11/23/10 Baltimore, Maryland – First, what happened in the markets yesterday? Nothing. Mr. Market is playing it cool. Still not revealing his intentions…
In the meantime, everybody is watching inflation. At least, they’re trying to watch inflation. Some people think they see it. Others don’t see anything at all.
“Look, if you monitored consumer prices the way they used to,” said colleague Chris Mayer yesterday, “you’d have an inflation reading of about 8%. But now, they’ve twisted the figures so much, they show no inflation when everyone knows prices are going up.”
Prices are soaring – for many things. Tuition, for example. Our youngest son, Edward, is going to college next year. We’re looking at colleges and universities. The price tags give us sticker shock.
A lot of other things are going up too – such as food. And gasoline.
The feds take out food and energy from the core inflation reading. They say the two are too “volatile” to give you a reliable measure of inflation.
And they fiddle with housing prices too. They assume everyone pays rent. So they calculate what the rent should be as a part of the cost of living. Of course, housing has just lost 20% to 30% of its value. So, in theory, rents are relatively low – even though people are not actually paying them. They’re still paying the mortgages they signed in the bubble years.
But if you took out the largely fictitious rent payments you’d have a CPI figure about where you want it, says old friend John Mauldin.
But the official line is that there ain’t no consumer price inflation in the United States of America. That’s what the nerds at the Bureau of Labor Statistics say. And they’re sticking with their story. Officially, CPI growth has never been lower.
The New York Times has the story.
Since the collapse of the housing market in the United States and the beginning of the global financial crisis , the Federal Reserve has made avoiding deflation a major priority, recalling the experience of Japan after its bubble burst in the early 1990s. The Fed has set an annual inflation target of 2 percent or a little lower, but is not getting it.
The latest figures, released this week, showed that overall inflation in consumer prices was 1.2 percent in the 12 months through October, while the core inflation rate – excluding food and energy – rose just 0.6 percent. The previous low for that index, of 0.7 percent, came in the 12 months through February 1961, when the economy was in recession.
…the core inflation figures are charting a path roughly similar to one shown in Japan 15 years earlier. That has been true despite a much stronger reaction by the American central bank, which was determined not to make the same mistakes the Japanese made.
Deflation is feared for several reasons. If consumers come to expect it, as happened in Japan, there is a strong incentive to delay purchases while waiting for a lower price. That can restrain economic activity and increase unemployment. In addition, deflation places downward pressure on asset prices, worsening the situation of those who are indebted.
“To change inflation expectations permanently,” wrote Mr. Batty of Standard Life, “a much larger monetary response would be needed from the US and Western authorities than that already announced. In summary, if central bankers decide that higher inflation must be engineered, then investors should anticipate another phase of extraordinary policy measures through QE3.”
Hey! Why not? QE15…QE16…QE17…
What a great show!
But let’s back up and see if we can see the big picture. The private sector went too deep into debt. In 2007, it dug in its heels on the edge of the cliff…
And as it was stepping backward…the public sector flew by…on its way to glory or Hell.
Ireland took a big leap when it practically nationalized all its banks. Trouble was, the banks owed a lot of money – more than the Irish government can cover.
So what happens next? Well, Ireland seems to have fallen off the cliff. It’s hoping to get a parachute from the IMF and EU. But nothing is certain…
…except that there are a lot of other European countries that aren’t in much better shape. Like climbers on a rock face, they’re roped together with Ireland…all hoping that a bailout will break the fall before they get pulled down too.
Over in North America, meanwhile, the feds took on the liabilities of the housing market when they took Fannie and Freddie into protective custody. The losses on those two alone are said to be headed to about $350 billion.
And then there are all the state and local governments that will need a handout…
…and 42 million people on food stamps…
…and a federal budget financing “gap” as big as the Grand Canyon.
And Ben Bernanke, who says he is an expert at these things, believes that if he could just get the country growing again…everything would work itself out.
How do you get it growing? Add more debt!
Well, that’s what quantitative easing really is. The feds print up more money. The dollars are claims against resources – just like other debt. The QE program is meant to cheapen the value of all debt (that is, by lowering the value of the currency in which it is calibrated). And that’s why everyone has his eye on inflation. If the value of the debt (and the dollar) doesn’t go down, the program is a big failure.
And then, what else can they do? They’ll have to try a more aggressive approach. QE3. And then QE4. And so on…
How much QE can the world take before the whole global economy rolls off a cliff? We don’t know. But we’re delighted to be able to find out.
Bill Bonner
for The Daily Reckoning
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
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My thought is that the USD (IOU’s on national output as you’ve mentioned above) is the #1 export by far. Like any exported commodity, supply & demand determine value. We are exploding the supply side, can the demand side keep up? If not, what is the correlating devaluation of this export as it’s volume increases?
Bill, I read elsewhere yesterday that part of the treasury purchases of domestic debt are in part due to there not being enough willing (or able?) counter parties globally to absorb the huge volume. This would imply the demand side being unable or unwilling to consume this debt. Do you think that this would be conjecture, or there is a telltale sign out there throwing a signal?
The weimar republic printed money for something like 10 years before they got hit with hyperinfaltion, they too were trying to create growth and full employement, i’m sure the European central bank are run by the same mindless descendants, maybe even Bernanke is related somehow?
“i’m sure the European central bank are run by the same mindless descendants, maybe even Bernanke is related somehow?”
Please don’t insult the Euro Central Bankers in this manner by suggesting they share the same gene pool as Bernanke. He appears to be descended from sturdy, mouth breathing, knuckle dragging Neanderthal stock.
Question for all you curb stone economists: Which would be a more effective weapon for the North Koreans, a trebuchet loaded with US bonds or with US dollars? Or will they get nuked before they get a chance to unleash their green Ooblick on the south?
Since the NKs roll their own US dollars and have more than they need anyway, I’d guess it would have to be Euros or Yuan.