11/18/10 Laguna Beach, California – “A cynic,” Oscar Wilde famously remarked, “is one who knows the price of everything, but the value of nothing.” A Federal Reserve Chairman is not so different.
Ben Bernanke seems to know the seasonally-adjusted, hedonically refined, government-calculated price of everything, but he seems incapable of determining the real-world value of a banana…or of a dollar bill for that matter.
Chairman Bernanke says the forces of deflation are encroaching upon the US economy. The government bean-counters tell him so. They tell him that the Consumer Price Index (CPI) increased only 1.2% during the past 12 months…and that the seasonally adjusted “core” CPI barely budged at all.
This disinflation/deflation stuff is a serious threat to economic recovery, Bernanke believes, and it must be quashed. If not, the bean-counters will walk into his office one of these days and tell him that seasonally-adjusted, hedonically refined prices are falling. And that would be a really bad thing.
Why? We are not really sure. But the rationale for Bernanke’s deflation-fighting campaign seems to go something like this:
Ben Bernanke was a good student; Ben Bernanke studied the Great Depression at MIT; the good student learned that the Great Depression was really bad; therefore, things that happened in the Great Depression were also really bad; deflation happened during the Great Depression; therefore, deflation must be bad [along with jazz and temperance]; bad things should not happen; therefore, deflation should not happen…and neither should jazz or temperance.
Even though the cause-effect relationship between deflation and the Great Depression are highly debatable, Bernanke countenances no debate whatsoever. He simply proceeds doggedly under the assumption that deflation is a cause of bad stuff and that it must be vanquished so that inflation can work its therapeutic marvels.
Therefore, the Federal Reserve must continue printing dollars and funneling them into the US economy until the “threat” of deflation becomes so remote that the Bureau of Labor Statistics removes the minus signs from its computer keyboards.
Putting aside for a moment the wisdom or idiocy of printing money to combat deflation, let’s examine merely the idiocy of combating an enemy that does not exist. Deflation is missing in action; it has already fled the battlefield. This fact seems obvious to everyone except the BLS, Ben Bernanke and the thinning ranks of 30-year T-bond buyers. Inflation is the real enemy, and Bernanke is inadvertently consorting with it.
What is a $600 billion quantitative easing operation if not a “supply line” to the forces of inflation?
But the chairman doesn’t see it that way. He sees things like contracting credit, rising savings rates, sluggish economic activity and meager employment growth as sure-fire signs of a dangerous deflationary trend. He also sees the press releases from the BLS that tell him prices are, as he would put it, “failing to rise.” But the truth of the matter is that the Consumer Price Index (CPI) is one big seasonally-adjusted, hedonically refined lie.
Officially, year-over-year CPI is up 1.17%. Officially, it is also up 8.51%. That’s right; based on the official CPI-calculation methodology in use prior to 1982, the year-over-year inflation rate would be soaring north of 8%. (Deflation looks nothing like that). This fascinating insight emerges from the always-fascinating work of John Williams at Shadow Government Statistics.
If the Shadow Stats inflation data would fail to convince the Chairman that inflationary phenomena are at least as prevalent as deflationary ones, he could take a peek at commodity prices (up 11% yoy) or at health insurance costs (up 12.5% yoy). Easier still, he could examine his grocery bill.
“It’s getting harder and harder for Americans to put food on the table,” The Classic Liberal reports, “our basic food costs have increased by an incredible 48% over the last year (measured by wheat, corn, oats, and canola prices). From the price at the pump to heating your stove, energy costs are up 23% on average (heating oil, gasoline, natural gas). A little protein at dinner is now 39% higher (beef and pork), and your morning cup of coffee with a little sugar has risen by 36% since last October…
“You don’t need a Harvard PhD in economics to understand what this means,” The Classic Liberal concludes.
Very true, but you do need a Harvard PhD in economics to not understand what this means. “You can always tell a Harvard grad,” the century-old saying goes, “you just can’t tell him much.”
Ben Bernanke did not merely graduate from Harvard, he graduated summa cum laude. The PhD came later, and not from Harvard. Be that as it may, we would never try to tell the Chairman anything about inflation or deflation. (He knows more about all of that stuff than we could ever hope to forget). We would simply tell him to look around…out in the real world where prices don’t conceal themselves inside hedonic refinements.
He wouldn’t have to look very far. Heck, he wouldn’t even have to look outside of academia. The price of a four-year college education is soaring, even though the value of that education is going nowhere. For more than a decade, college tuition has been increasing at triple the rate of CPI. As a result, 100 colleges or universities are now charging more than $50,000 per year for tuition, fees, room, and board, according to the Chronicle of Higher Education – that’s up from 58 last year and only five colleges two years ago. As recently as 2004, no college or university charged more than $50,000 per year.
The rising price of a college education is not synonymous with inflation, but it’s close. In the halls of academia, the only thing that’s deflating is the value of a college degree. According to the National Association of Colleges and Employers, more than half of all 2007 college graduates who had applied for a job had received an offer by Graduation Day. In 2008, that percentage tumbled to 26%, and to less than 20% last year. Meanwhile, the unemployment rates for all college graduates – both recent and ancient – have doubled from 2% to 4% during the last year.
Ergo, college prices up; value down.
But don’t try telling that to a college president. The number of college presidents receiving more than half a million dollars per year has been soaring at a 27% annualized rate during the last six years. The value of these presidents may or may not have soared commensurately. Either way, the aspiring youths who attend these universities are paying ever-higher prices to pursue their aspirations…and are assuming ever-larger quantities of student debt.
Earlier this year, for the first time ever, the total value of student loans outstanding exceeded the value of credit card debt outstanding. And this trend is accelerating. According the website Critical Mass, “The number of college students graduating with over $25,000 in student loan debt has tripled in the past decade alone. Today, 66% of students borrow to pay for college, taking on an average of $23,165 in debt. Twelve years ago, 58% borrowed to pay for college, taking on only $13,172 in debt.”
Is this inflation? Maybe not, but it sure as shinola isn’t deflation.
Eric Fry
for The Daily Reckoning
Eric Fry
Eric J. Fry, Agora Financial’s Editorial Director, has been a specialist in international equities for nearly two decades. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short-selling. Following his successes in professional money management, Mr. Fry joined the Wall Street-based publishing operations of James Grant, editor of the prestigious Grant's Interest Rate Observer. Working alongside Grant, Mr. Fry produced Grant's International and Apogee Research — institutional research products dedicated to international investment opportunities and short selling.
Mr. Fry subsequently joined Agora Inc., as Editorial Director. In this role, Mr. Fry supervises the editorial and research processes of numerous investment letters and services. Mr. Fry also publishes investment insights and commentary under his own byline as Editor of The Daily Reckoning. Mr. Fry authored the first comprehensive guide to investing internationally with American Depository Receipts. His views and investment insights have appeared in numerous publications including Time, Barron's, Wall Street Journal, International Herald Tribune, Business Week, USA Today, Los Angeles Times and Money.
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Well done, sir. Combating Orwellian Fed rhetoric is a noble cause indeed.
I’m not much of an expert on this stuff, but it seems to me, that the real purpose of QE2 is to inflate our debt away, since we can’t pay it. Anyone agree?
As much as I love all your articles, I am somehow apalled as to how you continue to see Bernanke and co as a team of people with high academic skills, good intentions, but horrible common sense and apparently blind to rising commodity prices. In my point of view, there is ABSOLUTELY no way these guys don’t understand the negative effects of QE1, QE2 etc and they are actually doing it in a very macabre and conscious way. They have their own agenda and they are very willing to pursuit to the end, at the expense of many people in the world, specially the poor. As I mentioned in another blog, PLEASE DON’T BE NAIVE !
What I am trying to say is that Bernanke is not alone in all this. A move as huge as QE has to be decided by several people and thought over and over again. Maybe Bernanke is a fool, but then he was put there BECAUSE he inclines to print money and prevent deflation. In this case, he is being told what to do, and he is just the public face of the American government. We all know that many times in history America says something in order to hide the actual truth(Weapons of Mass Destruction anyone??). QE2 is just more of the same. Come on, since when is Uncle Sam a straight poker player? Sorry, but its reputation in international affairs is very very bad and extremely one-sided.
Im not much of a religious kind of person. But your thoughts remind me of that verse in the book of revelations that says:
“And I heard a voice in the midst of the four living creatures saying, “A quart of wheat for a denarius, and three quarts of barley for a denarius; and do not harm the oil and the wine.”
Think about it, it is presenting inflation and deflation at the same time in the same place. And do not think that oil refers to petroleum please.
Regards
Inflation… deflation… neither is good news for the U.S. economy or for the rest of the world. As an avid research and survival enthusiast, it’s time we prepare for the future, all of this bad news surfacing daily is only leading up to a very dire situation. Check out http/survivalist-hub.blogspot.com/ for information on preparedness and http://www.gearupcenter.com for related survival products. Inflation/deflation is very real and is on its way. I see food and clothing prices beginning to rise and its only going to escalate rapidly. My suggestion: Purchase your “emergency products” such as survival food and freeze-dried food NOW, I would also suggest purchasing your clothing and outdoor apparel, some survival gear, survival supplies and even an emergency kit. You just never know what’s going to happen! A peace of mind is synonymous with emergency preparedness! Good luck.