How Inflation is Preventing a Real Economic Recovery

Oh what a wicked twist…

What a nasty turn…

What a bummer!

Now, consumer prices are rising. The feds wanted inflation. Apparently, they’ve got it. The latest figures show consumer prices rising at 0.5% per month. Doesn’t sound like much. But multiply by 12. It’s over 6% per year.

Producer prices are going up even faster – at a 20% annual rate, if you extrapolate from last month.

Of course, one swallow does not a springtime make. And maybe these early birds of inflation will prove to be loners. We won’t know for a while. But prices on energy, food, and auction-priced goods are definitely going up.

And as they go up, consumers are left with less spending power. Instead of encouraging the real economy forward, inflation is pushing it back.

Instead of causing more spending, the higher prices are absorbing what little purchasing power households had left. Instead of increasing demand, inflation is reducing it.

Let’s go back:

The real economy depends on two major things:

Jobs. And housing.

Most people spend money that comes directly from their jobs. And most of their accumulated wealth is in their houses. Neither looks good.

Here’s a little note on the job situation:

Massachusetts employment organization has canceled its annual job fair because not enough companies have come forward to offer jobs.

Richard Shafer, chairman of the Taunton Employment Task Force, says 20 to 25 employers are needed for the fair scheduled for April 6, but just 10 tables had been reserved. One table was reserved by a nonprofit that offers human services to job seekers, and three by temporary employment agencies.

Shafer tells the Taunton Daily Gazette the lack of employers means the task force won’t have enough money to properly advertise the fair.

The task force has been organizing the job fair nearly every year since 1984.

And Floyd Norris, at The New York Times, tells us that the price of housing is not likely to go up anytime soon:

To judge by the overall level of home sales in the United States, the housing market has stabilized at a level well below the peak period of 2005 and 2006 but still higher than the sales rates that characterized prosperous periods in the 1980s and 1990s. Still, few of those sales are of new homes and a rising proportion are forced sales of homes no longer worth the amount that was borrowed.

Yet sales of newly built single-family homes have plunged to the lowest levels seen since the government began collecting statistics on such sales in 1963. The Census Bureau reported this week that only 17,000 new homes were sold in February, for an annual rate of 250,000 after taking seasonal factors into account. Both of those numbers are the lowest on record.

The February sales pace was undoubtedly depressed by harsh weather in the Northeast, and a rebound in March or April is possible. But the total number of homes sold over the 12-month period – 349,000 – is lower than in any comparable period.

As a result, this cycle has been very different from previous ones.

Too many houses were built in many areas during the boom, and now housing starts have plunged… There are fewer newly built homes available, and in some areas, buyers complain that builders have not been willing to cut prices to meet the prices available on used homes in the same area.

The percentage of forced sales rose to nearly half of all sales in early 2009, at the height of the credit crisis, but fell to around 30 percent as the economy began to improve and banks imposed moratoriums on foreclosures. Now it is on the rise again, producing new pressures on prices and increased competition for home builders still trying to sell homes built in more optimistic times.

And now, as predicted, the feds’ policies are making things worse.

Mr. Market went into correction mode almost exactly four years ago. After years of letting himself go, he had to work out some issues…get clean…get straightened out.

The feds couldn’t leave well enough alone. They fought this correction with everything they had.

Mr. Market wanted deflation – to get rid of 50 years’ worth of debt build-up.

The feds wanted inflation – to boost the economy…and, not coincidentally, reduce the real value of the debt in the system.

Mr. Market took down asset values…reduced prices…bankrupted businesses…and forced households to cut back.

The feds pumped more cash and credit into the system – trying desperately to tempt the economy back to its bubble ways.

So far, neither Mr. Market nor the feds are getting all they want. But they’re both getting something…

Generally, the private sector is de-leveraging…but in an odd, uncertain, hesitating kind of way. A report in yesterday’s Financial Times tells us that the “rich” are cutting back their credit card debt. But the “poor” are actually increasing theirs.

Subprime borrowers have reduced their debts too – mostly by defaults, foreclosures and write-offs. They probably have been unable to pay down debt, for an obvious reason – they don’t have any money.

We saw a report that all of the increase in consumer debt could be traced to the government’s student loan program. The FT article made no mention of it. But it would be just like those wily feds – sneaking bottles of Jim Beam into the rehab center!

Prime borrowers, on the other hand, learned a lesson in the sharp crisis of ’07-’09. They’re still de-leveraging and drying out, no matter how much gin the feds put in the punch.

De-leveraging has put the real economy in a funk. Households struggle to make ends meet.

But the feds’ easy money – zero interest rates, $1.8 trillion in deficit spending, QE1 & 2 – is boosting up prices of speculative assets and global auction-priced goods. They’re having the first effect Mr. Bernanke wanted.

It’s that secondary effect that must be causing some worry at the Fed. Instead of giving households a helping hand, lifting them up out of the icy water…inflation is forcing them under water!


Bill Bonner
for The Daily Reckoning

The Daily Reckoning