Benzinga: Will Biden Trigger Inflation for Gold?

Article by Arkadiusz Sieron, PhD in Benzinga

Biden is expected to increase further government spending. For this and also other reasons, there is a risk that inflation under Biden’s presidency could be higher than under Trump’s presidency. It would be great news for gold.

Let’s face it, Joe Biden won’t have an easy presidency. I’m referring to Biden inheriting an economy with slow growth and too much public debt. Given the debt burden, it should be clear that under Biden’s presidency, real interest rates will remain at ultra-low levels. This is how a debt trap works – the more the debt grows, the less the economy (Treasury) can afford higher interest rates.

Moreover, Biden will have to face the risk of inflation. Actually, some analysts say that the new POTUS could contribute to the rise in prices. Is it true? Will we finally see an acceleration in the inflation rate? 

So far, consumer inflation has been subdued. The CPI overall annual rate has declined from 2.3 percent before the epidemic to 1.2 percent in October. 

For some people, this is really surprising, given all the money pumped by the Fed into the economy. However, the disinflation is perfectly in line with our predictions from the May edition of the Gold Market Overview: “In the short run, we expect disinflation, but we think that the risk of inflation later in the future is higher than a decade ago.”

Indeed, in the short-run, the negative demand shock outweighed other factors, and people simply increased their demand for money because of the enormous uncertainty and limited opportunities to spend money in the offline economy. 

But didn’t the Fed significantly increase the money supply? It did, but the central banks create only a monetary base, while the majority (more than 90 percent) of the broad money supply is created by the commercial banks. So, for inflationary trends, what really matters is not the Fed’s balance sheet, but rather the commercial banks’ credit expansion, since whenever the banks grant loans, they also create deposits, i.e., money supply.

Hey, wait a moment, but didn’t the pace of expansion of the banks’ credit and broad money supply also rise? They did! And this is the reason why I believe that the risk of inflation in the aftermath of the coronavirus crisis is higher than after the Great Recession, when banks were strongly hit and didn’t want to expand credit. 

Indeed, this is an important upward risk for inflation. Some economists point out here the pent-up demand, i.e., the strong increase in demand for a service or product, usually following a period of subdued spending. The idea is that consumers tend to hold off their demand during a recession, only to unleash it during recovery.

it’s possible that in 2021 we will see a rise in inflation. Higher inflation also means lower real interest rates, which is another piece of good news for the yellow metal.  

Biden is a supporter of major economic relief, including a second round of stimulus checks, so consumers’ spending power should increase further next year, thus contributing to higher consumer prices. So, although ....

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