QE Deflationary? Gold Drops Below Cash Cost, Approaches Marginal Production Costs.

QE Deflationary? No Kidding!
There was a very “wonkish” article by Stephen Williamson over the weekend discussing the impact of quantitative easing on inflationary expectations.  The article is filled with economic equations discussing interest rates and inflationary expectations but the real crux of the article was:

“In general, if we think that inflation is being driven by the liquidity premium on government debt at the zero lower bound, then if the Fed keeps the interest rate on reserves where it is for an extended period of time, we should expect less inflation rather than more.
But that’s not the way the Fed is thinking about the problem. What I hear coming out of the mouths of some Fed officials is that: (i) Things are bad in the labor market, and the Fed can do something about that; (ii) inflation is low. Thus, according to various Fed officials, the Fed can kill two birds with one stone, so it should: (a) keep doing QE; (ii) make it clear that it wants to keep the interest rate on reserves at 0.25% for a very long period of time.
What I hope the discussion above makes clear is that this is a trap for the Fed. There is not much that the Fed can do on its own about the short supply of liquid assets. They can get some action from QE, but the matter is mostly out of their hands, and more QE actually pushes the Fed further from its inflation goal. If the Fed actually wants more inflation, the nominal interest rate on reserves will have to go up. Of course, that will lead to some short-term negative effects because of money nonneutralities.”

This is not “new news” for anyone that has either a) been paying attention or; b) reading my posts (see here, here and here) on the deflationary impact of the Fed’s “QE” programs.  If we set the “math” aside for a moment, and focus on a consumption based economy, it becomes clear that stimulating asset markets will have little effect on economic or labor growth which is ultimately driven by end demand.
http://www.stawealth.com/daily-x-change/1893-qe-deflationary-no-kidding.html
Gold Drops Below Cash Cost, Approaches Marginal Production Costs
As we showed back in April, the marginal cost of production of gold (90% percentile) in 2013 was estimated at between $1250 and $1300 including capex. Which means that as of a few days ago, gold is now trading well below not only the cash cost, but is rapidly approaching the marginal cash cost of $1125… Of course, should the central banks of the world succeed in driving the price of gold to or below its costs of production (repressing yet another asset class into stocks) then we fear therepercussions will backfire from a combination of bankruptcies, unemployment, and as we have already seen in Africa – severe social unrest (especially notable as China piles FDI into that region).


http://www.zerohedge.com/news/2013-12-02/gold-tumbles-towards-marginal-production-costs
Debt Deflation in Spain: Record 4.7% Decline in Household Credit, Business Lending Down 10%
Read more at http://globaleconomicanalysis.blogspot.com/2013/12/debt-deflation-in-spain-record-47.html#jpBoYakydmlTUtK9.99
Ron Paul Rages “‘Easy’ Money Causes Hard Times”
http://www.zerohedge.com/news/2013-12-02/ron-paul-rages-easy-money-causes-hard-times