to accommodate the fatter rolls.

Greg Rosalsky wrote for NPR.org, “The original Charmin roll of toilet paper, [Edgar Dworsky, former Massachusetts assistant attorney general,] says, had 650 sheets. Now you have to pay extra for “Mega Rolls” and “Super Mega Rolls”—and even those have many fewer sheets than the original. To add insult to injury, Charmin recently shrank the size of their toilet sheets. Talk about a crappy deal.”

“Downsizing is really a sneaky price increase,” Dworsky told NPR. “Consumers tend to be price-conscious. But they’re not net-weight conscious. They can tell instantly if they’re used to paying $2.99 for a carton of orange juice and that goes up to $3.19. But if the orange juice container goes from 64 ounces to 59 ounces, they’re probably not going to notice.”

Homo economicus is assumed to notice this trickery pokery in neoclassical economics theory. Oliver Kim wrote in The Crimson, “But here’s a confession: Homo economicus is at most a useful fiction—in economic jargon, a model. Human beings do not actually think like Scrooge McDuck, but, in approximation and in aggregate, we often behave like we do.”

“Over the years, Edgar Dworsky has documented the downsizing of everything from Doritos to baby shampoo to ranch dressing. ‘The downsizing tends to happen when manufacturers face some type of pricing pressure,’ he says. For example, if the price of gasoline or grain goes up,” Rosalsky explained.

What the NPR scribe misses is inflation’s breakdown of the division of labor. Average folk, not savvy Homo economicus types, have to pump their own gas, scan their own groceries, and, probably worst of all, manage their own retirement funds.

Since the government has deemed its paper tickets and computer digits to be money, Murray Rothbard wrote, “then the government, as dominant money-supplier, becomes free to create money costlessly and at will. As a result, this ‘inflation’ of the money supply destroys the value of the dollar or pound, drives up prices, cripples economic calculation, and hobbles and seriously damages the workings of the market economy.” That would include the division of labor.

“As we’re seeing inflation picking up now, that’s why I think you’re going to see more items being downsized,” Dworksy told Rosalsky. “And maybe it’s going to be a double-whammy: We’re going to see some products going up in price at the same time that you’re actually getting less in the package.”

A Charmin spokeswoman, when confronted by reporters at WBUR about shrinking the size of their toilet sheet squares, pulled an explanation out of her you-know-what, suggesting it was the result of “innovations” allowing “consumers to, basically, wipe their butts more efficiently.”

Rosalsky, writing from NPR La La Land believes, “consumers will start to notice and voice concern and the power of consumer demand will force companies to listen and right-size their products.” Right-size? What’s the right size?

Don’t blame Charmin, as Ludwig von Mises explained. “[I]f the ruling party does not want to imperil its popularity by heavy taxation, it takes recourse to inflation.”

Consumers should complain to those working at the Eccles Building producing money, not to those in the private market producing toilet paper.

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GDP for the second quarter disappointed, coming in at an annualized rate of 6.5%. Is this a sign of impending stagflation?

While 6.5% growth looks good on the surface, economists polled by the Wall Street Journal expected annualized GDP to chart around 9.1%. This was a huge miss and indicates the economy isn’t growing nearly as fast as everybody assumed.

Looking deeper into the numbers reveals an even gloomier picture.

Nominal GDP grew at 13%, but inflation ate away half the growth. As WolfStreet put it, “high expectations got knocked down by spiking inflation that has surprised economists to the upside all year long.”

In fact, the GDP measure likely understated inflation. It assumed a Q2 annualized inflation rate of 6.1%. But the CPI registered a rise of 9.35%. If the folks calculating GDP used the CPI as the deflator, we’re looking at annualized growth of just 3.25%. Keep in mind, the modern CPI measure understates actual price increases. As Peter Schiff noted in a tweet, using a real inflation measure would likely reveal an economic contraction.

The definition of stagflation is “a situation in which the inflation rate is high, the economic growth rate slows, and unemployment remains steadily high.” We might not be there yet, but a lot of signs seem to be pointing in that direction. The fact that economic growth already seems to be slowing versus expectations should raise warning flags.

Virtually all of the Q2 GDP growth came from an 11.8% leap in consumer spending. This accounted for 70.6% of total GDP, the most ever. It was the first time consumer spending has ever made up more than 70% of GDP.

And what drove consumer spending? WolfStreet summed it up perfectly. It was “powered by the $1,400 stimulus checks that started going out in late March, extra unemployment benefits, and all the other government goodies and extras, and by stock market gains and whatnot.”

Meanwhile, gross private investment dropped by 3.5%. It was the second quarter in a row gross private investment has dropped.

We spent more but invested less. We spent money the Fed printed to buy products other nations produced. Inflation masks an imploding economy,” Schiff said in a tweet.

Schiff isn’t speculating when he says Americans are buying products produced by other nations. The trade deficit in good for June exceeded the high end of estimates and set another record, rising 3.5% to $91.2 billion.

A lot of mainstream pundits keep looking at these numbers as if they somehow reflect strength because Americans are buying so much stuff. But as Schiff pointed out, the strength of an economy isn’t measured by what you buy but by what you produce.

Strong economies produce more. They don’t simply consume more. We are consuming more despite the fact that our economy is weak. How are we doing that? Well, the Fed is printing money and we are spending it. But that does not constitute strength. That really evidences profound weakness.”

Recklessly spending money created out of thin air does not create economic strength. The only reason these numbers look good is because of Fed magic via monetary policy.

In a recent podcast, Schiff said, the economic data coming out “really evidences the stagflationary environment that we’re in.”

The big GDP miss doesn’t do anything to make us doubt Peter’s observation.

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The CFTC Commitment of Traders (COTs) report is released once a week and shows a breakdown of open interest by trader category. As discussed in the gold/silver pricing analysis, Open Interest can be a major factor in the metal price. The CFTC breaks down open interest by:

• Managed Money (e.g. Hedge Funds)
• Producers (e.g. gold mining companies)
• Swaps (e.g. banks)
• Non-Reportable
• Other

This analysis looks at the positioning of the trader categories above compared to price movement. Most analysts focus on the Managed Money group as the speculative money that drives the price. The Swaps generally sit on the opposite side of the Managed Money to provide liquidity as a counterparty.

Please note: the COTs report was published 7/30/2021 for the period ending 7/27/2021. All current data points are as of 7/27

Gold

Current Trends

Managed money is less than half what it was prior to the market sell-off in March 2020 (90k vs 230k in Feb 2020). Producers have also dropped their short position by nearly 100k contracts, from 163k vs. now net short 56k. While the big price run-up (black line) in summer 2020 was not entirely driven by increased long positioning, it does seem that positioning in open interest is having a much larger impact on price in 2021.

Figure: 1 Net Notional Position

Below shows the net change in contracts by trader type week over week. Swap is filtered out of this view because it mostly sits opposite the Managed Money to balance to zero. As shown below, May saw large increases in Managed Money long, followed by 3 consecutive declining weeks. Overall, we’ve seen choppy activity that may be causing the price of gold to bounce back and forth.

Figure: 2 Silver 50/200 DMA

The table below shows a series of snapshots in time. This data does NOT include options or hedging positions. Important data points to note:

• Since June 29, Managed Money has increased net positioning by almost 30k contracts (61k to 90k)

• • The last week was relatively flat
  • Net positioning is still 27k lower than in July 2020
  • This activity probably supported gold prices this July after a sell-off in June
  • Swap was on the other side, increasing net short position by 32k (140k to 172k)

• “Other” has also become slightly more bullish, increasing net longs by 8% from 101k to 109k

• • “Other” has maintained a bigger net long position than Managed Money over all periods

Figure: 3 Gold Summary Table

Historical Perspective

Looking over the full history of the COTs data by month produces the table below. The chart shows the last run-up in price in 2011, followed by the slow fall into 2015 until the new bull market started in 2016. The response to the Trump election (gold sold off hard) can be seen clearly in the sharp drop-off in late 2016.

This chart also shows how big the “Other” category has become on the long side. In 2011, Other Long had 8.6B in gross long vs 25B in the most recent period.

Figure: 4 Gross Open Interest

The CFTC also provides Options data. Producers have largely dominated, but Managed Money has played a larger role within the market more recently. Still modest compared to the futures side, 23B in long futures vs 3B in long options.

Figure: 5 Options Positions

Finally, looking at historical Net positioning shows the correlation of positioning with price. The peaks and valleys in price are mirrored in the Open Interest.

Figure: 6 Net Notional Position

Silver

Current Trends

Managed Money is less than one-third what it was prior to the market sell-off in March 2020 (20k vs 65k in Feb 2020). Swaps have also dropped their short position by nearly 30k contracts, from 36k vs now net short 6k now.

Figure: 7 Net Notional Position

Below shows the net change in contracts by trader type week over week. Swap is filtered out of this view because it mostly sits opposite the Managed Money to balance to zero. As shown below, Managed Money has been flooding out their long positions in recent weeks after the steady increases in April and May.

Figure: 8 Silver 50/200 DMA

The table below shows a series of snapshots in time. This data does NOT include options or hedging positions. Important data points to note:

• Since June 29, Managed Money has decreased net positioning by almost 12k contracts (33k to 21k)

• • In the latest week, net longs fell by another 6k, down 20%
  • Net positioning is still 27k lower than in July 2020
  • This activity shows why silver has been struggling of late
  • Swap was on the other side, decreasing net short position by 50% over the last month (12k down to 6k)

• “Other” also decreased their net long positioning by 10% from 11k to 10k

• • Unlike gold “Other” has maintained a smaller net long position than Managed Money over the last year

Figure: 9 Silver Summary Table

Historical Perspective

Looking over the full history of the COTs data by month produces the table below. The chart shows the last run-up in price in 2011, followed by the slow fall into 2015. The price collapse in silver in 2020 is clearly visible in this chart.

Figure: 10 Gross Open Interest

The CFTC also provides Options data. This has mainly been dominated by Non-Reportables, exceeding even producers. Options have fallen off significantly from the spike last July and are still well below the peak in 2011.

Figure: 11 Options Positions

Finally, looking at historical Net positioning shows the correlation of positioning with price. Similar to gold, the peaks and valleys in price are mirrored in the Open Interest.

Figure: 12 Net Notional Position

What it Means for Gold and Silver

Many long-term investors in gold and silver will point to this market as being the main culprit in suppressing physical prices. Paper supply of gold and silver is far easier to create than the physical. Paper shorts can be created to meet longs without having to source the physical metal. This is the nature of all futures markets, not just gold and silver.

While this certainly affects price discovery of the physical metal, like it or not this market does drive the spot price of gold and silver. Unless there is a run on the Comex, the trader positioning shown above will continue to drive prices. It is important to watch the positioning of speculators to better understand the price action.

Data Source: https://www.cftc.gov/MarketReports/CommitmentsofTraders/index.htm

Data Updated: Every Friday at 3:30 PM as of Tuesday

Last Updated: Jul 27, 2021

Gold and Silver interactive charts and graphs can be found on the Exploring Finance dashboard: https://exploringfinance.shinyapps.io/goldsilver/

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This analysis focuses on gold and silver data provided by the Comex/CME Group. See the article What is the Comex for more detail.

Silver: Recent Delivery Month

First Position Day is when contracts must post 100% margin to stand for delivery. Once delivery begins, contracts can settle in cash or more contracts can be opened and stand for immediate delivery (usually a sign of strong physical demand). Figure 1 below shows the last 24 months of silver delivery data when compared to First Position and the day before First Position. As shown, Open Interest falls significantly between the two days. This can be seen more clearly in Figure 4 below, the Open Interest countdown chart.

Silver is wrapping up a minor delivery month which usually means smaller delivery volume; however, can be a good indicator of physical demand. Contracts in the minor months are much more likely to stand for delivery versus the major months which speculators prefer due to much higher liquidity.

In this latest month, the number of contracts actually increased into the close rising by 69 contracts from 1,932 to 2,001. In the first day, 1,629 contracts have stood for delivery with 372 remaining as open interest. The minor months have seen a steady trend of new contracts opening and standing for delivery during the month. This trend will most likely continue for the August contract.

Figure: 1 24 month delivery and first notice

We can see in Figure 2 below how this most recent month stacks up more directly with other minor months. While August is only just above half the last two minor months, it is important to remember there are 30 days remaining for delivery. Not only can it be assumed that 372 from Open Interest will be added, but looking at April and June saw 74 and 679 contracts open mid month to stand for immediate delivery.

Figure: 2 Recent like-month delivery volume

Even with the Open Interest outstanding and a number of contracts opening mid-month for delivery, it is unlikely August will exceed the delivery volume seen in April and June. While this is slightly a negative trend, it is important to put this August into historical perspective. The chart below shows how this August on a notional (dollar) level is even set to exceed last August. Last July was right when silver saw its explosive move higher into the August contract.

Thus, there is more physical demand this August when price action has been sideways compared to last August when prices had doubled since the March lows.

Figure: 3 Notional Deliveries

Silver: Next Delivery Month

Jumping ahead to July shows that Silver is slightly below the trend line compared to recent major months. It is still way too early to gauge what delivery will be like for September based on the chart below.

Figure: 4 Open Interest Countdown

Instead, this next chart can give a good idea of the current trend for major month deliveries. Last year was seeing record deliveries and the volume has certainly fallen off since then. The mid-month countdown highlighted very strange behavior in July.

July 2021 was set to possibly exceed the record set last July; however, open interest collapsed into the final day at a rate greater than any prior contract over the last two years (Figure 1 above). Furthermore, more contracts were cash settled last month than any other month since May 2020.

Figure: 5 Historical Deliveries

Major Month: Cost to Roll

The cost to roll is the difference between the current month and the next major month. It has started increasing compared to recent months. If this continues to rise, it may prompt contracts looking to take delivery to act sooner since the cost to roll becomes more expensive. When the cost turns negative known as backwardation, it’s also a major signal of strong physical demand.

Only when it’s steady and low similar to May and July 2021 does it indicate an environment of complacency that makes it inexpensive to roll contracts forward. September is still relatively low, but higher than the last two months (potentially due to a longer time horizon stretching to the December contract).

Figure: 6 Roll Cost

Gold: Recent Delivery Month

The charts below follow the same order as the silver charts above.

August gold is a major delivery month. While 19,031 contracts at first position is still high relative to all history, it is far below the more recent major months. Gold has not seen contracts cash settling mid month which means total deliveries for August should slightly exceed 19k.

Figure: 7 24 month delivery and first notice

Even with mid-month activity increasing delivery above 19k, it will be very hard for gold to break out of its current downtrend. As the chart below shows, physical demand has been steadily falling month after month since last June.

Figure: 8 Recent like-month delivery volume

Looking historically at August, the most recent August is still well above average, but far below the nearly $10B in delivery volume that took place last August when gold was approaching all time highs.

Figure: 9 Notional Deliveries

Gold: Next Delivery Month

September Gold is a minor delivery month. The initial trend is promising as open interest has increased. The question going forward will be whether it maintains positive momentum and closes the month strong (similar to silver above), or turns back down as first position approaches. The Comex countdown update will be released around August 23rd to analyze the trend, about a week prior to September First Position.

Figure: 10 Open Interest Countdown

The last several minor months show a very choppy pattern. There have been a few massive months but also low delivery months. It was good to see July trending above May and January, but it’s still a far cry from the bigger months.

Figure: 11 Historical Deliveries

Wrapping up

Silver is still showing some strength despite a disappointing delivery amount for July. Gold needs to reverse course soon in order to recapture some of the near record deliveries from 2020.

Figure: 13 Annual Deliveries

Data Source: https://www.cmegroup.com/

Data Updated: Nightly around 11PM Eastern

Last Updated: Jul 29, 2021

Gold and Silver interactive charts and graphs can be found on the Exploring Finance dashboard: https://exploringfinance.shinyapps.io/goldsilver/

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Have you been watching the Olympics? I’ve always loved the Olympic Games. There’s always so much drama as the best athletes in the world compete for gold.

But did you know they are mostly competing for silver?

True story. There is very little gold in an Olympic gold medal.

Gold medals are primarily made out of silver. They are silver medals covered with about 6 grams of gold plating.

So, gold medal winners – for all practical purposes – you’re getting a silver medal.

Sorry about your luck.

The value of the metal in a 556-gram Olympic medal is a little over $800. That’s nothing to sneeze at. But if it was made completely from gold, it would be valued at over $35,000 (calculated with gold at $1,800). This probably explains why the medals aren’t solid gold.

As it is, each gold medal has about $360 worth of gold in it.

By the way, the medals are about 30 grams lighter than those handed out at the Winter Olympics in 2018. It’s interesting to note that the 6 grams of gold in a 2018 medal were only worth about $250. This, my friends, is why you buy gold.

According to Olympic records, the only time gold medals were purely made of gold was during the St. Louis games in 1904 and the London games in 1908. The medals were much smaller. And the average price of gold in 1904 was a mere $18.96 per ounce.

Oh – here’s another thing – the medals being handed out at the Tokyo Olympics are junk.

I mean – literally junk.

The folks planning for the 2020 (now 2021) Olympics collected enough silver, gold and bronze (copper and tin) from e-waste to make all of the medals for the games.

The Olympic Planning Committee collected 9,000 pounds of silver, 67 pounds of gold and 6,000 pounds of bronze. That’s a pretty impressive haul considering they basically just got people to donate their broken-down electronic devices. The Olympic planning committee put collection boxes in over 2,400 NTT Docomo phone stores as well as other locations throughout Japan. It took them about two years to collect the 5 million busted-up pieces of junk. But as it turns out, broken phones contain a payday – about $3 million worth of metal.

According to the Silver Institute, the typical mobile phone contains 90 mg of silver, 36 mg of gold, 0.7 grams of tin and 6 grams of copper.

Of course, the fact that they were able to recycle gold and silver from broken cell phones reveals an important characteristic of these precious metals. They are immutable. That’s a fancy-pants way of saying you can’t destroy it.  After the medal-making folks in Japan finished processing the silver and gold e-waste, it was as pure as the day it was originally extracted from the ore.

So, what about the bronze medal winners? They might as well not even bother. Those medals are formed of about 90% copper and 10% zinc. They weigh just under 500 grams each. The bronze medal is pretty much the penny of Olympic medals. But hey – what do you expect to get when you’re the second loser?

Fun on Friday is a weekly SchiffGold feature. I dig up some of the off-the-wall and off-beat stories relating to precious metals (however loosely) and share them with you – with tongue firmly planted in cheek. The opinions expressed are my own. They are 100% correct – but not necessarily shared by anybody else here – including Peter Schiff. Click here to read other posts in this series.

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The Federal Reserve has three primary tools to conduct Monetary Policy: reserve requirements, the discount rate, and open market operations (Quantitative Easing). Open market operations are how the Fed uses its balance sheet to provide liquidity to the market. More details can be found here. The Fed defines Open Market Operations as:

Open market operations involve the buying and selling of government securities. The term “open market” means that the Fed doesn’t decide on its own which securities dealers it will do business with on a particular day. Rather, the choice emerges from an “open market” in which the various securities dealers that the Fed does business with – the primary dealers – compete on the basis of price. Open market operations are flexible, and thus, the most frequently used tool of monetary policy.

This is a fancy way of saying the Fed prints money to buy up US debt, providing liquidity while also keeping interest rates low. Essentially, Quantitative Easing (QE) is debt monetization. This analysis explores the changes in the Fed balance sheet to better understand what the Fed is buying and when.

Recent Trends

The latest balance sheet figures show the total at 8.22T, up 143B from the prior month end, but down in the past week by 19B. The chart below shows how the Fed Balance sheet has grown by instrument over the last 18 months. The major surge from COVID can be clearly seen as 2.5T was added within 2 months. The monthly changes since then reflect QE on autopilot. Autopilot targets about 120B in monthly purchases split by 40B in MBS and 80B in US Treasuries. As the numbers show, this is not exact, but an approximation.

The “other” category surged and fell last year due to Repurchase Agreements. This is the opposite of the Reverse Repos. In standard Repo Agreements, the Fed buys from a dealer with an agreement to return the security. This was designed to be temporary in nature rather than a permanent addition to the balance sheet. These repurchase agreements put a floor under the Treasury market by providing unlimited liquidity.

Figure: 1 Monthly Change by Instrument

The table below shows the breakdown of holdings by instrument and the period over period change as indicated. The main takeaways:

• The balance sheet has grown by 1.27B over the last year, averaging about 100B a month rather than the target of 120B

• • More recent months are trending above this average and target

• The balance sheet grew by $4T over 3 years, the majority of which occurred since the start of Covid
• In the latest month, the focus has been on MBS(65B) and shorter0-term treasuries of 1-5 years (39B)
• The Fed is not putting much emphasis on short term debt adding only 63B over 1 year

• • The market for short term treasuries is still very liquid and does not need Fed support
  • Almost 40% of the Treasury Balance sits in 1-5 year maturing debt with another 40% in 5+

• MBS has grown by 451B over the last year and Treasuries have grown almost 1T

Figure: 2 Balance Sheet Breakdown

The chart below shows the percent distribution by product. While absolute values have increased quite significantly as shown in the table above, the distribution of holdings has changed some. MBS made up 40% of the balance sheet 3 years ago, but the number has fallen to under 30% as short term (<1 year) and medium-term (5-10 years) has increased from 9% to 12.6% and 7% to 11.7% respectively.

Figure: 3 Total Debt Outstanding

Zooming into weekly

Another chart to look at is the weekly change in the balance sheet. Anyone who follows the balance sheet closely will notice it dips once a month before jumping back up. The chart below shows how the fed balance sheet changes week over week. As seen, there are a few consistent trends:

• A series of MBS mature about every four weeks

• • This results in a slight decrease in the balance sheet for that week

• A bulk of MBS is also bought every 4 weeks that is larger than the maturing MBS

• • This creates a surge in the balance sheet for that week

• Treasury securities mature and are purchased with less volatility

The latest week saw 37B in MBS mature with 20B in Treasuries purchased. It is likely that in 2 weeks there will be a large purchase of MBS.

Figure: 4 Fed Balance Sheet Weekly Changes

The table below shows how the latest week compares to the weekly averages over 4, 24, 52, and 156 (3 years) weeks. The weekly averages are shown to gauge whether the current periods (1 and 4 weeks) are accelerating or decelerating. The averages are all divisible by 4 because that is about how many weeks a full cycle takes as shown in the plot above.

The Fed has averaged about 35B per week for 4 weeks totaling 140B, which is slightly above the 120B monthly target. The latest week saw a more than 50% increase in debt maturing in 1-5 years compared to the 4, 24, and 52-week averages. Perhaps this helped drive the 2-year rate from 25bps back to 20bps over the last two weeks.

Figure: 5 Average Weekly Change in the Balance Sheet

Historical Perspective

As mentioned, the Fed is monetizing US Debt. The chart below uses the data from the debt analysis and matches it up with the Fed balance sheet holdings. While this is not a perfect one-to-one match due to the nature of reporting, the outcome can be seen below. This chart focuses specifically on Treasury securities: Bills (<1 Year maturity), Notes (1-10 years), and Bonds (10+ years). This is the bulk of debt issuance and Fed purchases.

As can be seen below the Fed has monetized a large percentage of debt issued since Jan 2020. The focus is clearly seen in Notes and Bonds to keep a lid on long-term rates. The first chart shows the debt added in each of the last 4 years by instrument. The bottom chart shows the percent of that debt the Fed has purchased. In 2020, the Fed monetized more than 100% of notes and 90% of bonds. In 2021 those numbers have fallen to 35% and 46% respectively. While not a complete monetization, this is still massive in terms of scope.

Figure: 6 Debt Issuance by Year and Instrument

Figure: 7 Fed Purchase % of Debt Issuance

The final plot below takes a larger view of the balance sheet. It is clear to see how the usage of the balance sheet has changed since the Global Financial Crisis. The tapering from 2017-2019 can be seen in the slight dip before the massive surge due to COVID.

There is no way the Fed will come close to shrinking the balance sheet at this stage. With more fiscal spending on the horizon and an economy addicted to low interest rates, it is probable that the growth of the balance sheet may accelerate rather than decelerate.

Figure: 8 Historical Fed Balance Sheet

What it means for Gold and Silver

The Fed balance sheet is one of the drivers to the expanding money supply. The Fed’s monetary tools are used to keep rates low and cheap credit flowing. If the Fed keeps up the monetary stimulus, it will continue to drive inflation higher. If the Fed were to ever try and taper, allowing longer-term rates to rise, it will put pressure on many areas of the economy, including the federal deficit. In either case, Gold and Silver should benefit from high inflation if the Fed keeps printing or a shrinking economy if the Fed tapers.

Data Source: https://fred.stlouisfed.org/series/WALCL and https://fred.stlouisfed.org/release/tables?rid=20&eid=840849#snid=840941

Data Updated: Weekly, Thursday at 4:30 PM Eastern

Last Updated: Jul 28, 2021

Interactive charts and graphs can always be found on the Exploring Finance dashboard: https://exploringfinance.shinyapps.io/USDebt/

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The Federal Reserve held its July meeting this week. Once again, it didn’t do anything. But there was certainly plenty of talk to dissect. In this episode of the Friday Gold Wrap, host Mike Maharrey does just that with some analysis of the messaging coming out of the Fed meeting, along with a look at the newly released GDP numbers and what they might be telling us.

The SchiffGold Friday Gold Wrap podcast combines a succinct summary of the week’s precious metals news coupled with thoughtful analysis. You can subscribe to the podcast on iTunes and Stitcher.

Tune in to the Friday Gold Wrap each week for a recap of the week’s economic and political news as it relates to gold and silver, along with some insightful commentary.

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Peter Schiff: It’s Game Over if the Markets Call the Fed’s Bluff

If Inflation Is “Transitory” Why Is This Happening?

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The Federal Reserve insists inflation is “transitory” and the economy is making “progress.” Yet, it continues with the extraordinary monetary policy it launched at the onset of the COVID-19 pandemic. Meanwhile, we’re seeing all kinds of data hinting that the economy may not be as great as advertised. Despite this, and even as prices continue to spiral higher, the Fed’s only monetary policy is talk. Peter breaks it all down on his podcast and drills down to the key question: what happens if the markets call the Fed’s bluff?

The July Federal Reserve meeting took center stage this week, but there was a lot of economic data that got lost in the shuffle. Peter said the data “really evidences the stagflationary environment that we’re in.”

On Wednesday, the trade deficit in goods data came out. It exceeded the high end of estimates and set another record high, rising 3.5% to $91.2 billion. Peter said he doesn’t think this record will last long.

These records are going to fall like dominoes. And this is not happening because we have a strong economy. It’s happening because we have a weak economy.”

A lot of mainstream pundits keep looking at these numbers as if they somehow reflect strength because Americans are buying so much stuff. But as Peter pointed out, the strength of an economy isn’t measured by what you buy but by what you produce.

Strong economies produce more. They don’t simply consume more. We are consuming more despite the fact that our economy is weak. How are we doing that? Well, the Fed is printing money and we are spending it. But that does not constitute strength. That really evidences profound weakness.”

Recklessly spending money created out of thin air does not create economic strength. The only reason these numbers look good is because of Fed magic via monetary policy.

The Fed is really not as clueless as people think when it comes to inflation. They’re not missing the inflation problem. I think they understand that there’s an inflation problem. They also understand that they would create an even bigger problem, from their perspective, if they tried to do anything about it, which is why they’re not, which is why they are pretending that the situation is transitory.”

The mainstream understands that inflation is worse than the Fed claims. But it doesn’t understand why the Fed isn’t doing anything about it because they don’t understand the Fed can’t do anything about it without collapsing the economy.

They don’t understand that we have a bubble. It is the biggest bubble in history. And even the tiniest little pin would prick it, which is why the Fed does not want to supply that pin.”

Most people in the mainstream think the Fed did the right thing by expanding monetary policy in response to the pandemic. (It didn’t.) But they don’t understand why the Fed is continuing that policy now, given that we’re in a recovery. They’re sitting around scratching their heads wondering why the Fed doesn’t go ahead and tighten things back up.

They don’t understand that we haven’t recovered. We’ve just become addicted to the stimulus. The stimulus is a monetary heroin. And not only can’t the fed withdraw the drug; the Fed has to continue to supply the habit with greater and greater quantities of the drug.”

Over the last two months, exports have remained flat while imports exploded. Peter said this is like a company hemorrhaging red ink. How can the US finance these massive deficits? Because foreigners are willing to trade stuff for financial assets. But how much longer can this continue?

June durable goods data also came out on Wednesday. It was also a big miss on the downside and the number is trending lower. Meanwhile, new homes sales collapsed in June for the third consecutive month, hitting a 14-month low. Why are home sales slowing? Because prices are rising so fast. Even with mortgage interest rates at record low levels, people are being priced out of the market. Peter said he doesn’t think the rise in home prices is anywhere close to ending because the cost of construction continues to rise. At some point, construction will likely slow and that will have an impact on employment.

Rent is a big component of CPI. According to government calculations, rents have remained relatively low. But MarketWatch analysis shows that actual rents are up 25% year-over-year. That is 10 times the level the government is using to calculate CPI.

Imagine what the CPI would be right now if you replaced the government number with a 25% private-sector number from Realtor.com. You would be looking, I think, at a year-over-year inflation rate, right now, at 13%.”

Meanwhile, the Fed continues to insist inflation is “transitory” and everything is fine.

Peter goes on to break down the Fed meeting and Jerome Powell’s post-meeting press conference. He notes that it’s all talk and the Fed is basically bluffing. The real question is what happens if markets call that bluff? And there are signs that may be happening.

Get Peter Schiff’s key gold headlines in your inbox every week – click here – for a free subscription to his exclusive weekly email updates.

Call 1-888-GOLD-160 and speak with a Precious Metals Specialist today!